<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 000-29387
PETS.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-4730753
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
435 BRANNAN STREET, SUITE 100
SAN FRANCISCO, CA 94107
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(415) 222-9999
(REGISTRANT'S TELEPHONE NUMBER)
Check whether the registrant (1) filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [ ] No [X]
The number of shares of common stock, $.00125 par value, outstanding on
March 31, 2000 was 29,579,137.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PETS.COM, INC.
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (unaudited).................. 3
Condensed Balance Sheets as of March 31, 2000 and December
31, 1999.................................................... 3
Condensed Statements of Operations for the three months
ended March 31, 2000 and December 31, 1999.................. 4
Condensed Statement of Cash Flows for the three months ended
March 31, 2000.............................................. 5
Notes to Condensed Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 27
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................... 27
Item 2. Changes in Securities and Use of Proceeds................... 27
Item 3. Defaults Upon Senior Securities............................. 28
Item 4. Submission of Matters to a Vote of Security Holders......... 28
Item 5. Other Information........................................... 29
Item 6. Exhibits and Reports on Form 8-K............................ 29
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
PETS.COM, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 70,114 $ 30,196
Inventories................................................. 8,116 6,756
Prepaid advertising expenses................................ 11,782 7,223
Other prepaid expenses and current assets................... 1,735 999
--------- --------
Total current assets.............................. 91,747 45,174
Certificate of deposit...................................... 889 845
Fixed assets, net........................................... 17,010 11,327
Intangible assets........................................... 372 399
Other assets................................................ 4,774 2,565
--------- --------
Total assets...................................... $ 114,792 $ 60,310
========= ========
LIABILITIES & STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable............................................ $ 8,199 $ 6,563
Accrued expenses............................................ 4,877 2,137
Payable to related parties.................................. 416 370
Capital lease obligations................................... 176 16
--------- --------
Total current liabilities......................... 13,668 9,086
Capital lease obligations, long term........................ 812 104
Stockholders' equity:
Convertible preferred stock................................. -- 20
Common stock................................................ 37 6
Additional paid-in capital.................................. 214,893 128,442
Accumulated deficit......................................... (100,866) (61,778)
Stockholder note receivable................................. -- (188)
Deferred stock-based compensation........................... (13,752) (15,382)
--------- --------
Total stockholders' equity........................ 100,312 51,120
--------- --------
Total liabilities and stockholders' equity........ $ 114,792 $ 60,310
========= ========
</TABLE>
See notes to condensed financial statements.
3
<PAGE> 4
PETS.COM, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Net sales................................................... $ 7,651 $ 5,168
Cost of goods sold.......................................... 12,515 11,570
-------- --------
Gross margin.............................................. (4,864) (6,402)
Operating expenses:
Marketing and sales....................................... 28,855 30,676
Product development....................................... 2,686 2,646
General and administrative................................ 2,331 2,211
Amortization of stock-based compensation.................. 1,075 979
-------- --------
Total operating expenses.......................... 34,947 36,512
-------- --------
Operating loss.............................................. (39,811) (42,914)
Interest income, net........................................ 723 491
-------- --------
Net loss.................................................... $(39,088) $(42,423)
======== ========
Basic and diluted net loss per share........................ $ (2.54) $ (28.92)
======== ========
Weighted average shares outstanding used to compute basic
and diluted net loss per share............................ 15,408 1,467
======== ========
</TABLE>
See notes to condensed financial statements.
4
<PAGE> 5
PETS.COM, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Operating Activities:
Net loss.................................................... $(39,088) $(42,423)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 1,032 678
Amortization of deferred stock-based compensation......... 1,075 980
Changes in:
Inventories............................................ (1,360) (4,884)
Prepaid marketing expenses............................. 7,223 (5,009)
Other prepaid expenses and current assets.............. (736) (588)
Certificates of deposit................................ (44) (695)
Other assets........................................... 1 (58)
Accounts payable, accrued expenses and other........... 4,376 2,885
Payable to related parties............................. 46 370
-------- --------
Net cash used in operating activities....................... (27,475) (48,744)
Investing Activities:
Purchase of fixed assets.................................... (5,660) (4,620)
Strategic debt and equity investments....................... (2,210) (2,310)
-------- --------
Net cash used in investing activities....................... (7,870) (6,930)
Financing Activities:
Proceeds from exercise of stock options..................... 114 400
Repurchase of stock options exercised....................... (33) --
Proceeds from issuances of preferred stock.................. -- 49,255
Proceeds from issuances of common stock..................... 75,342 --
Repayments on capital lease................................. (160) (16)
-------- --------
Net cash provided by financing activities................... 75,263 49,639
-------- --------
Net increase in cash and cash equivalents................... 39,918 (6,035)
Cash and equivalents at beginning of period................. 30,196 36,231
-------- --------
Cash and equivalents at end of period....................... $ 70,114 $ 30,196
======== ========
Supplemental Cash Flow Information:
Property and equipment acquired under capital lease
obligations............................................... $ 1,028 $ --
Issuance of preferred stock for media advertising........... $ 11,782 $ --
</TABLE>
See notes to condensed financial statements.
5
<PAGE> 6
PETS.COM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Pets.com, inc., (the
"Company"), have been prepared in conformity with generally accepted accounting
principles for interim financial information and with the instructions for Form
10-Q and Article 10 of Regulation S-X. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed, or
omitted, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of the Company's management, the statements include
all adjustments necessary (which are of a normal and recurring nature) for the
fair presentation of the results of the interim periods presented. These
financial statements should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 1999, included in the
Company's Prospectus, dated February 10, 2000 filed with the Securities and
Exchange Commission in connection with the Company's initial public offering.
The results of operations for any interim period are not necessarily indicative
of the results of operations for any other interim period or for a full fiscal
year
2. 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 and warrants are not included in the
calculation of diluted net loss per share because they are antidilutive.
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 DECEMBER 31, 1999
--------------- ------------------
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C>
Numerator:
Net loss.................................................. $(39,088) $(42,423)
======== ========
Denominator:
Weighted average common shares outstanding................ 18,325 4,408
Less weighted average common shares issued subject to
repurchase agreements.................................. (2,917) (2,941)
-------- --------
Denominator for basic and diluted calculation............. 15,408 1,467
======== ========
Net loss per share:
Basic and diluted......................................... (2.54) (28.92)
======== ========
</TABLE>
3. STOCKHOLDERS' EQUITY
On January 7, 2000 the Company's board of directors approved an amendment
to the Company's 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 Buena Vista
Internet Group and Infoseek Corporation, affiliates of The Walt Disney Company,
to perform joint marketing, content development and other promotional
activities. An affiliate of The Walt Disney Company also purchased 1,102,400
shares of Series C convertible preferred stock in exchange for media rights
valued at $11.8 million on ABC, Inc.
6
<PAGE> 7
PETS.COM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 adjusted to reflect this split.
Initial Public Offering of Common Stock
On February 11, 2000 the Company completed its initial public offering of
7,500,000 shares of common stock resulting in $75.3 million in net proceeds. In
connection with the closing of the offering, all of the outstanding convertible
preferred stock was converted into an aggregate of 17,402,940 shares of common
stock.
4. NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB
101 provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements of all public registrants. Any change in the
Company's revenue recognition policy resulting from the interpretation of SAB
101 would be reported as a change in accounting principle in the quarter ending
June 30, 2000. While the Company has not completed its assessment of the impact
of the adoption of SAB 101, it believes that implementation will not have a
material adverse impact on its existing revenue recognition policies.
7
<PAGE> 8
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This discussion contains forward-looking statements. 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 consider various factors, including
the risks outlined in the Risk Factors section of our prospectus related to our
initial public offering filed with the Securities and Exchange Commission (SEC)
on February 10, 2000 pursuant to Rule 424(b)(4) of the Securities Act of 1933
and, from time to time, in other reports we file with the SEC. 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. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward looking
statements after the date of this Quarterly Report on Form 10-Q to conform such
statements to actual results or to changes in our expectations.
OVERVIEW
Pets.com, Inc. is 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 15,000 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 two distribution centers, our SKU count
is slightly larger than the number available at the largest pet superstores, and
we expect our SKU count will continue to increase throughout 2000.
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.
8
<PAGE> 9
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.
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.
RESULTS OF OPERATIONS
Because we commenced commercial operations on February 17, 1999 and have a
short operating history, we believe that period-to-period comparisons are less
meaningful than an analysis of recent quarterly operating results. Accordingly,
we are providing a discussion and analysis of our results of operations that
compares the quarter ended March 31, 2000 to the quarter ended December 31,
1999.
9
<PAGE> 10
The following table sets forth our unaudited quarterly statement of
operations data for the three quarters ending September 30, 1999, December 31,
1999 and March 31, 2000. This unaudited quarterly information has been derived
from our unaudited financial statements and, in the opinion of management,
includes all adjustments, consisting of normal recurring adjustments necessary
for a fair presentation of such information in accordance with generally
accepted accounting principles. The operating results for any quarter are not
necessarily indicative of the operating results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31,
1999 1999 2000
------------- ------------ ---------
<S> <C> <C> <C>
Net sales.............................................. $ 568 $ 5,168 $ 7,651
Cost of goods sold..................................... 1,766 11,570 12,515
-------- -------- --------
Gross margin......................................... (1,198) (6,402) (4,864)
Operating expenses:
Marketing and sales.................................. 10,693 30,676 28,855
Product development.................................. 2,194 2,646 2,686
General and administrative........................... 1,205 2,211 2,331
Amortization of stock-based compensation............. 1,139 979 1,075
-------- -------- --------
Total operating expenses..................... 15,231 36,512 34,947
-------- -------- --------
Operating loss......................................... (16,429) (42,914) (39,811)
Interest income, net................................... 577 491 723
-------- -------- --------
Net loss..................................... $(15,852) $(42,423) $(39,088)
======== ======== ========
</TABLE>
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.
Net sales for the first quarter of 2000 were $7.7 million, a 48% increase
over net sales for the fourth quarter of 1999 of $5.2 million. Our cumulative
customer accounts increased from 144,000 at the end of fourth quarter 1999 to
264,000 customer accounts at the end of first quarter 2000, an increase of 83%.
Orders from repeat customers also increased during the first quarter to more
than 50% of total orders, as opposed to 39% for the fourth quarter of 1999. The
increase in net sales was a result of the increase in our customer base and the
increase in our repeat orders as a percentage of total orders.
Cost of Goods Sold and Gross Margin. Cost of goods sold consists primarily
of the costs of products sold to customers and outbound and inbound shipping
costs. We expect cost of goods sold 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,
the number and location of distribution centers from which we ship products, and
inventory control. Our product margins currently range from between 25% and 30%
in the aggregate. The introduction of our private label line, Pets.complete,
during the first quarter 2000 is expected to have a positive impact on our
aggregate product margins over time since this line enjoys higher margins.
Gross Margin improved from negative 124% in the fourth quarter of 1999 to
negative 64% during the first quarter of 2000. The negative gross margins were
the result of promotional sales discounts associated with new customer
acquisition and our negative margin on shipping. The improvement in gross margin
is primarily attributable to a decrease in our shipping costs as our second
distribution center in Indianapolis was opened in
10
<PAGE> 11
March. This new warehouse allowed us to eliminate priority shipping services and
costs since we can now effectively reach the majority of the country with ground
service, within an acceptable period of time.
Marketing and Sales Expenses. Marketing and sales expenses consist
primarily of advertising and promotional expenditures, distribution expenses,
supplies, payroll and related expenses for personnel engaged in marketing,
merchandising, business development and customer service and fulfillment
expenses. Marketing and sales expenses decreased from $30.7 million in the
fourth quarter of 1999 to $28.9 in the first quarter 2000. The decrease was
primarily due to a decrease in advertising media and promotional costs.
We intend to continue to pursue our branding and marketing campaign.
Marketing and sales expenses may 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. Product development
increased from $2.6 million in the fourth quarter of 1999 to $2.7 million in the
first quarter of 2000. The slight increase was due to a general increase in
development costs.
Over the next several months, we plan to continue to staff 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 or remain consistent, 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 design, production, finance, human
resources, executive and administrative personnel, corporate facility expenses,
professional services expenses, travel and other general corporate expenses.
General and administrative expenses increased from $2.2 million in the fourth
quarter of 1999 to $2.3 million in the first quarter of 2000. The increase was
primarily due to increased expenses associated with the Company's new
administrative and reporting requirements as a public company.
We expect general and administrative expenses to increase or remain
consistent in the future as we expand our staff and incur additional costs
related to the anticipated growth of our business and our status as a public
company. However, we expect such expenses to fluctuate as a percentage of net
revenue from quarter to quarter.
Amortization of Stock-Based Compensation. Amortization of stock-based
compensation increased from $.9 million in the fourth quarter of 1999 to $1.1
million in the first quarter of 2000. The increase was due to the grant of stock
options to new employees prior to the Company's initial public offering. 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.
Interest Income, net. Interest income represents earnings on our cash and
cash equivalents net of interest expense associated with capital lease
obligations. Interest income was $.5 million in the fourth quarter of 1999 and
$.7 million in the first quarter of 2000. The increase is due to a higher
average outstanding balance of cash and cash equivalents earning interest during
the first quarter of 2000. Such increase is due to cash obtained in February
2000 from our initial public offering.
Income Taxes. There was no provision or benefit for income taxes for any
period since inception due to our operating losses. We have not recognized any
benefit from the future use of loss carryforwards for any period since inception
because of uncertainty surrounding their realization. The amount of net
operating losses that we can utilize may be limited pursuant to tax regulations
applicable to certain circumstances, including in the event that we experience a
cumulative stock ownership change of more than 50% over a three year period.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering, we financed our operations primarily
through private sales of convertible notes payable and preferred stock, which,
yielded net cash proceeds of $109.2 million. In February 2000, we completed our
initial public offering and issued 7,500,000 shares of common stock at an
initial public offering price of $11.00 per share. In connection with our
initial public offering, we received $75.3 million in net cash proceeds.
We have incurred net losses of $100.9 million from inception to March 31,
2000. We believe that we will continue to incur net losses for the forseeable
future and that the rate at which we will incur such losses could increase from
current levels.
Net cash used in operating activities was $27.5 million for the first
quarter of 2000. Net cash used in operating activities for this period primarily
consisted of net losses of $39.1 million, partially offset by a net source of
funds from working capital.
Net cash used in investing activities was $7.9 million for the first
quarter of 2000. Net cash used in investing activities primarily consisted of
acquisition of leasehold improvements and purchases of equipment and systems,
including computer equipment, warehouse handling equipment and fixtures and
furniture. The Company also made strategic investments in PetPlace.com, and
Petspark.com, amounting to $2.2 million.
Net cash provided by financing activities was $75.3 million for the first
quarter of 2000. Net cash provided by financing activities during the quarter
primarily consisted of net cash proceeds from the Company's initial public
offering.
As of March 31, 2000 we had $70.1 million of cash and cash equivalents. As
of that date, our principal commitments consisted of obligations outstanding
under capital and operating leases aggregating approximately $2.7 million
through December 31, 2000. In March we invested an additional $1.5 million in
PetPlace.com, Inc. This brings our total investment in PetPlace.com, Inc to $3.5
million. Although we have no material commitments for capital expenditures, we
anticipate that our levels of capital expenditures and lease commitments will be
consistent with anticipated growth in operations, infrastructure and personnel.
During the first quarter 2000, we opened our second distribution center to
ensure greater control over the distribution process, to ensure adequate
supplies of products to our customers, and to reduce our need to use special
delivery options for diverse geographic locations. In the second quarter of
2000, the new distribution center will require an additional $2 million to $3
million as it begins to operate at full capacity. 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 our
distribution centers and increases in our 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 $11.8 million of media advertising on ABC, Inc.,
an affiliate of The Walt Disney Company.
We believe that our existing cash and cash equivalents, together with our
available funds, will be sufficient to meet our anticipated needs for working
capital and capital expenditures into the first quarter of 2001. 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.
RISK FACTORS
The following is a discussion of certain factors which currently impact or
may impact our business, operating results and/or financial condition. Anyone
making an investment decision with respect to our capital stock or other
securities is cautioned to carefully consider these factors, along with the
factors discussed in our Registration Statement on Form S-1 (File No. 333-92433)
and our periodic reports filed pursuant to the Securities Exchange Act of 1934,
as amended.
12
<PAGE> 13
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 THREE YEARS.
We incurred net losses of $39.1 million for the three-month period ended
March 31, 2000 and cumulative losses of $100.9 million from our inception
through March 31, 2000. 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 three 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
centers;
- 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
- 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.
13
<PAGE> 14
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.
During the first quarter of 2000 we introduced 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 two distribution centers -- one in Union City, California
which has a satellite operation in Hayward, California, and a second center in
Greenwood, Indiana. We expect to begin operating a third distribution center
within the next twenty-four months. 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 an additional
$2 million to $3 million in facilities and equipment during the second quarter
of 2000 in connection with the recent opening of our Greenwood distribution
center. 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."
SINCE WE CURRENTLY OPERATE ONLY TWO DISTRIBUTION CENTERS LOCATED IN THE SAN
FRANCISCO BAY AREA AND GREENWOOD, INDIANA, WE ARE SUSCEPTIBLE TO THE RISK OF
DAMAGE TO OUR DISTRIBUTION CENTERS.
Since we currently only operate two distribution centers 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 original
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, this 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.
14
<PAGE> 15
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 centers; 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 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.
15
<PAGE> 16
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. 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, 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 informal 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 lower
operational
16
<PAGE> 17
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 owns approximately 30.4% of our common stock, 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 March 31, 2000, 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 seven periods of up to three hours each during which our site was
unavailable to customers due to scheduled periodic maintenance, five instances
of one hour or less during which the site was unavailable to customers, and one
period of 6 hours during which the site was unavailable for customer
transactions. 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
17
<PAGE> 18
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 to March 31, 2000 we grew from 4 to 123 to 270 to 279
employees, respectively. We currently have two distribution centers, and expect
to begin operating a third distribution center within the next twenty-four
months. 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.
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,
18
<PAGE> 19
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 lack
of a partnership 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.
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,
19
<PAGE> 20
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.
As of March 31, 2000, 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. Many of 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.
20
<PAGE> 21
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
21
<PAGE> 22
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 trademark applications. Any claims
or customer confusion related to our trademarks, or our failure to obtain any
trademark registration, would negatively affect our business. On April 12, 2000,
we filed a complaint for declaratory judgment in the United States District
Court for the Northern District of California against a third party to establish
that we have not infringed upon any third-party trademarks in connection with
the creation of our Pets.com Sock Puppet. See Part II, Other Information, Item
1 -- Legal Proceedings.
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
22
<PAGE> 23
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.
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 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 CONTROL THE MAJORITY OF OUR
COMMON STOCK AFTER OUR INITIAL PUBLIC OFFERING AND THEREFORE ARE 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 our initial public offering, Amazon.com beneficially owns
approximately 30.4% of our outstanding common stock and Mark Britto,
Amazon.com's Vice President of Strategic Alliances is a member of our Board of
Directors. Therefore, Amazon.com is 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 has sufficient votes to prevent the
tax-free treatment of an acquisition. Moreover, our executive officers,
directors and entities affiliated with them, including Amazon.com, in the
aggregate, beneficially own approximately 54.8% of our outstanding common stock.
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.
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.
23
<PAGE> 24
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, use or other similar taxes in respect of goods
sold by Pets.com, except from purchasers located in California and Indiana.
However, one or more states other than these two states or the federal
government may seek to impose sales tax collection obligations on sales made by
out-of-state online retailers such as Pets.com, to customers residing in the
taxing state, 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, use or other taxes on the
transactions with respect to which we do not currently collect such taxes 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. 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 that ensures 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 result in a
delay in shipment of products to
24
<PAGE> 25
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 very few 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
25
<PAGE> 26
such as those governing privacy, libel and taxation apply to Web stores 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.
OUR STOCK PRICE IS SUBJECT TO FLUCTUATION, WHICH COULD RESULT IN SUBSTANTIAL
LOSSES FOR INVESTORS.
The market price for our common stock has and will continue to vary. 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 have fallen since
reaching near historical highs in prior months. Investors may be unable to
resell their shares of our common stock at or above the price they paid for
them. 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
OUR INITIAL PUBLIC 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. After our initial public offering,
we had outstanding 29,544,737 shares of common stock. This includes 7,500,000
shares that we sold in the offering, which were eligible for immediate resale in
the public market. The remaining 22,044,737 shares will become eligible for
resale in the public market at various times between now and January 18, 2001.
26
<PAGE> 27
NEW STOCKHOLDERS INCUR SUBSTANTIAL DILUTION AS A RESULT OF THE EXERCISE OF PRIOR
STOCK OPTION GRANTS.
We have issued options to acquire common stock at prices significantly
below our initial public offering price. Assuming that outstanding options are
exercised in full, there would be dilution to investors who purchased out stock
either in connection with or subsequent to our initial public offering.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have assessed our vulnerability to certain market risks, including
interest rate risk associated with financial instruments included in cash and
cash equivalents. Due to the short-term nature of these investments and our
investment policies and procedures, we have determined that the risk associated
with interest rate fluctuations related to these financial instruments does not
pose a material risk to the Company.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business.
(a) On April 12, 2000, we filed a complaint for declaratory judgment in the
United States District Court for the Northern District of California against
Robert Smigel, the creator of Triumph, the Insult Comic Dog, to establish that
Pets.com has not infringed upon any trademark held by Mr. Smigel or engaged in
unfair competition, that Mr. Smigel defamed Pets.com by claiming that we stole
the idea for our Sock Puppet from him, and that Mr. Smigel has engaged in trade
libel by making false accusations against us.
(b) 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 answered and asserted affirmative
defenses to the complaint. Pending before the court is plaintiff's motion for
summary judgment on whether it is entitled to a $500,000 payment from us. We
have opposed the motion and a hearing is scheduled for May 30, 2000.
(c) On April 24, 2000, a former employee filed a complaint against us in the
Superior Court of the State of California for the City and County of San
Francisco alleging, in connection with her employment with and subsequent
resignation from Pets.com, breach of contract, breach of the covenant of good
faith and fair dealing, fraud, defamation and misappropriation of trade secrets.
We believe we have meritorious defenses against all of the claims and intend to
vigorously defend against them.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(A) On January 25, 2000, we effected a .8 for 1 reverse stock split and
reincorporated from California to Delaware. Consequently, each share of capital
stock outstanding prior to this event was reconstituted as .8 of a share, and
each shareholder of the prior California corporation became the holder of an
equivalent number of shares of capital stock of the successor Delaware
corporation.
(B) Not applicable.
(C) Recent Sales of Unregistered Securities; Uses of Proceeds From Registered
Securities.
(a) Securities Sold.
(i) Between January 1, 2000 and March 31, 2000, we issued and sold
54,800 shares of Common Stock to seventeen (17) individuals pursuant to the
exercise of outstanding stock options at a weighted average exercise price
of $2.08 per share.
27
<PAGE> 28
(ii) On January 18, 2000, we issued and sold to an affiliate of The
Walt Disney Company a total of 1,102,400 shares of Series C Preferred
Stock, which shares were converted into an equivalent number of shares of
our Common Stock immediately prior to the effective time of our initial
public offering.
(b) Underwriters and Other Purchasers.
There were no underwriters for the transactions set forth in (a)(i)
and (ii) above. The shares described in item (a)(i) above were sold to
seventeen (17) of our employees and consultants. The shares described in
item (a)(ii) above were sold to Catalyst Investments, L.L.C., an affiliate
of The Walt Disney Company.
(c) The shares referenced in item (a)(i) above that were sold pursuant
to the exercise of stock options were sold at an average weighted exercise
price of $2.08, for total proceeds of $114,000. The shares referenced in
item (a)(ii) above were sold for consideration other than cash. Such
non-cash consideration consists of media advertising time provided by ABC,
Inc. valued at $11.8 million.
(d) The sales referenced in item (a)(i) above were exempt from
registration under Rule 701 of the Securities Act of 1933, as amended (the
"Act"). The sale referenced in item (a)(ii) above was exempt from
registration under Section 4(2) of the Act.
(e) Terms of Conversion or Exercise. Not applicable.
(f) Use of Proceeds from sale of Registered Securities.
On February 16, 2000, the Company closed its initial public offering of
Common Stock, $0.001 par value. The managing underwriters in the offering were
Merrill Lynch & Co., Bear Stearns & Co. Inc., Thomas Weisel Partners LLC, and
Warburg Dillon Read LLC (the "Underwriters"). The shares of Common Stock sold in
the offering were registered under the Act on a Registration Statement on Form
S-1 (the "Registration Statement") (Reg. No. 333-92433) that was declared
effective by the SEC on February 11, 2000. On that date 7,500,000 shares of
Common Stock registered under the Registration Statement were sold at a price of
$11.00 per share. The aggregate price of the offering amount registered and sold
was $82,500,000. In connection with the offering, the Company paid an aggregate
of $5,775,000 in underwriting discounts and commissions to the Underwriters and
the aggregate proceeds to the Company were $75.3 million after deducting
offering expenses of $1.4 million.
We currently expect to use the net proceeds primarily for working capital
and general corporate purposes, including funding product development and
expanding the sales and marketing organization. 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 have used a portion and may continue to
use a portion of the net proceeds for further development of our distribution
capabilities and programs to expand our customer base. None of the Company's net
proceeds of the offering were paid directly or indirectly to any director,
officer, persons owning 10% or more of any class of equity securities of
Pets.com, or an affiliate of Pets.com.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The shareholders of Pets.com approved the following actions by written
consent on the indicated dates. On January 17, 2000, the required number of
shareholders approved our Fifth Amended and Restated Articles of Incorporation
which eliminated previously authorized Series B-1 Preferred Stock and authorized
1,500,000 shares of Series C Preferred Stock. On January 25, 2000, the required
number of shareholders approved our reincorporation into Delaware from
California, a 0.8-for-1 reverse stock split, our public company charter
documents, certain indemnification agreements with our officers and directors,
and ratification of Ernst &
28
<PAGE> 29
Young LLP as our independent auditors for the years ending December 31, 1999 and
December 31, 2000. On February 8, 2000, the required number of shareholders
approved a resolution to convert all outstanding shares of Preferred Stock to
Common Stock immediately prior to the closing of our initial public offering of
Common Stock.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following exhibit is attached hereto:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.37 Exclusive Distribution with Salt H(2)0 Headquarters, Inc.
dated December 8, 1999 and Amendment to Exclusive
Distribution Agreement dated April 28, 2000.
10.38 Yahoo! Remote Merchant Integration (RMI) Agreement dated as
of February 3, 2000 with Yahoo! Inc.
10.39 Exclusive Representation Agreement dated March 20, 2000 with
Brian P. Hakan & Associates, Inc.
27.1 Financial Data Schedule
</TABLE>
b. The Company filed the following reports on Form 8-K during the quarter
ended March 31, 2000: None.
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PETS.COM, INC.
By: /s/ PAUL MANCA
------------------------------------
Paul Manca
Chief Financial Officer (Principal
Accounting and Finance Officer)
Date: May 12, 2000
30
<PAGE> 31
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.37 Exclusive Distribution with Salt H(2)0 Headquarters, Inc.
dated December 8, 1999 and Amendment to Exclusive
Distribution Agreement dated April 28, 2000.
10.38 Yahoo! Remote Merchant Integration (RMI) Agreement dated as
of February 3, 2000 with Yahoo! Inc.
10.39 Exclusive Representation Agreement dated March 20, 2000 with
Brian P. Hakan & Associates, Inc.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.37
EXCLUSIVE DISTRIBUTION AGREEMENT
This Exclusive Distribution Agreement ("Agreement") is entered into and
made effective as of this 8th day of December, 1999 ("Effective Date") by and
between PETS.COM, INC. ("Pets.com"), a Delaware corporation, with its principal
offices located at 435 Brannan Street, San Francisco, CA 94107 and SALT H2O
HEADQUARTERS, INC. ("Salt H2O"), a Minnesota Corporation, with its principal
offices at 801 East 79th Street, Bloomington, MN 55420 (each a "party" and
collectively the "parties").
RECITALS
WHEREAS, Pets.com owns and operates the Pets.com Website (as defined
below) which markets and sells pet related goods to consumers; and
WHEREAS, Salt H2O is a supplier of fish and other animals for the pet
industry; and
WHEREAS, Pets.com and Salt H2O desire to establish a relationship
whereby Pets.com will become the exclusive direct consumer Internet distributor
of certain animals supplied by Salt H2O.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein set forth, the parties agree as follows:
AGREEMENT
1. Definitions. For purposes of this Agreement, the following terms shall have
the following meanings whenever initially capitalized:
"Pets.com Website" shall mean a site or sites on the Internet, including
without limitation the World Wide Web, established and operated by Pets.com,
including without limitation the site currently located at http://www.pets.com.
"Animal" shall mean any animal supplied by Salt H2O packaged alone or
together with any other product in accordance with this Agreement. The parties
agree that the definition of "Animals" shall initially be restricted to
saltwater fish, invertebrates and live rocks.
"Customer" shall mean any person or entity that acquires an Animal from
the Pets.com Website for its own personal use and not for resale or
distribution.
"Internet Market" shall mean the marketing and sale of products and
services over the Internet along with the direct consumer distribution of such
products and services.
"Pets.com Marks" shall mean any trademark, service mark, logo or other
indicia owned by Pets.com.
"Pets E-commerce Company" shall mean any website or other online service
or entity that markets, sells or allows Customers to purchase Animals over the
Internet. For purposes of this Agreement, "Pets E-Commerce Company" does not
include Salt H2O's existing customers as of the Effective Date set forth in
Exhibit A and other wholesale customers and aquarium maintenance companies
serviced by Salt H2O unless such customer or company is acquired by a Pets
E-commerce Company.
"Probationary Period" shall mean the period of sixty (60) days after the
date which Salt H2O begins to fulfill orders for Animals placed by Customers on
the Pets.com Website during which time Pets.com will evaluate whether Salt H2O
can satisfy the requirements of Pets.com, including without limitation the
timely sourcing, picking, packing and shipping of Animals.
1
<PAGE> 2
2. Exclusive Distribution.
2.1 Appointment. Salt H2O hereby appoints Pets.com and Pets.com agrees
to become the exclusive worldwide distributor of all Animals supplied by Salt
H2O including the exclusive right and license to source, supply, package,
market, distribute, fulfill orders and sublicense the same for the Internet
Market.
2.2 Non-Competition. Salt H2O including its officers, directors and
employees shall not, directly or indirectly, whether as principal, agent,
officer, director, employee, investor, consultant, stockholder, or otherwise,
alone or in association with any other person invest in, provide services for,
carry on, manage, operate or become engaged in, or otherwise take part in a Pet
E-Commerce Company.
2.3 Audit. During the Term of this Agreement and for two years
thereafter, Salt H2O shall maintain complete and accurate business and
accounting records, sufficient to substantiate its compliance under this
Agreement. Pets.com may, at its expense, audit the applicable records in order
to verify Salt H2O's compliance under this Agreement. Audits may be made from
time to time upon reasonable notice from Pets.com during the Term of the
Agreement and for two (2) years thereafter. If the audit report indicates that
Salt H2O has not complied with this Agreement, Pets.com shall be entitled to
terminate this Agreement for cause pursuant to Section 10.3 and Salt H2O shall
refund to Pets.com the portion of the consideration set forth in Section 3
prorated over the Term of this Agreement for the period of noncompliance.
3. Consideration. In consideration of these exclusive distribution and
fulfillment rights, Pets.com will pay Salt H2O the sum of [*] in accordance with
the following schedule: Upon execution of this Agreement, Pets.com shall pay
Salt H2O [*] which shall be refunded to Pets.com if Pets.com terminates this
Agreement during the Probationary Period. Thereafter, Pets.com shall pay Salt
H2O in equal quarterly installments of [*] over the Term of this Agreement
commencing after the Probationary Period during which time Pets.com will
evaluate whether Salt H2O can satisfy the requirements of Pets.com, including
without limitation the timely sourcing, picking, packing and shipping of
Animals.
4. Salt H2O Obligations.
4.1 Distribution and Packaging. Salt H2O agrees to fulfill orders for
and deliver the Animals to Customers ordered through the Pets.com Website in
accordance with this Agreement no later than March 1, 2000 unless another date
is mutually agreed by both parties. Salt H2O must (i) pick, pack and ship
Animals; and (ii) send electronic confirmations of such orders to Pets.com, all
within twenty four (24) hours of the placement of an order (excluding weekend
days) by a Customer on the Pets.com Website.
4.2 Live Arrival Date and Fill Rate. Salt H2O shall guarantee the live
arrival of Animals and a minimum of a five (5) day survival after such arrival
or will refund to Customer the purchase price of such Animals provided that the
total annual cost of any replacement Animals does not exceed five percent (5%)
of the total cost of Animals supplied by Salt H2O pursuant to this Agreement.
Salt H2O shall also ensure that the initial fill rate for fish will be at least
92.5%.
4.3 Proprietary Rights and Legends. Salt H2O shall include any Pets.com
Marks, copyright notices and any other proprietary rights legends specified by
Pets.com on at least two (2) sides of all packaging of Animals, or in any other
manner specified by Pets.com. Salt H2O shall not remove or alter any proprietary
rights notice placed in or on the packaging of Animals by Pets.com. Salt H2O
acknowledges that the Pets.com Marks are owned solely and exclusively by
Pets.com, and agrees to use the Marks only in the form and manner and with
appropriate legends as prescribed by Pets.com. Salt H2O agrees not to use any
other trademark or service mark in connection with its delivery of the Animals,
and may not private label the packaging of Animals or any portion thereof, or
include any Salt H2O or third party trademark, copyright or any proprietary
rights legends on the packaging of Animals or any portion thereof without prior
written approval of Pets.com.
*CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
2
<PAGE> 3
4.4 Availability List. Salt H2O shall provide Pets.com a database of
species including common and scientific names and compatibility list which must
be downloaded into Pets.com inventory system on a regular basis to be mutually
determined by the parties. Should there be a discrepancy between the product
availability lists of Salt H2O and Pets.com, Salt H2O's list shall be the
conclusive list for purposes of Section 4.2.
4.5 Special Offers to Customers. Salt H2O shall provide Customers weekly
"specials" in addition to special groupings of fish, live rock and coral as
"special packs."
4.6 Authorized Fulfillment. All fulfillment of Animals made hereunder
will include only Animals for which Salt H2O is authorized to fulfill orders.
Salt H2O is not authorized to make, and shall not make, any other warranties,
representations, or promises on Pets.com's behalf.
4.7 Seasonal Adjustments. Salt H2O shall use its best efforts to timely
supply Animals in accordance with this Agreement based on a standard of
commercial reasonability, which means that the supply obligation shall include
consideration of the seasonal nature of certain products as well as other market
and supply factors beyond the control of Salt H2O.
4.8 Service and Returns for Customers. Salt H2O shall be solely
responsible for complying with Pets.com's current customer service and warranty
provisions as set forth at http://www.pets.com/footer/footer_guaranteel.html and
which may be amended from time to time by Pets.com.
4.9 Compliance With Applicable Laws. Salt H2O shall ensure that its
fulfillment and delivery of Animals complies with any and all applicable state,
federal and local laws and regulations.
5. Pricing. The price of Animals, including without limitation the costs of
picking, packing, boxing, shipping and all materials including hot and cold
packs is set forth in Exhibit B subject to change by mutual agreement by the
parties provided that the current and future prices offered to Pets.com will be
no greater than the lowest price offered to Salt H2O's other customers at such
time, regardless of volume. Salt H2O will provide Pets.com sixty (60) days
written notice of all price increases (with the exception of fuel surcharges),
which will apply to purchase orders received after such period. Any price
decreases will apply to all purchase orders and unshipped orders as of the date
of such price decrease.
6. Technicians. At Pets.com's expense, Salt H2O shall initially hire two (2)
technicians to provide customer service to Customers at Salt H2O's premises.
Should Pets.com deem necessary, Salt H2O agrees to hire additional technicians
at Pets.com's sole discretion and expense. Such technicians shall be the
employees of Pets.com and report to the Director of Customer Service at
Pets.com.
7. Confidentiality. Both parties expressly undertake to retain in confidence the
terms and conditions of this Agreement, any attached Exhibits and all
information and know-how transmitted by either party and make no use of such
information and know-how except under the terms and during the existence of this
Agreement. Both parties shall guarantee and ensure its employees' compliance
with this paragraph. Both parties' obligations under this paragraph shall
survive any termination of this Agreement and shall extend to the earlier of
such time as the information is in the public domain or five (5) years following
the termination of this Agreement. This Section shall not prohibit the parties
from disclosing such information as is specifically required by any Federal or
state authorities. Notwithstanding the foregoing, either party may disclose
confidential information in accordance with any judicial or other governmental
order or request, provided that such party shall immediately notify the other
party in writing upon its receipt of such order or request and shall assist the
other party as is reasonable in seeking any protective order or its equivalent
or in limiting the scope of disclosure of any Confidential Information.
3
<PAGE> 4
8. Indemnification.
8.1 By Salt H2O. Salt H2O shall, at its own expense, indemnify, defend
and hold harmless Pets.com, against any third-party claim, suit, action, or
other proceeding brought against Pets.com, to the extent that such claim, suit,
action or other proceeding is based on or arises from: (i) any material breach
of Salt H2O's obligations, promises, representations, warranties or agreements
hereunder or (ii) the fulfillment or delivery of Animals; provided, however,
that: (a) Pets.com provides Salt H2O with prompt notice of any such claim; (b)
Pets.com permits Salt H2O to assume and control the defense and settlement of
such action, with counsel chosen by Salt H2O; (c) Pets.com does not enter into
any settlement or compromise of any such claim without Salt H2O's prior written
consent; and (d) Pets.com cooperates with Salt H2O in such defense, at Salt
H2O's expense.
8.2 By Pets.com. Pets.com shall, at its own expense, indemnify, defend
and hold harmless Salt H2O, against any third-party claim, suit, action, or
other proceeding brought against Salt H2O, to the extent that such claim, suit,
action or other proceeding is based on or arises from any material breach of
Pets.com's obligations, promises, representations, warranties or agreements
hereunder; provided, however, that: (a) Salt H2O provides Pets.com with prompt
notice of any such claim; (b) Salt H2O permits Pets.com to assume and control
the defense and settlement of such action, with counsel chosen by Pets.com; (c)
Salt H2O does not enter into any settlement or compromise of any such claim
without Pets.com's prior written consent; and (d) Salt H2O cooperates with
Pets.com in such defense, at Pets.com's expense.
9. Representation and Warranties; Limitation of Liability.
9.1 Mutual Representations and Warranties. Each party to this Agreement
represents and warrants to the other party that: (a) such party has the full
corporate 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; (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; and (d)
such party acknowledges that the other party makes no representations,
warranties or agreements related to the subject matter hereof that are not
expressly provided for in this Agreement.
9.2 UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE LIABLE TO THE OTHER
PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL, PUNITIVE OR EXEMPLARY
DAMAGES, EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES,
ARISING FROM ANY PROVISION OF THIS AGREEMENT, SUCH AS, BUT NOT LIMITED TO, LOSS
OF REVENUE OR ANTICIPATED PROFITS OR LOST BUSINESS.
10. Term and Termination.
10.1 Term. This Agreement shall take effect on the Effective Date and
will continue in effect for [*] from the date Salt H2O commences performance of
its obligations hereunder ("Term") and may be renewed by Pets.com, in its sole
discretion, for an additional [*].
10.2 Termination Without Cause. Pets.com shall have the right to
terminate this Agreement at any time during the Probationary Period without
cause or if Salt H2O is unable to perform any of its obligations under this
Agreement by March 1, 2000. Salt H2O shall refund to Pets.com all payments made
to Salt H2O during the Probationary Period and neither party shall be
responsible to the other for any other costs or damages.
10.3 Termination with Cause. Notwithstanding this section, either party
may terminate this Agreement immediately upon notice, if the other party: (i)
becomes insolvent; (ii) files a petition in bankruptcy; or (iii) breaches any of
its material obligations under this Agreement in any material respect, which
breach is not remedied within fourteen (14) days following written notice to
such breaching party.
*CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
4
<PAGE> 5
10.4 Effect of Termination. Upon termination of this Agreement for any
reason, (a) Salt H2O will immediately cease fulfillment of the Animals, (b) Salt
H2O will return to Pets.com any of Pets.com's confidential information in the
possession of or under the control of Salt H2O, (c) all licenses granted herein
shall terminate and (d) Sections 7, 8, 9, 10 and 11 shall survive in accordance
with their terms.
11. General Provisions.
11.1 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 7, 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.
11.2 Delay in Performance. If as a result of fire, casualty, act of God,
riot, war, labor dispute, government regulation, or decree of any court or any
other event beyond the control of Salt H2O or Pets.com, either of the parties
shall be unable to perform its obligations hereunder, such inability shall not
constitute a breach of this Agreement, and such obligations shall be performed
as soon as the cause of the inability ceases or is removed; provided that if
such an event as set forth in this Section 11.2 extends for a period in excess
of ninety (90) days, the other party shall be entitled to terminate this
Agreement pursuant to Section 10.3.
11.3 Expenses. Each party shall be responsible for its own legal,
accounting and other fees and expenses related to this Agreement. Each party
shall indemnify and hold harmless the other party from any claim for broker's or
finder's fees arising from this Agreement by any person claiming to have been
engaged by such party.
11.4 No Partnership or Agency. Pets.com and Salt H2O will remain
independent contractors and not agents or employees of one another and nothing
in this Agreement shall be construed to create or constitute an
employer-employee relationship, partnership, joint venture, franchise, agency,
or contract of employment between Pets.com and Salt H2O.
11.5 Governing Law; Jurisdiction. This Agreement shall be governed by
and construed in accordance with the laws of the State of California, without
reference to the conflicts of laws provisions thereof.
11.6 Entire Agreement. This Agreement and all attached Exhibits
constitute the entire agreement between Pets.com and Salt H2O, and supersedes
and terminates any and all prior agreements or contracts, written or oral,
entered into between the parties relating to the subject matter hereof. Any
representations, promises, or conditions in connection therewith not in writing
signed by both parties shall not be binding upon either party. This Agreement
shall control any provisions in purchase orders which are inconsistent with this
Agreement.
11.7 Assignment. This Agreement may be assigned by Pets.com in
connection with the sale or merger of all or substantially all of the assets or
equity of Pets.com. This Agreement may not be assigned by Salt H2O without the
prior written consent of Pets.com.
11.8 Notices. All notices required or contemplated by this Agreement
shall be in writing, delivered by U.S. certified mail (return receipt
requested), or via overnight courier (e.g., Federal Express, or DHL), and
addressed as follows:
If to Pets.com: Pets.com, Inc.
435 Brannan Street
San Francisco, CA 94107
Attn: Julie Wainwright
If to Salt H2O: Salt H2O Headquarters, Inc.
5
<PAGE> 6
801 East 79th Street
Bloomington, MN 55420
Attn: Chad Collins
Such notices shall be deemed given three (3) business days after being
deposited in the United States mail or one business day after being delivered
with an overnight carrier.
11.9 Partial Invalidity. Should any of this Agreement be held to be
void, invalid, or inoperative, the remaining provisions of this Agreement shall
not be affected and shall continue in full force and effect.
IN WITNESS WHEREOF, the parties have entered into this Agreement on the
Effective Date written above. This Agreement is not binding until executed by
Pets.com.
PETS.COM ("PETS.COM") SALT H2O HEADQUARTERS ("SALT H2O")
By: /s/ J. L. Wainwright By: /s/ Chad Collins, President
-------------------------------- ---------------------------------
J. L. Wainwright Chad Collins
- ----------------------------------- ------------------------------------
Name (please print) Name (please print)
CEO President
- ----------------------------------- ------------------------------------
Title Title
12/9/99 12/8/99
- ----------------------------------- ------------------------------------
Date Date
6
<PAGE> 7
Exhibit A
List of Existing Pets E-Commerce Companies
www.whatafish.com
www.premieraquarium.com
7
<PAGE> 8
Exhibit B
Pricing
Pets.com livestock prices are standard list price less 5% unless otehrwise
agreed upon.
Pets.com shipping prices are listed below
<TABLE>
<CAPTION>
Box Dimension Box Charges Shipping Charges
- ------------- ----------- ----------------
<S> <C> <C>
Small [*] [*]
Medium [*] [*]
Large [*] [*]
Extra Large [*] [*]
</TABLE>
All shipping rates are for priority overnight shipping with FedEx.
All prices subject to change per the agreement.
Live rock has no box charge and shipping is on a per lb. basis.
*CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
8
<PAGE> 9
AMENDMENT TO
EXCLUSIVE DISTRIBUTION AGREEMENT
This Amendment (the "Amendment") to the Exclusive Distribution Agreement
is entered into and made effective as of this 28th day of April, 2000
("Effective Date") by and between PETS.COM, INC. ("Pets.com"), a Delaware
corporation, with its principal offices located at 435 Brannan Street, San
Francisco, CA 94107 and SALT H2O HEADQUARTERS, INC. ("Salt H2O"), a Minnesota
Corporation, with its principal offices at 801 East 79th Street, Bloomington, MN
55420 (each a "party" and collectively the "parties").
WHEREAS, the parties entered into an Exclusive Distribution Agreement
(the "Agreement") which has an effective date of December 8, 1999, and
WHEREAS, the parties wish to amend the Agreement as provided herein.
NOW, THEREFORE, the parties, intending to be legally bound, agree as
follows:
1. Section 4.1 of the Agreement is amended to read in its entirety as follows:
Distribution and Packaging. Salt H2O agrees to fulfill orders for and
deliver the Animals to Customers ordered through the Pets.com Website in
accordance with this Agreement no later than March 1, 2000 unless another date
is mutually agreed by both parties. Salt H2O must (i) begin to pick, pack and
ship Animals no earlier than 12:00 CST and ship the last order of each day
before 7:00 PM CST; and (ii) send electronic confirmations of such orders to
Pets.com, all within twelve (12) hours of the placement of an order (excluding
weekend days) by a Customer on the Pets.com Website except that during limited
periods of excessively high order and related activity, the parties may extend
the twelve (12) hour requirement. Salt H2O shall package the Animals in
accordance with the packaging guidelines as set forth in Exhibit 1.
2. Section 4.2 of the Agreement is amended to read in its entirety as follows:
Live Arrival Date and Fill Rate. Salt H2O shall guarantee the live
arrival of Animals and a minimum of a five (5) day survival after such arrival
or will refund to Customer the cost of such Animal paid by such Customer
provided that the total annual cost of any replacement Animals does not exceed
five percent (5%) of the total cost, to be reviewed on a monthly basis, of
Animals supplied by Salt H2O pursuant to this Agreement. Salt H2O shall also
ensure that the initial fill rate for fish will be at least 92.5%.
3. Section 4.4 of the Agreement is amended to read in its entirety as follows:
Availability List and Catalog. Salt H2O shall provide to Pets.com (i) a
database of species including common and scientific names and a compatibility
list which must be downloaded into the Pets.com inventory system on a regular
basis to be mutually determined by the parties; (ii) an
<PAGE> 10
electronic version of Salt H2O's complete catalog on daily basis at a mutually
agreeable time; and (iii) hourly updates to such catalog.. Should there be a
discrepancy between the product availability lists of Salt H2O and Pets.com,
Salt H2O's list shall be the conclusive list for purposes of Section 4.2.
4. Section 4.8 of the Agreement is amended to read in its entirety as follows:
Service and Returns for Customers. Salt H2O shall be solely responsible
for complying with Pets.com's current customer service and warranty provisions
as set forth at http://www.pets.com/footer/footer_guaranteel.html and which may
be amended from time to time by Pets.com. In addition and at Pets.com's expense,
Salt H2O will arrange for the return of all undelivered Animals to Salt H2O for
next day morning delivery via Federal Express or other comparable carrier
service.
5. Section 4.10 is added to the Agreement to read in its entirety as follows:
"Salt H2O has provided product photographs to Pets.com for its sales and
use in distribution and hereby grants to Pets.com the nonexclusive worldwide
right and license for such use. Pets.com agrees that all such photographs
provided to it by Salt H2O shall be returned to Salt H2O upon termination of the
Agreement."
6. Section 9.3 is added to the Agreement to read in its entirety as follows:
"With respect to potential animal losses occurring during the period of
product shipment where such losses are attributable to a common carrier, such
animal losses shall not be the responsibility of Salt H2O."
7. Section 5.1 is added to the Agreement to read in its entirety as follows:
"All payments for Animals will be made to Salt H2O within fifteen (15)
days of the close of each week's shipments."
2
<PAGE> 11
IN WITNESS WHEREOF, the parties have entered into this Amendment on the
Effective Date written above. This Amendment is not binding until executed by
Pets.com.
PETS.COM ("PETS.COM") SALT H2O HEADQUARTERS ("SALT H2O")
By: /s/ JULIE WAINWRIGHT By: /s/ CHAD COLLINS
-------------------------------- ---------------------------------
Julie Wainwright Chad Collins
- ----------------------------------- ------------------------------------
Name (please print) Name (please print)
CEO President
- ----------------------------------- ------------------------------------
Title Title
4/28/00 4/28/00
- ----------------------------------- ------------------------------------
Date Date
3
<PAGE> 1
EXHIBIT 10.38
YAHOO! REMOTE MERCHANT INTEGRATION (RMI) AGREEMENT
THIS RMI AGREEMENT (the "Agreement") is made as of this February 3, 2000 (the
"Effective Date") between YAHOO! INC. ("Yahoo!"), a Delaware corporation, and
Pets.com, Inc. ("Merchant"), a Delaware corporation. In consideration of the
mutual promises contained herein, the parties agree as follows:
1. MERCHANT PRODUCT INFORMATION. Merchant will provide to Yahoo! information
relating to Merchant products in accordance with Yahoo!'s technical and
formatting specifications. Such information will include without limitation
a Merchant identifier, product name, product description, product price, URL
for the Web page on the Merchant Site (as defined below) that features the
product, URL for the Web page on the Merchant Site that contains the product
image and, if applicable, any warranty notices or disclaimers, product
availability, return information, sizes, colors, SKU numbers, Web pages and
graphic files, including but not limited to graphical brand features of
Merchant (collectively referred to as "Merchant Product Information").
Merchant agrees to update all Merchant Product Information in accordance
with Yahoo!'s technical and formatting specifications and in a timely
manner, which will be no less frequent than updates to such information on
the Merchant Site. Yahoo! will host Merchant Product Information on Yahoo!
servers and include Merchant Product Information in Yahoo!'s U.S. based
on-line shopping property (referred to as "Yahoo! Shopping" or the
"Service") and will update the Merchant Product Information no less
frequently than [*] every [*] business hours. Yahoo! is solely responsible
for the design, layout, posting and maintenance of Yahoo! Shopping. Merchant
will provide the Merchant Product Information to Yahoo! in accordance with
the product categories/taxonomy for pet related products that Merchant uses
on its web site.
2. MERCHANT PAGES. Merchant will permit Yahoo! to download and display, via a
"Proxy Server" or other means, Web pages from the Web site operated by or
for Merchant (the "Merchant Site"), currently located at
http://www.pets.com. Such pages, any portions thereof and any content
therein, as modified and displayed by Yahoo! in accordance with this
Agreement, are referred to as "Merchant Pages. "Merchant and Yahoo are
simultaneously entering into an agreement for the placement of certain Ad
Units of Merchant that will appear on Yahoo Shopping and link directly to
the Merchant Pages.
3. RESPONSIBILITIES AND RIGHTS WITH RESPECT TO MERCHANT PRODUCT INFORMATION AND
MERCHANT PAGES. All Merchant Product Information and Merchant Pages will
conform to Yahoo!'s technical and formatting specifications. Yahoo! reserves
the right not to post or include any Merchant Product Information or
Merchant Pages on any Yahoo! branded or co-branded property with reasonable
notice to Merchant for any reason except in order to secure [*] agreement
with another [*] merchant. In the event that Yahoo! becomes aware of a
potential conflict involving any hypertext links or third party advertising
included in the Merchant Pages, including but not limited to a violation of
law or a conflict with Yahoo!'s advertising guidelines or preexisting
contractual arrangements, Yahoo! will notify Merchant and may request that
Merchant remove or replace such hypertext links or third party advertising
on Merchant Pages. The foregoing only applies to Merchant Pages and does not
affect operation of or any material on the Merchant Site.
4. CUSTOMER ORDER INFORMATION.
(a) ORDER PLACEMENT AND FULFILLMENT. Users of Yahoo! Shopping may search for
and navigate to Merchant Product Information and Merchant Pages via
Yahoo! Shopping pages designed and hosted by Yahoo!. Users of Yahoo!
Shopping will order items to be purchased from Merchant via Merchant
Pages. Check-out for orders also will be conducted on Merchant Pages
(the "Check-out Pages"). Information relating to the purchase of
Merchant products via the Service, including product name, product
quantity, amount paid, user's proper name, shipping address, billing
address, email address and credit card information ("Customer Order
Information") will be transmitted to Merchant. Merchant will send
Merchant's then-standard order confirmation email to each user via email
within twenty-four (24) hours after Merchant receives the Customer Order
Information. Merchant will be solely responsible for all products
offered by Merchant on Yahoo! Shopping, including without limitation
billing, shipping and fulfillment of goods, returns and customer service
and for any acts or omissions that occur in connection with such product
offerings. During the Term (as defined below), if Merchant intends to
modify the Check-out Pages or otherwise redesign the Merchant Site,
Merchant will provide Yahoo! with (i) at least [*] business days written
notice prior to implementing such modification or redesign and (ii)
reasonable technical assistance, as Yahoo! may reasonably request, to
ensure that the Service will be uninterrupted.
(b) PRIVACY AND CONSUMER PROTECTION. Each party agrees to implement adequate
security protections to ensure the privacy of Customer Order
Information. Each party further agrees (i) to post a privacy policy on
its web site that, at a minimum, discloses any and all uses of personal
information collected from users by such party, including but not
limited to any uses of personal information collected during a
transaction that is cancelled or otherwise not completed by the user;
(ii) to place a prominent notice on any Check-out Pages on which such
party collects personal information from users that such information is
being collected; (iii) to provide a hypertext link on all Check-out
Pages to such party's privacy
*CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 2
policy; and (iv) to use Customer Order Information only as expressly
permitted by such party's privacy policy. If a user requests, or if
Yahoo! conveys such request on behalf of the user, that Merchant remove
personal information relating to any user from Merchant's database and
other records, Merchant agrees to remove such information promptly from
its database or other records.
5. INFORMATION MAINTAINED BY YAHOO! AND RELEVANT TO THE TRANSACTION. In the
event that a registered Yahoo! user places an order for a Merchant product
via the Service, Yahoo! already may maintain information about the user in
Yahoo!'s proprietary databases that is relevant to the transaction,
including but not limited to that user's proper name, shipping address,
billing address, email address and credit card information. Merchant
acknowledges that Yahoo! may give registered Yahoo! users the option to have
certain input fields on Check-out Pages that request Customer Order
Information "populated" with applicable information about that registered
Yahoo! user from Yahoo!'s proprietary databases. For clarity, the parties
understand that such "population" by Yahoo! will not affect Merchant's
ownership of Customer Order Information, as set forth in Section 7(c), and
will not transfer, impair or otherwise limit Yahoo!'s rights in the
"populated" information.
6. REGISTRATION OF UNREGISTERED YAHOO! USERS WHO PURCHASE FROM MERCHANT VIA THE
SERVICE. Merchant agrees that users who are not registered with Yahoo! may
be given the opportunity, but will not be required, to register with Yahoo!
before completing a discrete transaction with Merchant via the Service.
7. MERCHANT LICENSES TO YAHOO!.
(a) MERCHANT PRODUCT INFORMATION. Merchant hereby grants to Yahoo! a
worldwide, non-exclusive license to use, display, modify, make
derivative works from, reproduce and distribute Merchant Product
Information and any portions thereof and any derivative works therefrom
during the Term solely for the purpose of providing features of the
Service, including without limitation the right to incorporate Merchant
Product Information into a database and the right to display in any
manner the results of search queries and comparisons conducted by users
of the Service. Notwithstanding the foregoing, (i) Yahoo! may modify and
create derivative works from Merchant Product Information only to the
extent reasonably necessary to fit the format of the Service or to
provide features to end users of the Service and (ii) Yahoo! shall not
make available to any third party a downloadable or printable database
of Merchant Product Information except in the context of search services
made available to end users on the Service. Merchant also grants to
Yahoo! (i) the right to maintain such Merchant Product Information on
Yahoo! servers during the Term; (ii) the right to authorize the
downloading and printing of Merchant Product Information, or any portion
thereof, by users provided that such downloading or printing is provided
in the context of search services made available to end users on the
Service; and (iii) subject to Merchant's prior approval, which will not
be unreasonably withheld, the right to use Merchant Product Information
solely for the purposes of promoting Merchant products, Yahoo! Shopping
or Yahoo! generally.
(b) MERCHANT PAGES. Merchant grants to Yahoo! a worldwide, non-exclusive
license to use, display, modify, make derivative works from, reproduce
and distribute Merchant Pages to end users via the Service during the
Term solely for the purpose of making the Merchant Site available to end
users per Section 2. Notwithstanding the foregoing, Yahoo! may modify
and create derivative works from Merchant Pages only to the extent
reasonably necessary to fit the format of the Service or to provide
features of the Service. Without limiting the foregoing, notwithstanding
anything to the contrary in this Agreement, Yahoo! shall not use,
display, modify, make derivative works from, reproduce or distribute any
editorial content appearing on the Merchant Site, except as part of the
Merchant Site made available to end users via the Service. Merchant also
grants to Yahoo! (i) the right to designate and display a Yahoo! URL for
all Merchant Pages and (ii) with prior approval of Merchant, the right
to redirect certain hypertext links on Merchant Pages to certain pages
of the Service.
(c) CUSTOMER ORDER INFORMATION. Merchant owns Customer Order Information and
grants to Yahoo! a perpetual, worldwide, sublicensable, non-exclusive
license to use Customer Order Information in aggregate form, such that
Customer Order Information is not individually attributable to Merchant,
for research, marketing or other promotional purposes.
8. YAHOO! LICENSES TO MERCHANT. Yahoo! may provide Merchant with access to
certain software owned by Yahoo! (the "Software") in order to, among other
things, facilitate the transmission of Customer Order Information to
Merchant. In the event that Yahoo! provides Merchant with access to
Software, the terms that govern such access to, and use of, said Software
will be mutually agreed upon by the parties.
9. DISCLOSURE OF INFORMATION IN CONNECTION WITH MERCHANT. Merchant agrees that
Yahoo! may disclose information related to Merchant, including but not
limited to Customer Order Information, in the good faith belief that such
action is reasonably
<PAGE> 3
necessary: (a) to comply with the law or legal process or (b) to protect the
rights of Yahoo! arising hereunder or otherwise arising under applicable
law; provided, however, that for any disclosure under (b), Yahoo! will (i)
provide Merchant with the opportunity to resolve the matter itself. Yahoo!
will be entitled to disclose such information only if the matter is not
resolved within ten (10) business days and Yahoo! determines, in good faith
that disclosure is necessary and (ii) afford Merchant a reasonable
opportunity to seek protective legal treatment of any such disclosure.
Notwithstanding the foregoing, nothing in this section will impose a duty on
Yahoo! to make any such disclosures. Merchant also acknowledges and agrees
that Yahoo! may access information related to Merchant on Yahoo! servers
during the Term as necessary to identify or resolve technical problems or
respond to complaints about the Service.
10. PAYMENTS TO YAHOO!. Merchant will pay to Yahoo! [*] of Revenue received by
Merchant. "Revenue" means the total net retail amount of sales, excluding
shipping, handling, taxes and returns, from users that purchase Merchant
products via the Service. Merchant will pay such Revenue share amounts [*]
within [*] days of the end of each [*] and will accompany each payment with
a written report certified by an officer of Merchant that includes (a) the
total retail dollar amount of sales made via the Service and (b) the
calculation of Revenue share due to Yahoo!. Merchant will maintain complete
and accurate records in accordance with generally accepted methods of
accounting for all such transactions and will allow Yahoo!, at its own
expense, to direct an independent certified public accounting firm to
inspect and audit such records during normal business hours with written
notice to Merchant. In the event that any audit reveals an underpayment of
more than [*] percent [*], Merchant will pay the reasonable cost of such
audit. All fees are payable in U.S. dollars. Late payments will bear
interest at the rate of one percent (1%) per month (or the highest rate
permitted by law, if less). In the event of any failure by Merchant to make
payment, Merchant will be responsible for all reasonable expenses (including
attorneys' fees) incurred by Yahoo! in collecting such amounts.
11. TERM, TERMINATION AND MODIFICATION. This Agreement will become effective as
of the Effective Date and will, unless sooner terminated as provided herein
or as otherwise agreed, remain effective for a period of [*] commencing on
March 1, 2000. No amendment to any provision of this Agreement will be
effective unless in writing and signed by both parties. Upon termination,
Yahoo! reserves the right to delete from its servers any and all information
related to Merchant, including but not limited to Merchant Product
Information. Sections 4(b), 7(c), 9, 10 (for payments accrued and unpaid
during the Term and for any extensions of the Term), 11 and 13 through 15
will survive termination or expiration of this Agreement.
12. Representations and Warranties.
(a) BY MERCHANT. Merchant represents and warrants that it (i) has full power
and authority under all relevant laws and regulations to offer, sell and
distribute the products offered by it, including but not limited to
holding all necessary licenses from all necessary jurisdictions to
engage in the advertising and sale of such products, and (ii) will not
engage in any activities: (A) that constitute or encourage a violation
of any applicable law or regulation, including but not limited to the
sale of illegal goods or the violation of export control or obscenity
laws; (B) that infringe the rights of any third party, including but not
limited to the intellectual property, business, contractual or fiduciary
rights of others; and (C) that are in any way connected with the
transmission of the unsolicited distribution of email or with any
unethical marketing practices.
(b) BY YAHOO!. Yahoo! represents and warrants that it (i) has full power and
authority under all relevant laws and regulations to offer the Service
and (ii) will not engage in any activities that are in any way connected
with the transmission of the unsolicited distribution of email or with
any unethical marketing practices.
13. INDEMNITY.
(a) BY MERCHANT. Merchant agrees to indemnify and hold harmless Yahoo! and
its parents, subsidiaries, affiliates, officers, directors,
shareholders, employees and agents from any claim or demand, including
reasonable attorneys' fees, made by any third party to the extent that
such claim or demand is based on, or arises out of, (i) any products
offered, distributed or sold by Merchant in connection with the Service;
(ii) any mistake, error or omission made by Merchant, including but not
limited to data corruption and/or wrongful disclosure of Customer Order
Information; or (iii) any alleged violation of any rights of another,
including but not limited to Merchant's use of any content, trademarks,
service marks, trade names, copyrighted or patented material, or other
intellectual property used by Merchant; provided, however, that in any
such case: (A) Yahoo! provides Merchant with prompt notice of any such
claim; (B) Yahoo! permits Merchant to assume and control the defense of
such action, with counsel chosen by Merchant (who will be reasonably
acceptable to Yahoo!); and (C) Merchant does not enter into any
settlement or compromise of any such claim without Yahoo!'s prior
written consent, which consent will not be unreasonably withheld. It is
understood and agreed that Yahoo! will not be required to edit or review
for accuracy or appropriateness any content provided by Merchant.
*CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 4
(b) BY YAHOO!. Yahoo! agrees to indemnify and hold harmless Merchant and its
parents, subsidiaries, affiliates, officers, directors, shareholders,
employees and agents from any claim or demand, including reasonable
attorneys' fees, made by any third party to the extent that such claim
or demand is based on, or arises out of, any infringement of the United
States copyright, trademark or other proprietary right of a third party
established under United States law that results from Yahoo!'s use of
Yahoo! trademarks, service marks, logos or other distinctive Yahoo!
brand features; provided, however, that in any such case: (i) Merchant
provides Yahoo! with prompt notice of any such claim; (ii) Merchant
permits Yahoo! to assume and control the defense of such action, with
counsel chosen by Yahoo! (who will be reasonably acceptable to
Merchant); and (iii) Yahoo! does not enter into any settlement or
compromise of any such claim without Merchant's prior written consent,
which consent will not be unreasonably withheld.
14. DISCLAIMER OF WARRANTIES AND LIMITATIONS OF LIABILITY AND DAMAGES. THE
SERVICE IS PROVIDED ON AN "AS IS" AND "AS AVAILABLE" BASIS WITHOUT
WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED
TO WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
NEITHER THIS AGREEMENT NOR ANY DOCUMENTATION FURNISHED UNDER IT IS INTENDED
TO EXPRESS OR IMPLY ANY WARRANTY THAT THE SERVICES WILL BE UNINTERRUPTED,
TIMELY OR ERROR-FREE.
EXCEPT FOR OBLIGATIONS UNDER SECTION 13, NEITHER PARTY NOR ITS PARENTS,
SUBSIDIARIES, AFFILIATES, OFFICERS, DIRECTORS, SHAREHOLDERS, EMPLOYEES AND
AGENTS WILL BE LIABLE, UNDER ANY CIRCUMSTANCES OR LEGAL THEORIES WHATSOEVER,
FOR ANY LOSS OF BUSINESS, PROFITS OR GOODWILL, LOSS OF USE OR DATA,
INTERRUPTION OF BUSINESS OR FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR
CONSEQUENTIAL DAMAGES OF ANY CHARACTER, EVEN IF THAT PARTY IS AWARE OF THE
RISK OF SUCH DAMAGES. IN ADDITION, AND EXCEPT FOR OBLIGATIONS UNDER SECTION
13, NEITHER PARTY WILL BE LIABLE UNDER ANY CIRCUMSTANCES OR LEGAL THEORIES
FOR ANY DAMAGES THAT RESULT IN ANY WAY FROM MERCHANT'S USE OR INABILITY TO
USE THE SERVICE, OR THAT RESULT FROM ERRORS, DEFECTS, OMISSIONS, DELAYS IN
OPERATION OR TRANSMISSION, OR ANY OTHER FAILURE OF PERFORMANCE OF THE
SERVICE. FINALLY, EXCEPT FOR OBLIGATIONS UNDER SECTION 13, ONE PARTY'S
LIABILITY TO THE OTHER WILL NOT, FOR ANY REASON, EXCEED [*] DOLLARS [*].
15. MISCELLANEOUS. Any and all press releases and other public announcements
relating to this Agreement and/or the underlying transactions between Yahoo!
and Merchant, including the method and timing of such announcements, must be
approved in advance by the parties in writing. Each party reserves the right
to withhold approval of any public announcement in its sole discretion. Any
notices or communications will be by electronic mail or in writing and will
be deemed delivered upon receipt to the party to whom such communication is
directed. If to Yahoo!, such notices will be addressed to 3420 Central
Expressway, Santa Clara, CA 95051. If to Merchant, such notices will be
addressed to the electronic or mailing address specified on the signature
page of this Agreement. The section headings in this Agreement are for
convenience only and may not be relied upon to construe or otherwise
interpret this Agreement. This Agreement constitutes the final, complete and
exclusive statement of the agreement between the parties with respect to its
subject matter and supersede all previous proposals. This Agreement and the
relationship between Merchant and Yahoo! will be governed by the laws of the
state of California without regard to its conflict of law provisions.
Merchant and Yahoo! agree to submit to the personal and exclusive
jurisdiction of the Superior Court of the State of California for the County
of Santa Clara or the United States District Court for the Northern District
of California. If any provision of this Agreement is found invalid or
unenforceable, that provision will be enforced to the maximum extent
permissible, and the other provisions of this Agreement will remain in full
force. Neither party's failure to exercise or enforce any right or provision
of this Agreement will constitute a waiver of such right or provision. Both
parties agree that, regardless of any statute or law to the contrary, any
claim or cause of action arising out of or related to use of the Service or
this Agreement must be filed within [*] after such claim or cause
of action arose, or be forever barred.
16. Each party will appoint in writing a person who will act as the primary
point of contact for the other party with respect to this Agreement. Yahoo!
shall make reasonable efforts to provide a staging environment where
Merchant may test new versions of the Merchant Site and Merchant Pages for
compatibility with the Yahoo Shopping technology before such new versions
are made available to end users. Yahoo! shall make available to Merchant a
technical contact to reasonably assist in the resolution of technical issues
that may arise in connection with this Agreement.
[SIGNATURE PAGE FOLLOWS]
*CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 5
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives as of the date first written above.
YAHOO! INC.
By: /s/ Anil Singh By: /s/ Chris Deyo
-------------------------------- ---------------------------------
Title: SVP Title: President
----------------------------- ------------------------------
Address: 3420 Central Expressway Address: 435 Brannan St.
--------------------------- ----------------------------
Santa Clara, CA 95051 San Francisco, CA 94107
--------------------------- ----------------------------
Telecopy: Telecopy:
-------------------------- ---------------------------
E-mail: E-mail:
---------------------------- -----------------------------
<PAGE> 6
EXHIBIT A
STANDARD TERMS AND CONDITIONS FOR YAHOO! ADVERTISING AND PROMOTION PROGRAMS
Thank you for advertising with Yahoo! Inc. ("Yahoo"). The following terms and
conditions (the "Standard Terms") together with the insertion order to which
these Standard Terms are attached (the "Insertion Order"), and Exhibits B
("Addendum to Standard Terms and Conditions for Yahoo! Advertising") and C ("FTC
Order") constitute the complete and entire expression of the agreement (the
"Agreement") between you (the "Advertiser") and Yahoo.
1. PLACEMENT OF AD UNITS. Yahoo agrees to place (or, if applicable, distribute)
the advertising units ("Ad Units") as provided in the Insertion Order. All Ad
Units shall comply with Yahoo's standard advertising specifications, including
those set forth at http://docs.yahoo.com/docs/advertising/. All such
specifications are subject to change in Yahoo's sole discretion. All Ad Units
shall be served by Yahoo and shall link directly to pages within Advertiser's
website indicated on the Insertion Order ("Advertiser Site"), unless otherwise
agreed to by Yahoo in writing. In the event of Advertiser's material breach of
the Agreement, Yahoo shall have the right to suspend performance of its
obligations under the Agreement and any other agreement between the parties,
until the breach is fully remedied.
2. TERMS OF PAYMENT. Advertiser agrees to pay Yahoo in accordance with the terms
and schedule set forth in Exhibit B. All payments are non-refundable and
non-creditable and shall be made by Advertiser via cashiers check per Exhibit B.
Amounts not paid on or before each due date shall bear interest at the rate of
one percent (1%) per month (or the highest rate permitted by law, if less).
Notwithstanding the foregoing, any failure by Advertiser to make payments as
specified in Exhibit B shall constitute a material breach of this Agreement.
Advertiser will be responsible for all reasonable expenses (including attorneys'
fees) incurred by Yahoo in collecting any overdue payments.
3. POSITIONING. Except as otherwise expressly provided in the Insertion Order,
the manner in which an Ad Unit is positioned within any Yahoo property shall be
at the sole discretion of Yahoo. Notwithstanding the foregoing, Yahoo may, at
its sole discretion, replace any keyword or category (or subcategory) within the
Insertion Order for mutually agreeable comparable inventory in the event that
(i) Yahoo believes such keyword, category or subcategory to be a trademark,
trade name, company name, product name or brand name belonging to or claimed by
a third party, or (ii) Yahoo modifies the Yahoo property to which such keyword,
category or subcategory relates. Further, Yahoo reserves the right, at any time,
to redesign or modify the organization, structure, specifications, "look and
feel," navigation, guidelines and other elements of any Yahoo property,
including those on which an Ad Unit is displayed or delivered, provided,
however, that Yahoo! will provide Advertiser mutually agreeable comparable
inventory in the event that Yahoo! modifies or replaces any category (or
subcategory) within the Insertion Order.
4. USAGE STATISTICS. Other than as expressly specified in the Insertion Order,
Yahoo makes no guarantees with respect to usage statistics, levels of
impressions, Page Views, Click-Throughs or other measure for any Ad Unit
(collectively, "Ad Unit Measurements"). "Click-Through" means a user selecting
or clicking on an Ad Unit as solely measured by Yahoo's advertising reporting
system. "Page View" means a user's request for a page on a Yahoo property.
Advertiser acknowledges that Ad Unit Measurement statistics provided by Yahoo
are the official, definitive measurements of Yahoo's performance on any such
delivery obligations. Yahoo! represents that the processes and technology used
to generate such statistics have been certified and audited by an independent
agency. No other measurements or usage statistics (including those of Advertiser
or any third party) shall be accepted by Yahoo. Advertiser understands that
multiple Ad Units on a page requested by a user's browser, could result in
multiple Ad Unit Measurements being generated. Yahoo! shall provide Advertiser
with access to daily usage reports which shall include the guaranteed
impressions by each area, and the delivered impressions and Click-Through rates
by each area and by each creative item.
5. TERM/TERMINATION. The term of the Agreement (the "Term") shall be as set
forth in the Insertion Order and neither party shall be under any obligation to
renew the Agreement upon expiration of the Term. Notwithstanding the foregoing,
the Agreement may be terminated at any time by either party immediately upon
written notice to the other party if the other party (i) becomes insolvent; (ii)
files a petition in bankruptcy; or (iii) makes an assignment for the benefit of
its creditors. In addition, the Agreement may be terminated by either party on
thirty (30) days written notice to the other party of such other party's
material breach of any of its obligations under the Agreement (ten (10) days in
the case of a failure to pay any fees), which breach is not remedied within such
notice period.
6. NO ASSIGNMENT OR RESALE OF AD SPACE. Advertiser may not resell, assign or
transfer any of its rights or obligations hereunder, and any attempt to resell,
assign or transfer such rights or obligations without Yahoo's prior written
approval shall be null and void and a material breach of the Agreement.
Notwithstanding the foregoing, either party may assign this Agreement to an
entity who acquires substantially all of the stock or assets of such party;
provided that written consent will be required in the event that the
non-assigning party reasonably determines that the assignee will not have
sufficient capital or assets to perform its obligations hereunder, or that the
assignee is a competitor of the non-assigning party. All terms and provisions of
the Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective permitted transferees, successors and assigns.
7. MAKE GOODS. In the event that Yahoo (i) fails to post an Ad Unit in
accordance with the Agreement, (ii) fails to deliver the number of total Ad Unit
Measurements specified in the Agreement (if any) substantially by area in the
Insertion Order by the end of the Term, or (iii) of any other failure, technical
or otherwise, of such Ad Unit to appear as provided in the Agreement, the sole
liability of Yahoo to Advertiser shall be limited to, at Yahoo's sole
discretion, (x) a pro rata refund of the advertising fee representing
undelivered or misdelivered Ad Unit Measurements, (y) placement of the Ad Unit
within a reasonable time in a mutually agreeable
<PAGE> 7
comparable position, or (z) extension of the Term until the total Ad Unit
Measurements are delivered. Notwithstanding the foregoing, Yahoo shall have no
liability for any failure or delay resulting from the failure or delay of
Advertiser in performing any of its obligations hereunder or any governmental
action, fire, flood, insurrection, earthquake, power failure, riot, explosion,
embargo, strikes whether legal or illegal, labor or material shortage,
transportation interruption of any kind, work slowdown or any other condition
beyond the control of Yahoo affecting production or delivery of the Ad Units in
any manner.
8. ADVERTISERS REPRESENTATIONS; INDEMNIFICATION. Ad Units are accepted upon the
representation that Advertiser has the right to publish the contents of the Ad
Unit without infringing the rights of any third party and without violating any
law or regulation. In consideration of Yahoo's posting of the Ad Units,
Advertiser agrees, at its own expense, to indemnify, defend and hold harmless
Yahoo, and its employees, representatives, agents and affiliates, against any
and all expenses and losses of any kind (including reasonable attorneys' fees
and costs) incurred by Yahoo in connection with any claims, administrative
proceedings or criminal investigations of any kind arising in any manner from
the Ad Unit and/or any material, product or service of Advertiser to which users
can link through the Ad Unit (including without limitation, any claim of
trademark, patent or copyright infringement, defamation, breach of
confidentiality, privacy violation, false or deceptive advertising or sales
practices) or a breach by Advertiser of any provision of the Agreement .
9. LIMITATION OF LIABILITY. EXCEPT AS PROVIDED IN SECTION 8, UNDER NO
CIRCUMSTANCES SHALL ADVERTISER, YAHOO OR ANY AFFILIATE OF EITHER PARTY BE LIABLE
TO THE OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL, PUNITIVE OR
EXEMPLARY DAMAGES, INCLUDING, WITHOUT LIMITATION, LOST REVENUE OR PROFITS, IN
ANY WAY ARISING OUT OF OR RELATED TO THIS AGREEMENT OR POSTING OF THE AD
UNIT(S), EVEN IF A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
10. PROVISION OF ADVERTISING MATERIALS. Advertiser will provide all materials
for the Ad Unit in accordance with Yahoo's policies in effect from time to time,
including (without limitation) the manner of transmission to Yahoo and the
lead-time prior to posting of the Ad Unit. Notwithstanding anything to the
contrary in the Agreement, Yahoo shall have no obligation to post any Ad Unit
that is not in accordance with such policies. Advertiser hereby grants to Yahoo
a non-exclusive, worldwide, fully paid license to use, reproduce and display the
Ad Unit (and the contents, trademarks and brand features contained therein) in
accordance herewith.
11. RIGHT TO REJECT AD UNIT. All contents of Ad Units are subject to Yahoo's
reasonable approval. Yahoo reserves the right to reject or cancel any Ad
Unit,insertion order, URL link, space reservation or position commitment
(subject to Section 3), at any time, in its reasonable discretion (including the
belief by Yahoo that placement of an Ad Unit,URL link, etc., may subject Yahoo
to criminal or civil liability). Yahoo will give Advertiser written notice of
any such rejection and the reasons therefor and agrees to exercise such right
only in good faith and not in order to secure a contractual advantage with
another advertiser.
12. USER DATA. All information and data provided to Yahoo by users of the Yahoo
properties or otherwise collected by Yahoo relating to user activity on the
Yahoo properties shall be retained by and owned solely by Yahoo. All information
and data provided to Advertiser on the Advertiser Site or otherwise collected by
Advertiser relating to user activity on the Advertiser Site shall be retained by
and owned solely by Advertiser. Each party agrees to use such information only
as authorized by the user and shall not disclose, sell, license or otherwise
transfer any such user information to any third party or use the user
information for the transmission of "junk mail", "spam", or any other
unsolicited mass distribution of information. Advertiser shall ensure that all
information provided by users of the Advertiser Site is maintained, accessed and
transmitted in a secure environment and in compliance with its privacy policy
(which shall be posted prominently on any area in which personally identifiable
or financial information is collected). In the event the Insertion Order
contains a promotion where Yahoo will be sharing user information with
Advertiser, Advertiser represents and warrants that it has reviewed the FTC
Order set forth in Exhibit C (the "FTC Order") and will not engage in any
conduct that would cause Yahoo to violate the FTC Order. Further, Advertiser
agrees to follow and comply with all reasonable instructions and directions of
Yahoo to help ensure Yahoo's compliance with the FTC Order. Advertiser further
represents and warrants that (i) if any user requests or if Yahoo requests at
the request of any user that Advertiser remove any personally identifiable
information ("User Data") relating to such user from Advertiser's database and
other records, then Advertiser shall promptly remove such User Data from its
database and other records, and (ii) it will not (a) resell any User Data, or
(b) engage in any conduct which would cause Yahoo to violate the FTC Order.
Advertiser shall cooperate fully with Yahoo, and follow and comply with all
reasonable instructions and directions of Yahoo to ensure Yahoo's compliance
with the FTC Order. Advertiser agrees that the indemnification obligation set
forth in Section 8 above includes any and all losses or damages incurred by
Yahoo in connection with a breach by Advertiser of this Section 12.
13. LINK BACK. Advertiser shall place a "back to Yahoo" graphic link on the
first page of the Advertiser Site to which users click-through from any Ad Unit
that is an 88x31 merchant button with Advertiser's logo ("Merchant Button"). The
Yahoo graphic link shall (a) be placed on the Advertiser site in a manner
reasonably approved by Yahoo (and below the fold placement is permitted) (b)
contain the Yahoo name and logo as provided by Yahoo, (c) be no less than 88
pixels wide and 33 pixels high, and (d) directly link the user back to the page
designated by Yahoo on the Yahoo properties. Yahoo hereby grants to Advertiser a
non-exclusive, worldwide, fully paid license to use, reproduce and display the
Yahoo name and logo to indicate the location of the Yahoo graphic link as set
forth herein.
14. YAHOO COMPETITORS. In no event shall the [*] on the Advertiser Site to which
users click-through from any Merchant Button placed by Yahoo in connection with
this Agreement contain graphic or textual hyperlinks, promotion or advertising
banners relating to [*] or [*] similar to Yahoo (including, but not limited to,
[*].
*CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 8
15. PERFORMANCE REQUIREMENTS. The Advertiser Site shall comply with the scale,
speed and performance requirements mutually agreed upon by the parties and will
(i) handle no less than [*] simultaneous requests, (ii) have a minimum [*]%
uptime and maximum [*]% downtime (except for planned downtime which may be
required for system enhancements, upgrades and preventative maintenance), and
(iii) initiate data transfers within fewer than [*] seconds, on average, of
request. Advertiser will provide customer service support for all inquiries
regarding the products and services offered on the Advertiser Site. Advertiser
will provide, and publicize on the Advertiser Site, the following customer
service resources: (a) an 800/888 phone number as a dedicated customer service
line on the help pages of the Advertiser Site, (b) an email address and other
contact information, and (c) conspicuous information/guidelines on Advertiser's
refund policy. Without limitation, failure by Advertiser to substantially meet
any of these criteria for customer service will be a material breach of this
Agreement.
16. INSURANCE. Advertiser agrees that it will maintain insurance with a carrier
that is reasonably acceptable by Yahoo and with coverage for commercial general
liability and errors and omissions of at least [*] dollars per occurrence.
Advertiser will name Yahoo as an additional insured on such insurance and will
provide evidence of such insurance to Yahoo within ten (10) days of the
Effective Date. Such insurance policy shall not be cancelled or modified without
Yahoo's prior written consent, which shall not be unreasonably withheld.
17. MISCELLANEOUS. The Agreement (i) shall be governed by and construed in
accordance with, the laws of the State of California, without giving effect to
principles of conflicts of law; (ii) may be amended only by a written agreement
executed by an authorized representative of each party; and (iii) supersedes any
and all other agreements, whether written or oral, between the parties
pertaining to the subject matter hereof. Both parties consent to the
jurisdiction of the courts of the State of California with respect to any legal
proceeding arising in connection with the Agreement. No conditions other than
those set forth in the Agreement shall be binding on Yahoo unless expressly
agreed to in writing by Yahoo. In the event of any inconsistency between the
Insertion Order or the exhibits hereto and these Standard Terms, these Standard
Terms shall control.
18. CONFIDENTIALITY. The terms and conditions of the Agreement shall be
considered confidential and shall not be disclosed to any third parties except
to such party's accountants, attorneys, or except as otherwise required by law.
Advertiser shall make no public announcement (including, but not limited to,
through any press release) regarding the existence or content of the Agreement
without Yahoo's prior written approval, which may be withheld at Yahoo's sole
discretion. If the Agreement or any of its terms must be disclosed by either
party under any law, rule or regulation, each party shall (i) give written
notice of the intended disclosure to the other party at least five (5) days in
advance of the date of disclosure, (ii) redact portions of this Agreement to the
fullest extent permitted under any applicable laws, rules and regulations, and
(iii) submit a request, to be agreed upon by the requesting party, that such
portions and other provisions of this Agreement receive confidential treatment
under the laws, rules and regulations of the body or tribunal to which
disclosure is being made or otherwise be held in the strictest confidence to the
fullest extent permitted under the laws, rules or regulations of any other
applicable governing body.
19. THIRD PARTY AD SERVING. The parties agree that no third party may serve any
Ad Unit to any Yahoo property without the prior written consent of Yahoo, which
may be withheld for any reason or for no reason. If Yahoo has approved the use
by Advertiser of a third party ad server ("Third Party Server") in connection
with the Insertion Order, the following provisions shall apply: (i) The
Advertiser shall post each Ad Unit to a staging area and shall notify Yahoo of
such posting at least [*] business days prior to the date on which Third
Party Server is scheduled to serve such Ad Unit to a Yahoo property. Such Ad
Unit shall be reviewed and approved in writing by Yahoo before it can be served
by Third Party Server. In accordance with Sections 10 and 11 above, Yahoo
reserves the right to reject any Ad Unit or any element thereof, for any reason
in its sole discretion. (ii) The Advertiser shall post all scheduling changes,
new target URLs, new HTML specifications, new graphics and all other new or
revised Ad Units ("Revisions") to a staging area and shall notify Yahoo of such
posting at least [*] business days prior to the time at which Advertiser wishes
such Revisions to take effect. Revisions shall not be implemented until approved
by Yahoo in writing, which approval may be withheld at Yahoo's sole discretion.
(iii) If Advertiser discovers that an Ad Unit has been served to a Yahoo
property (by Advertiser, Third Party Server or otherwise) in violation of the
Agreement, Advertiser shall immediately notify Yahoo of the violation (along
with a written explanation) and remove the Ad Unit from its placement or
rotation on the Yahoo properties. Nothing in this Section 17 shall limit any of
Yahoo's rights or remedies in the event of such breach.
*CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 9
(iv) In the event Yahoo exercises its right to cancel an Ad Unit in accordance
with these Standard Terms, Yahoo shall notify Advertiser in writing. The
Advertiser must cause the Ad Unit to be removed from the Yahoo properties and
from its advertising rotation no later than [*] after written notification by
Yahoo.
These Standard Terms and this Agreement have been executed by the duly
authorized representatives of the parties, and are effective as of 2/3/00.
YAHOO! INC. ADVERTISER
Company: pets.com
----------------------------
By: /s/ Anil Singh By: /s/ Chris Deyo
-------------------------------- ---------------------------------
Name: Anil Singh Name: Chris Deyo
------------------------------ -------------------------------
Title: SVP Title: President
----------------------------- ------------------------------
Attn: Senior VP Sales Attn:
3420 Central Expressway
Santa Clara, CA 95051
Tel.: (408) 731-3300 Tel: 415-222-9999
Fax: (408) 731-3302 Fax: 415-222-9998
e-mail: e-mail:
*CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 10
EXHIBIT B
ADDENDUM TO
STANDARD TERMS AND CONDITIONS
FOR YAHOO! ADVERTISING
This Addendum (the "Addendum") is entered into as of February 3, 2000
(the "Effective Date") between Yahoo! Inc., a Delaware corporation ("Yahoo") and
Pets.com Inc., a Delaware corporation ("Pets.com") and amends the Standard
Terms and Conditions for Yahoo! Advertising that Pets.com agreed to as part of
Insertion Order No. 90983 (the "Insertion Order").
For good and valuable consideration, the receipt of which is hereby
acknowledged, Yahoo and Pets.com hereby agree to add the following additional
provisions to the Insertion Order Standard Terms as follows:
20. Limited Exclusivity. For a term of [*] (commencing on [*] and continuing
until [*]), Yahoo agrees that it will not place any paid advertisements or
promotions on the [*] page of [*] (currently located at http://[*]) for the
online sale of pet products by any of the following companies (hereinafter
referred to as "Pets.com Competitors"): [*]. Pets.com acknowledges and agrees
that, under no circumstances shall anything in this Section 12 be deemed to
restrict in any manner Yahoo's ability to (a) integrate any editorial content in
any Yahoo Property; provided that (1) prior to integrating any pet-related
content from a third party on the [*] page of [*], Yahoo agrees to first request
such pet-related content from Pets.com and (2) if pet-related content is
provided by a Pets.com Competitor, such content will not be branded with a
graphic of the Pets.com Competitor but may be branded with a text only link, or
(b) conduct its normal course of business with Pets.com Competitors (subject to
the limitations expressly set forth herein) on any Yahoo Property. In the event
Yahoo, in its sole discretion, decides to extend the limited exclusivity set
forth above [*], Pets.com shall have a [*] for such program. Yahoo will provide
Pets.com with a written description of the terms and requirements for the
extension of such program. If Pets.com declines to commence negotiations with
Yahoo regarding the opportunity described in the notice within ten (10) days
after receiving such written notice from Yahoo, or if the parties fail to reach
agreement within ten (10) days following the commencement of good faith
negotiations (or such later date as is agreed to by the parties), Yahoo may
offer the opportunity to any third party.
21. Yahoo agrees to use reasonable commercial efforts to present to Pets.com new
advertising opportunities on any new Yahoo property (a) that is dedicated to
pets and pet related content, (b) that is solely developed and branded by Yahoo
and (c) where Yahoo controls the hosting, serving and placement of advertising.
22. Payments. In consideration of Yahoo's performance and obligations as set
forth in the Insertion Order, Pets.com will compensate Yahoo in an amount equal
to [*]. Pets.com will pay such fees to Yahoo on or before the dates set forth in
the schedule below. The first payment of [*] is designated as a non-refundable
and non-creditable set up fee for design, setup and consultation of the
advertisement placements set forth in the Insertion Order. Pets.com and Yahoo
are also entering into an RMI Agreement for the incorporation of the Pets.com
web site into Yahoo Shopping (the "RMI Agreement"). Pets.com shall pay to Yahoo
the fees set forth in the RMI Agreement according to its terms (in addition to
the fees set forth herein).
*CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 11
<TABLE>
<CAPTION>
Payment Date
-------- ----
<S> <C>
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
</TABLE>
23. Payment Terms. All payments herein are non-refundable (except as expressly
set forth in Section 7 of the Insertion Order Standard Terms) and non-creditable
and will be made via cashier check. Yahoo will provide Pets.com with an invoice
for each payment. In the event that Yahoo is unable to activate the Ad Units
described in the Insertion Order on or before March 1, 2000 due to any failure
of Pets.com, including but not limited to Pets.com's failure to provide Yahoo
with the materials to make the Ad Units available on or before February 25, 2000
or Pets.com's failure to comply with the performance requirements set forth in
Section 15 of the Insertion Order Standard Terms, all payments made or due
hereunder will be converted to a non-refundable, non-creditable holding fee for
making the advertising inventory available to Pets.com.
24. Confidentiality. Except as otherwise set forth herein, each of the parties
shall use at least the same degree of care which it uses to prevent the
disclosure of its own confidential information of like importance to prevent the
disclosure of Confidential Information disclosed to it by the other party under
this Agreement, which in no event will be less than a reasonable degree of care
to protect the Confidential Information of the other party. Each party shall
promptly notify the other party of any actual or suspected misuse or
unauthorized disclosure of such other party's Confidential Information. As used
herein, "Confidential Information" means any information disclosed by one party
to another pursuant to this Agreement which is marked as confidential or
proprietary, or, if disclosed orally, is designated as confidential at the time
of disclosure and confirmed in a writing to the recipient within thirty (30)
days of such disclosure. Notwithstanding the above, neither party shall have
liability to the other party with regard to any Confidential Information of such
other party which the receiving party can demonstrate (i) was in the public
domain at the time it was disclosed or has entered the public domain through no
fault of the receiving party; (ii) was known to the receiving party, at the time
of disclosure; (iii) was disclosed with the prior written approval of the
disclosing party; (iv) was independently developed by the receiving party
without any use of the Confidential Information of the other party; (v) became
known to the receiving party from a source other than the disclosing party
without breach of this Agreement by the receiving party and otherwise not in
violation of the disclosing party's rights; (vi) has been disclosed to third
parties by the disclosing party without restrictions similar to those contained
in this Agreement; or (vii) is disclosed pursuant to the order or requirement of
a court, administrative agency, or other governmental body; provided, however,
that the receiving party shall provide prompt written notice thereof to the
disclosing party to enable the disclosing party to seek a protective order or
otherwise prevent or restrict such disclosure.
This Addendum has been executed by the duly authorized representatives of the
parties, effective as of the Effective Date.
YAHOO! INC. PETS.COM, INC.
By: /s/ Anil Singh By: /s/ Chris Deyo
-------------------------------- ---------------------------------
Name: Anil Singh Name: Chris Deyo
------------------------------ -------------------------------
*CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 12
Title: SVP Title: President
----------------------------- ------------------------------
Attn: Bonnie Neulight
-------------------------------
-------------------------------
-------------------------------
Tel: 415-222-9999
--------------------------------
Fax: 415-222-9998
--------------------------------
e-mail:
-----------------------------
<PAGE> 1
EXHIBIT 10.39
EXCLUSIVE REPRESENTATION AGREEMENT
LAST REVISED MARCH 15, 2000
THIS AGREEMENT is made as of the 20th day of March, 2000, by and between
BRIAN P. HAKAN & ASSOCIATES, INC., a Missouri corporation with its mailing
address of 10800 Farley, Suite 310, Overland Park, Kansas 66210 ("Hakan"), and
PETS.COM, INC., a Delaware corporation with a mailing address of 435 Brannan
Street, San Francisco, California 94107 (the "Client").
Hakan has offered to act as the Client's licensing representative to
promote the use by third parties of official licensed merchandise directed to
people containing the Pets.com Sock Puppet (which is set forth on Exhibit A and
is hereinafter referred to as the "Symbol") and, as used in conjunction with the
Symbol, Client's trademarks, logos, names, slogans, designs, likenesses, visual
representations and other commercial Symbol set forth on Exhibit B (hereafter,
such trademarks, logos, names, slogans, designs, likenesses, visual
representations and other commercial Symbol set forth on Exhibit B shall
collectively be referred to as the "Marks").
The Client wishes to retain Hakan to act as its exclusive representative
to promote the use by third parties of the Symbol for the commercial benefit of
the Client, and Hakan has agreed to accept these duties, subject to the terms
and conditions set forth below.
IT IS THEREFORE AGREED AS FOLLOWS:
1. APPOINTMENT OF HAKAN:
(a) The Client hereby appoints Hakan to be its exclusive world-wide
representative (in all countries where Client has rights) to manage the
licensing of the Symbol (and the Marks, but only when used with the Symbol) to
licensees for the purpose of the manufacture and sale of tangible consumer
products directed to people (such as hats, shirts, mugs, watches, mouse pads,
stuffed animals and toys for people) containing the Symbol (collectively
referred to as the "Included Licensing Opportunities").
(b) In the event that Client desires to engage an outside agency to
merchandize an additional commercial character developed by Client during the
term of this Agreement, Client shall notify Hakan in writing of such desire and
shall enter into exclusive good faith negotiations with Hakan for a period of
fourteen (14) days from the date of such written notice. In the event the
parties have not executed a definitive agreement within such fourteen (14) day
period, Client shall be free to negotiate and enter into agreements with any
third party regarding merchandizing any such additional commercial character.
(c) Notwithstanding anything to the contrary herein, Hakan shall have no
right to pursue any licensing agreement or relationship pursuant to which the
Symbol (collectively referred to as the "Excluded Categories"):
(i) will appear in an audio-visual work or audio work, such as a
television show, radio show, television or radio commercial, motion picture,
animated work, video game, audio CD or any work similar to the foregoing in any
media now known or hereafter developed; or
(ii) will appear in any advertising or promotion of Client or any
affiliate of Client in any media now known or hereafter created including
without limitation television, radio, print and online advertising; or
(iii) will appear in connection with the manufacture, sale or
promotion of products directed to pets (such as pet food, pet food bowls, pet
food containers, pet toys, pet apparel, collars, leashes, litter boxes, pet
furniture and cages, pet beds, pet ID tags and pet combs).
(iv) will appear on products manufactured, developed or licensed
exclusively for, and sold exclusively at The Disney Store retail stores.
(d) Client will use commercially reasonable efforts to introduce the
licensees of products directed to people working with Hakan under this agreement
to appropriate personnel within the business operations of The Disney Store
retail stores in the event that Client desires to develop products for sale
exclusively at The Disney Store retail stores.
<PAGE> 2
(e) All licensing agreements shall be subject to the prior written
approval of the Client as to form and substantive terms and Hakan shall not have
the authority to bind Client to any contract or enter into any agreement on the
behalf of Client. Client may withhold approval of any agreement in its sole and
exclusive discretion. Client's approval of any license agreement shall
conclusively be presumed by execution by the Client of such license agreement.
Hakan will take all reasonable steps to see that all license agreements will be
with responsible third parties, whose merchandise and activities are of high
standard and whose merchandise is of such appearance and style as the enhance
the value of the Symbol and whose policies of sale, distribution and
exploitation will be of high standard. Each license agreement shall contain an
appropriate provision for copyright and trademark labeling, indemnification and
product liability insurance. Promptly upon execution of this Agreement, the
parties will work to develop a standard licensing agreement.
2. DUTIES OF HAKAN:
(a) Hakan shall render all services of this Agreement as an independent
contractor. Nothing in this Agreement shall be construed to (i) create a
partnership between the Client and Hakan, (ii) give either party the power to
direct and control the day-to-day activities of the other, (iii) constitute the
parties as partners, joint venturers, co-owners or otherwise as participants in
a joint undertaking, or (iv) allow Hakan to enter into any contract or agreement
on behalf of the Company for any purpose whatsoever. All financial and other
obligations associated with Hakan's business and obligations under this
Agreement are the sole responsibility of Hakan. Such obligations shall include
but not be limited to the production of style guides for merchandise containing
the Symbol, coordination of retail promotional materials, development of Hakan's
Pets.com trade show materials, and payment of New York Licensing Show trade show
exhibition fees.
(b) Hakan's duties under this Agreement include soliciting, negotiation
and submitting to the Client opportunities for the licensing of the Symbol.
Hakan agrees to use all diligent and reasonable efforts, consistent with good
business practice, in such manner as to obtain the largest gross receipts from
the licensing and exploitation of the rights covered by this Agreement as shall
be reasonably possible and as shall be consistent with the premium quality and
standards of the Symbol. Each License Agreement shall provide for all payments
thereunder to be made to a separate bank account in Client's name and that the
parties shall, promptly after execution of this Agreement, set forth mutually
agreeable procedures to allow Hakan to withdraw funds from such account.
(c) Hakan shall, on behalf of the Client, supervise the licensees
pursuant to license agreements made in accordance with this Agreement to ensure
full compliance and performance of all obligations and duties of the licensees
thereunder; provided that the Client reserves the right to assert on its own
behalf any and all of its rights as Licensor under the Licensing Agreements.
Nothing in this Agreement shall be construed to permit or obligate Hakan to
institute any legal action of any kind under any License Agreement.
(d) Hakan shall promptly notify the Client of any actual or possible
infringement of Client's rights in the Symbol or the rights granted to any
licensee which may come to the notice of Hakan during the term of this
Agreement. The Client and Hakan shall cooperate with each other regarding the
Client's enforcement of its rights to the Symbol, provided that:
(i) the Client shall not be bound to institute legal proceedings;
(ii) the Client shall approve and conduct all legal proceedings
relating to the Symbol at the Client's sole expense; and
(iii) nothing in this Agreement shall be construed to permit or
obligate Hakan to institute any legal action of any kind against any alleged
infringer; and
(iv) the Client shall, during the term of this Agreement and any
extension or renewal thereof, reasonably defend the Symbol from infringement so
as to preserve its value.
(e) Hakan and its employees will in all instances refer to the Symbol as
the "Pets.com Sock Puppet."
(f) Hakan shall exhibit and promote products containing the Symbol at
the New York Licensing show and such other trade shows and similar events as
Hakan and Client may determine is in their mutual best interest.
<PAGE> 3
(g) Hakan and Client shall cooperate to develop guidelines for the use
of the Pets.com logo and/or trademark in connection with the Symbol, which
guidelines shall be subject to the written approval of Client within its sole
and exclusive discretion, and which may be modified by Client at any time.
(h) Hakan shall bear its own expenses arising out of and relating to
this Agreement. Without limiting the foregoing, Hakan shall be responsible for
expenses incurred for the development and printing of style guides, appropriate
licensing sales materials and New York licensing trade show exhibits.
(i) Hakan shall use commercially reasonable efforts to obtain the
cooperation of licensees to make available to Pets.com for distribution through
its distribution channels (such as the Pets.com web site, the Amazon.com web
site and The Disney Store online) those products containing the Symbol that
Hakan generates licensing agreements for through its efforts hereunder.
3. COMPENSATION OF HAKAN:
(a) As compensation for all services rendered and expenses incurred by
Hakan in performing its duties under this Agreement, Hakan shall be entitled to
retain [*] of all gross revenues received from Included Licensing Opportunities
other than Excluded Revenues (as defined below) and other than Web/Disney Store
Revenues (as defined below) during the term of this Agreement and any extension
or renewal thereof; whether generated as a result of the efforts of Hakan or the
Client. As used in this Agreement, "Excluded Revenues" means (i) all revenues
derived from the sale or marketing of those products listed on Exhibit D and the
following six (6) products currently under development by Client: Denim Shirt,
Coffee Mug, Posters of outdoor advertising, Kids Watch, Picture Frames and Kids
Back Pack and (ii) all revenue derived from the sale or marketing of any
products within the Excluded Categories.
(b) Hakan shall, following the payment of all expenses in connection
with the collection of such damages, including attorney's and consultant's fees,
be paid [*] of any damages or settlement proceeds recovered by Client in
connection with any dispute with a third party relating to such third party's
right to use the Symbol in connection with tangible consumer products directed
to people.
(c) "Web/Disney Store Revenues" means all revenues (except revenues from
Excluded Categories) derived from the sale or marketing of any products
containing the Symbol made through: (1) any web site owned or operated by
Client, (2) any co-branded version of the Pets.com web site, (3) the web site of
any affiliate or subsidiary of Client, (4) the Amazon.com web site, (5) The
Disney Store, (6) The Disney Store online (collectively the "Web Sites"). Client
agrees that the only tangible consumer products directed to people containing
the Symbol, other than Excluded Categories (and other than those products which
contain the Symbol which are listed on Exhibit D and the following six (6)
products currently under development by Client: Denim Shirt, Coffee Mug, Posters
of outdoor advertising, Kids Watch, Picture Frames and Kids Back Pack), sold at
the Web Sites shall be those products licensed pursuant to the terms and
conditions of this Agreement. As compensation for expenses incurred by Hakan in
the promotion of the Symbol, Hakan shall be entitled to retain ten percent (10%)
of gross Web/Disney Store Revenues derived from the sale of Included Licensing
Opportunities.
(d) The balance of such amounts shall be payable to the Client on a
quarterly basis within forty five (45) days after the close of each calendar
quarter during the term of this Agreement. Client shall have the right to
terminate this Agreement in the event Hakan fails to make a timely payment or
provide a required report if such failure is not cured within the ten (10)
business days following written demand by Client.
(e) Hakan shall submit a report of sales and royalties paid to the
Client at the time payments are due hereunder, in the form, and containing such
detail as the parties shall reasonably agree. The Client shall have the right to
audit Hakan's books and records pertaining to activities under this Agreement,
but not more frequently than annually, and not with less than five (5) business
days written notice. Hakan agrees to pay the reasonable cost of any such audit
if such audit finds that reported revenues for any quarter have been understated
by more than five percent .
(f) In the event that Hakan fails to make a payment or submit a report
to the Client when due, Hakan shall have the right to cure such default within
ten (10) business days from receipt of written notice from the Client
*CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 4
which states specifically the nature of the problem.
(g) Upon the termination of this Agreement other than any termination by
Client pursuant to Sections 3(b) or 7(e), Hakan shall be entitled to receive:
(i) [*] of the gross royalty revenues and advances (other than
those gross royalty revenues or advances for which Hakan is entitled to receive
payment under Section 3(g)(ii) or 3(g)(iii)) either received by or due to the
Client during the [*] following the termination date from all bona fide leads
for which Hakan has notified Client in a timely manner pursuant to Section 7(d)
that it has solicited business for the Client. Such payment shall be made
quarterly and payment shall made within forty five (45) days of the end of the
calendar quarter in which payment is actually received by Client;
(ii) a trailing commission thereafter of [*] of the gross royalty
revenues and advances generated from Included Licensing Opportunities other than
Excluded Categories and other than Web/Disney Store Revenues received by or due
to the Client during the greater of: (a) the [*] following the termination date;
or (b) the remainder of the original term of such licensing agreements which
have been originally entered into during the term of this Agreement; and
(iii) a trailing commission thereafter of [*] of Web/Disney Store
Revenues derived from the sale of Included Licensing Opportunities received by
or due to the Client during the greater of: (a) the [*] following the
termination date; or (b) the remainder of the original term of such licensing
agreements which have been originally entered into during the term of this
Agreement.
4. THE CLIENT'S DUTIES AND OBLIGATIONS:
(a) All effort and expense to register the rights (patent, copyright,
trademarks or similar rights) pertaining to the Symbol and the Marks undertaken
by Client shall be at Client's expense and Hakan shall not be responsible for
undertaking such activities, except that Hakan shall (without expense to Hakan)
cooperate with Client to perfect and defend such registrations. Client shall
retain all right, title and interest in and to the Symbol and the Marks. All use
by Hakan of the Symbol and the Marks in connection with this Agreement shall
inure to the benefit of Client. Except as explicitly provided in this Agreement,
Hakan shall not, without the prior written approval of Client, use in any
advertising, public announcement, press release or any other promotional
endeavor the Symbol or the Marks. Hakan agrees that it will not in any
jurisdiction use, register or otherwise appropriate any Symbol or Mark that is
confusingly similar to the Symbol or the Marks.
(b) The Client shall be responsible for the enforcement of all rights
(patent, copyright, trademarks or similar rights) pertaining to the Symbol. The
Client will reasonably defend its ownership of and rights in the Symbol and will
take all measures which it, in its sole and exclusive discretion, determines are
necessary and appropriate to ensure the best protection of these rights such as
the application of patent, registrations for trademarks and/or enforcement
actions.
(c) The Client shall use all reasonable efforts to obtain the full
cooperation of all of the Client's partners, affiliates and subsidiaries with
Hakan.
(d) The Client shall use commercially reasonable efforts to obtain
agreements from Chiat and Sullivan Perkins assigning to Client any rights such
parties may have in the Symbol.
5. THE CLIENT'S WARRANTIES AND REPRESENTATIONS:
(a) Client represents and warrants that:
(i) it has the full corporate right, power and authority to enter
into this Agreement and to perform the acts required of it hereunder; and
(ii) the execution of this Agreement and the performance of its
obligations and duties hereunder, do not and will not violate any agreement to
which Client is a party or by which it is otherwise bound; and
*CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 5
(iii) when executed and delivered, this Agreement will constitute
a legal, valid and binding obligation of Client, enforceable against Client in
accordance with its terms; and
(iv) the Client has the full and absolute right to grant to Hakan
the exclusive right to represent and license the Symbol in the manner permitted
by this Agreement without obtaining any further consent from any of its
affiliates, subsidiaries or any other third party; In the event of breach of
this section 5(a)(iv) by Client, Hakan's sole remedy and Client's sole liability
shall be indemnification of Hakan pursuant to Section 5(c); and
(v) except as set forth on Exhibit C, to Client's knowledge, the
Symbol is a valid trademark, service mark and commercial symbol owned by the
Client and, to Client's knowledge, no other person has any rights therein; and
(vi) except as set forth on Exhibit C, to Client's knowledge,
there are no infringing uses with respect to the Symbol and, to Client's
knowledge, each component of the Symbol is valid and does not infringe upon any
trademarks, copyrights or other license rights of any one; and
(vii) Client has not granted to any party other than Hakan any
right that conflicts with the rights of Hakan pursuant to this Agreement (except
in connection with the sale via the Client website of (1) the products listed on
Exhibit D and (2) the following six (6) products currently being developed by
Client: Denim Shirt, Coffee Mug, Posters of outdoor advertising, Kids Watch,
Picture Frames and Kids Back Pack).
(b) The Client will indemnify, defend (using attorneys reasonably
acceptable to Hakan) and hold harmless Hakan and all of its officers, directors,
agents, contractors, attorneys and employees, together with all successors and
assigns of said parties, from and against any claim, liability cost or expense,
including without limitation reasonable attorney's fees, incurred by said
parties arising from the breach by the Client of any warranty or representation
made in this Agreement; provided that Hakan provides Client with (i) prompt
written notice of such claim or action, (ii) sole control and authority over the
defense or settlement of such claim and (iii) proper and full information and
reasonable assistance to defend and/or settle any such claim or action.
(c) The Client will, at its expense, defend Hakan (using attorneys
reasonably acceptable to Hakan) and all of its officers, directors, agents,
contractors, attorneys and employees, together with all successors and assigns
of said parties, from and against any claim against by said parties based upon
the infringement or unfair competition through the use or license of the Symbol;
and Client shall pay any money damages awarded as a result of such claim;
provided that Hakan provides Client with (i) prompt written notice of such claim
or action, (ii) sole control and authority over the defense or settlement of
such claim and (iii) proper and full information and reasonable assistance to
defend and/or settle any such claim or action.
6. HAKAN WARRANTIES AND REPRESENTATIONS:
Hakan warrants and represents unto the Client as follows:
(a) Hakan represents and warrants that: (a) it has the full corporate
right, power and authority to enter into this Agreement and to perform the acts
required of it hereunder; (b) the execution of this Agreement and the
performance of its obligations and duties hereunder, do not and will not violate
any agreement to which Hakan is a party or by which it is otherwise bound; and
(c) when executed and delivered, this Agreement will constitute a legal, valid
and binding obligation of Hakan, enforceable against Hakan in accordance with
its terms.
(b) Hakan will indemnify, defend (using attorneys reasonably acceptable
to Client) and hold the Client and all of its officers, directors, agents,
contractors, attorneys and employees, together with all successors and assigns
of said parties harmless from and against any and all liability, cost and
expense, including legal fees, incurred by or charged against the Client
resulting from the breach by Hakan of any representation or warranty made by
Hakan under the terms of this Agreement.
(c) Hakan also will indemnify, defend (using attorneys reasonably
acceptable to Client) and hold harmless the Client and all of its officers,
directors, agents, contractors, attorneys and employees, together with all
successors and assigns of said parties from and against any and all liability,
cost and expense, including legal fees, resulting from Hakan's acts and
omissions in the performance of this Agreement which cause damage or injury to
the
<PAGE> 6
Client or any third persons.
(d) Hakan shall not assert any right or title to or interest in or
directly or indirectly challenge the validity, ownership or title of Client to
the Symbol or the Marks. Hakan shall not take any action which might dilute or
lessen Client's rights, title or interest in any Symbol or the Marks. Any
variation, modification or derivative work of the Symbol or the Marks made by
either party in connection with this agreement shall be the sole and exclusive
property of Client. Hakan hereby assigns to Client all right, title and interest
in and to any variation, modification or derivative work of the Symbol or the
Marks made by Hakan or its employees, consultants, independent contractors or
any third party working with Hakan in connection with this Agreement. Hakan
represents and warrants that all employees, consultants, independent contractors
and third parties who develop any variation, modification or derivative work of
the Symbol or Marks in connection with this Agreement shall execute a written
agreement with Hakan assigning to Hakan all right, title and interest in and to
such variation, modification or derivative work or the Symbol or Marks. Use of
the Symbol and the Marks by Hakan shall be solely as a licensing representative
pursuant to this agreement.
7. TERM:
(a) This Agreement shall be in effect for an initial term starting on
March 15, 2000 and ending on March 31, 2003, unless sooner terminated as set
forth herein.
(b) If Hakan has generated less than [*] in accrued gross revenues
and/or royalty guarantees from licensing Agreements made pursuant to this
Agreement prior to June 30, 2001, then Client shall have the right to terminate
this Agreement upon written notice to Hakan, provided that such notice is given
prior to October 1, 2001.
(c) The parties will meet at a mutually agreed upon time at least one
hundred and twenty (120) days prior to the end of the initial term, or any
extension or renewal term, of this Agreement to discuss and negotiate in good
faith the renewal term. At the end of the initial term of this Agreement, this
Agreement shall automatically renew for an additional term of three (3) years
unless either party gives written notice to the other party at least sixty (60)
days prior to the end of the initial term indicating that, in good faith, it is
not satisfied with the discussions between the parties regarding the renewal
term.
(d) Upon March 31 and September 30 of each year during the term of this
Agreement, and upon termination of this Agreement, Hakan shall provide Client
with a written list of all parties which Hakan has solicited for business on
behalf of the Client.
(e) This Agreement may be terminated at any time by a party, effective
immediately upon notice, if the other party: (a) files a petition in bankruptcy,
(b) makes an assignment for the benefit of its creditors, or (c) breaches any of
its material responsibilities or obligations under the Agreement which breach is
not remedied within thirty (30) days from receipt of written notice of such
breach if such breach is capable of being cured.
(f) The following sections shall survive the termination or expiration
of this Agreement: 3(e), 5, 6, 7(f), and 8-11.
8. GENERAL TERMS:
(a) This writing represents and expresses the entire and final
understanding of the parties regarding the subject matter contained therein. All
prior negotiations and preliminary agreements are merged into and superseded by
this Agreement. None of the provisions of this Agreement can be modified or
amended except by written agreement executed by all parties to this Agreement.
(b) No waiver by either party, whether expressed or implied, of any of
the provisions of this Agreement or of any breach or default hereto shall
constitute a continuing or future waiver of such provisions. Nor shall a waiver
by either party prevent that party from enforcing any and all provisions of this
Agreement or from acting upon the same for a subsequent breach or default of the
other party.
(c) This Agreement is made pursuant to the laws of the State of
California and it is agreed that the
*CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 7
laws of that State shall control in the enforcement and understanding of this
Agreement.
(d) This Agreement may not be assigned by either party without the prior
written consent of the other, provided, however, that either party may assign
this Agreement to any successor by way of merger, acquisition or sale of all or
substantially all of the assets of said party.
(e) This Agreement shall be binding upon the successors and permitted
assigns of the parties.
(f) 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),
ARISING FROM OR IN CONNECTION WITH THIS AGREEMENT, SUCH AS, BUT NOT LIMITED TO,
LOSS OF ANTICIPATED PROFITS OR LOST BUSINESS.
(g) Neither Hakan nor any of its affiliates or subsidiaries shall issue
any press release or similar announcement in connection with this Agreement or
any license agreements entered into in connection with this Agreement without
the prior written consent of Client.
9. NOTICES:
Any notice required or permitted to be given under this Agreement shall
be sufficient if in writing, in the English language, and shall be deemed to be
fully given when personally delivered or sent by confirmed facsimile or two days
after being sent by commercial courier to the addresses first set forth above,
which may be changed from time to time pursuant to ten days' advance notice
hereunder.
10. DISPUTE RESOLUTION:
(a) In the event of a dispute between the parties, Hakan and the Client
agree to attempt to resolve the dispute by a face-to-face meeting with a
qualified mediator to be chosen by mutual agreement.
(b) Except for any dispute arising in whole or in part under Section
4(a), 4(b) or 6(d) of this Agreement, in the event that the dispute can not be
resolved by mediation, either by a failure to promptly cooperate in the
mediation process or otherwise, the parties agree that the dispute shall be
resolved by binding arbitration under the governing rules of the American
Arbitration Association.
(c) The mediation or arbitration shall be conducted in the State of the
party who will be the respondent in that action. For example, if Hakan requests
the mediation or arbitration, it will be conducted in the state where the Client
has its notice address, and if the Client makes the request for arbitration, it
will be conducted in Kansas. The costs of the mediation and/or arbitration shall
be shared equally and each party shall bear its own attorney fees.
11. CONFIDENTIALITY:
The parties hereby acknowledge that in the course of activities under this
Agreement each of them may have access to confidential and proprietary
information which relates to the other party's marketing, business, and
technology (the "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 as is reasonably required in connection with the exercise of
its rights and obligations under this Agreement (and only subject to binding use
and disclosure restrictions at least as protective as those set forth herein).
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 the
receiving party; (iii) otherwise known to the receiving party through no
wrongful conduct of the receiving party, (iv) required in order to enforce such
party's rights under this Agreement, or (v) required to be disclosed by law or
court order. Moreover, any party hereto may disclose any Confidential
Information hereunder to such party's agents, attorneys, lenders, accountants,
financial advisors and other representatives or any court of competent
jurisdiction or any other party empowered hereunder or as reasonably required to
resolve any dispute between the parties hereto. Each party shall treat the terms
of this Agreement as
<PAGE> 8
"Confidential Information." Hakan acknowledges and agrees that all information
relating to licensing agreements made in accordance with this Agreement, whether
generated by Hakan or Client, shall be deemed to be "Confidential Information"
of Client.
<PAGE> 9
IN WITNESS WHEREOF, the parties have executed this agreement intending
to be legally bound.
HAKAN: THE CLIENT:
Brian P. Hakan and Associates Pets.com, Inc.
By: /s/ Brian P. Hakan By: /s/ Chris Deyo
-------------------------------- ---------------------------------
Brian P. Hakan, President Chris Deyo, President
Date: 3/20/00 Date: 3/21/00
------------------------------ -------------------------------
<PAGE> 10
EXHIBIT A
The Symbol
Pets.com Sock Puppet
<PAGE> 11
EXHIBIT B
The Marks
The Pets.com logo
<PAGE> 12
EXHIBIT C
Disclosure Schedule
1. Client received a letter dated February 22, 2000 from Robert Smigel pursuant
to which Mr. Smigel claims that the Symbol infringes the rights of Mr. Smigel.
2. Client engaged TBWA/CHIAT/DAY, Inc. ("Chiat") in connection with the
development of the Symbol and certain advertising and promotions of Client
including the Symbol. Client does not have an agreement with Chiat under which
the rights to Symbol are assigned to Client. Thus, Chiat may own certain rights
in the Symbol, including copyright and trademark rights.
3. Client engaged Sullivan Perkins in connection with the development of certain
products containing the Symbol. Client does not have an agreement with Sullivan
Perkins under which the rights to the embodiments of the Symbol developed by
Sullivan Perkins are assigned to Client. Thus, Sullivan Perkins may own certain
rights in the Symbol, including copyright and trademark rights.
4. Client executed an agreement dated October 12, 1999 with Macy's East, Inc.
under which Macy's developed and provided a balloon in the Macy's Thanksgiving
Day Parade. Pursuant to this Agreement, neither Client nor Macy's may use the
balloon embodiment of the Symbol without the written permission of the other
party.
The foregoing information is provided solely for the purpose of the disclosure
of information to Hakan and shall not be construed as an admission on the part
of Client that any of the above parties have valid claims to any rights in or to
the Symbol or any embodiments thereof.
<PAGE> 13
EXHIBIT D
Products Directed To People Which Contain The Symbol
And Which Are Currently Sold Via The Pets.com Web Site
Adult Sweatshirt
Child Sweatshirt
Adult Polar Fleece
Adult T-Shirt
Child T-Shirt
Adult Cap
Child Cap
Adult Watch
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 70,114
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 8,116
<CURRENT-ASSETS> 91,747
<PP&E> 19,011
<DEPRECIATION> 2,001
<TOTAL-ASSETS> 114,792
<CURRENT-LIABILITIES> 13,668
<BONDS> 0
0
0
<COMMON> 37
<OTHER-SE> 100,275
<TOTAL-LIABILITY-AND-EQUITY> 114,792
<SALES> 7,651
<TOTAL-REVENUES> 7,651
<CGS> 12,515
<TOTAL-COSTS> 12,515
<OTHER-EXPENSES> 34,947
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (723)
<INCOME-PRETAX> (39,088)
<INCOME-TAX> 0
<INCOME-CONTINUING> (39,088)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,088)
<EPS-BASIC> (2.54)
<EPS-DILUTED> (2.54)
</TABLE>
