<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 21, 2000
REGISTRATION NO. 333-32176
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PAPEREXCHANGE.COM, INC.
(exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
DELAWARE 5113 04-3505848
(STATE OF INCORPORATION) PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER INDENTIFICATION NO.)
</TABLE>
31 ST. JAMES AVENUE
3(RD) FLOOR
BOSTON, MA 02116
(617) 536-4310
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
KENT DOLBY, CHIEF EXECUTIVE OFFICER
PAPEREXCHANGE.COM, INC.
31 ST. JAMES AVENUE
3(RD) FLOOR
BOSTON, MA 02116
(617) 536-4310
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES OF ALL COMMUNICATIONS, INCLUDING COMMUNICATIONS SENT TO THE AGENT FOR
SERVICE, SHOULD BE SENT TO:
<TABLE>
<S> <C>
JOHN R. UTZSCHNEIDER KEITH F. HIGGINS
JONATHAN K. BERNSTEIN JOHN B. AYER
BINGHAM DANA LLP ROPES & GRAY
150 FEDERAL STREET ONE INTERNATIONAL PLACE
BOSTON, MA 02110 BOSTON, MA 02110
(617) 951-8000 (617) 951-7000
(617) 951-8736 (FAX) (617) 951-7050 (FAX)
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ______
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Subject to Completion. Dated April 21, 2000
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
Shares
[LOGO]
Common Stock
--------------
This is an initial public offering of shares of common stock of
PaperExchange.com, Inc. All of the shares of common stock are being sold by
PaperExchange.
Prior to this offering, there has been no public market for the common
stock. PaperExchange anticipates that the public offering price will be between
$ and $ per share. Application has been made for quotation of the
common stock on the Nasdaq National Market under the symbol "PPEX".
SEE "RISK FACTORS" BEGINNING ON PAGE 4 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
-------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-------------------
<TABLE>
<CAPTION>
Per
Share Total
-------- --------
<S> <C> <C>
Initial public offering price.............................. $ $
Underwriting discount...................................... $ $
Proceeds, before expenses, to PaperExchange................ $ $
</TABLE>
To the extent that the underwriters sell more than shares of common
stock, the underwriters have the option to purchase up to an additional
shares from PaperExchange at the initial public offering price less the
underwriting discount.
The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
GOLDMAN, SACHS & CO.
CHASE H&Q
ROBERTSON STEPHENS
BANC OF AMERICA SECURITIES LLC
Prospectus dated , 2000.
<PAGE>
Inside Front Cover--a foldout of graphics and text
RED HERRING COVER
This cover will be a gloss-coated bifold. It has 6 sides, 4 at the front and
2 at the back.
LAYOUT:
- -------------------------------------------------------------------------------
Inside Front Cover Outside Front Cover Outside Back Cover
(First Fold)
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Double Page Spread - Inside Front Cover Inside Back Cover
(Inside Bi-Fold)
- -------------------------------------------------------------------------------
DESIGN:
The Outside Back Cover will have the PaperExchange logo centered.
The Inside Front Cover will have the PaperExchange logo and 2 color graphics.
Graphic 1 will be a sub-section of the PaperExchange model and how it fits
into the paper industry. Graphic 2 will be a pointer to turn the page/open
the bi-fold.
The Double Page spread inside the bi-fold will have 2 major graphics. One
diagrammatically depicts the paper industry supply chain. The second graphics
depicts the PaperExchange model and how it fits within the industry supply
chain.
The Inside Back Cover will be a different graphical representation of the
PaperExchange model.
COLORS:
All pages except the outside covers will be 4-color. Outside Front Cover will
be 3-color. Outside Back Cover will be a 2-color.
PaperExchange uses Panton 287 for the blue in our logo. The gray is a black
screen with 35% black and 65% black.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SOME OF THE IMPORTANT INFORMATION IN THE
PROSPECTUS. IT MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU.
YOU SHOULD READ THIS SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION ABOUT
US AND OUR FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS
PROSPECTUS.
PAPEREXCHANGE.COM, INC.
PaperExchange is a leading business-to-business marketplace for the pulp and
paper industry that enables buyers and sellers in the industry to transact
business on the Internet. Our marketplace includes a real time exchange that
enables participants to list offers to sell or requests to purchase products and
services in a secure and neutral environment. Using our proprietary technology,
our members can review pulp and paper products offered online, negotiate
pricing, and complete transactions. This technology enables buyers and sellers
to customize the use of our marketplace in a manner that allows members to
preserve existing business relationships. We also offer several fulfillment
services, such as logistics and credit clearing, as well as quality inspection
through a third party provider. In addition, we offer industry specific content,
such as real time industry news, information on upcoming expositions and
conferences, feature articles and a career center that allows members to post
and explore job opportunities.
Our marketplace has attracted and registered more than 4,100 corporate
members from over 80 countries. To date, our members have completed in excess of
140 transactions representing a total of approximately 9,800 tons of pulp and
paper. We have recently signed strategic agreements with producers such as
International Paper, Asia Pulp & Paper and Bowater, which are designed to
promote the listing of products for sale through our marketplace. We have also
entered into strategic agreements with buyers, such as Staples, for commitments
to purchase products.
The pulp and paper industry represents an estimated $500 billion of sales
globally and over an estimated $182 billion in North America. The industry is
extremely fragmented, with approximately 2,000 producer mills and approximately
300,000 converting and printing plants worldwide. Traditional marketing and
procurement methods in the industry are inefficient, costly, and time consuming
for both buyers and sellers. The lack of widely available pricing and other
market information, the capital intensive nature of the industry, the complexity
of the paper production process, and poor technology adoption further limit the
efficiency of the industry. These factors create the opportunity for a
business-to-business e-commerce marketplace that streamlines industry
participants' procurement methods, reduces inefficiencies in production and the
supply chain, and broadens sales and marketing channels.
We intend to be the leading provider of an Internet-based e-commerce
solution across all pulp and paper product categories, and are led by a
management team with extensive experience in the pulp and paper industry and in
technology. We intend to leverage and expand our strategic relationships while
maintaining a neutral marketplace. Our strategy is to concentrate on attracting
new members to our marketplace through a focused sales and marketing effort, and
to continue to enhance the functionality and performance of our technology
platform. As we add more suppliers and purchasers to our marketplace, we intend
to create a network effect, whereby the addition of each new member increases
the overall value of the marketplace to all members.
1
<PAGE>
CORPORATION INFORMATION
We were formed in Delaware in April 1998 as a limited liability company
under the name "PaperExchange.com, LLC". We converted to a Delaware corporation
in February 2000 under the name "PaperExchange.com, Inc.". Our principal
executive offices are located at 31 St. James Avenue, 3(rd) Floor, Massachusetts
02116, and our telephone number at that address is (617) 536-4310. Our address
on the World Wide Web is http://www.paperexchange.com. References to our Web
site do not incorporate by reference the information contained at our Web site
into this prospectus. This prospectus assumes no exercise of the underwriters'
over-allotment option.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by PaperExchange....... shares
Common Stock to be outstanding after this
offering.................................. shares
Proposed Nasdaq National Market symbol...... "PPEX"
Use of proceeds............................. For working capital and general corporate
purposes. See "Use of Proceeds".
</TABLE>
The number of shares to be outstanding excludes 3,248,748 shares of common
stock issuable upon exercise of options outstanding as of March 31, 2000 under
our 2000 Equity Incentive Plan at a weighted average exercise price of $2.43 per
share, 5,000,001 shares of common stock issuable upon exercise of warrants at a
weighted average exercise price of $2.00 per share, options to purchase
1,767,020 shares of common stock at an exercise price of $2.38 per share,
options to purchase 450,000 shares of common stock at an exercise price of $9.74
per share and 519,149 shares of common stock issuable upon exercise of warrants
at an exercise price of $10.00 per share.
2
<PAGE>
SUMMARY FINANCIAL DATA
The following summary financial data are derived from our financial
statements. You should read this summary financial information in conjunction
with our financial statements and the related notes. Potentially dilutive common
shares have been excluded from the shares used to compute earnings per share in
each loss year because their inclusion would be antidilutive. The as adjusted
balance sheet data give effect to our sale of the shares in this offering at an
assumed initial public offering price of $ per share and after deducting
the estimated underwriting discounts and commissions and our estimated offering
expenses.
<TABLE>
<CAPTION>
APRIL 10, 1998 THREE MONTHS ENDED
(INCEPTION) THROUGH YEAR ENDED ---------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999 MARCH 31, 1999 MARCH 31, 2000
------------------- ------------------- --------------- ---------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues........................ $ 2 $ 114 $ 1 $ 3,445
Cost of revenues.................... -- 92 -- 3,342
---------- ---------- ---------- ----------
Gross profit........................ 2 22 1 103
Operating costs:
Sales and marketing............... 541 3,376 406 7,747
Technology........................ 141 3,104 266 2,712
General and administrative........ 207 2,116 194 2,768
Write-off of capitalized
software........................ -- 209 -- --
---------- ---------- ---------- ----------
Operating loss...................... (887) (8,783) (865) (13,124)
---------- ---------- ---------- ----------
Net loss............................ $ (860) $ (9,051) $ (861) $ (14,585)
========== ========== ========== ==========
Basic and diluted loss per share.... $ (0.03) $ (0.26) $ (0.03) $ (0.36)
========== ========== ========== ==========
Weighted average shares used to
compute basic and diluted loss per
share............................. 30,000,000 34,881,564 30,000,000 40,319,260
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
-------------------------
AS
ACTUAL ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $18,093
Working capital............................................. 17,276
Total assets................................................ 23,909
Long-term debt.............................................. 256
Total liabilities........................................... 4,198
Total stockholders' equity.................................. 19,711
</TABLE>
3
<PAGE>
RISK FACTORS
THIS OFFERING AND AN INVESTMENT IN OUR COMMON STOCK INVOLVE A HIGH DEGREE OF
RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE MAKING AN
INVESTMENT DECISION. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO
ANY OF THESE RISKS, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT. YOU ALSO
SHOULD REFER TO THE OTHER INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS,
INCLUDING OUR FINANCIAL STATEMENTS AND THE RELATED NOTES.
WE FACE DIFFICULTIES ENCOUNTERED BY EARLY STAGE COMPANIES WITH LIMITED OPERATING
HISTORIES AND IN NEW AND RAPIDLY EVOLVING MARKETS
Our company was founded in April 1998 and has not yet generated significant
revenue. Because our operating history is so limited, it is very difficult to
evaluate our business and our future prospects. We will encounter risks and
difficulties frequently encountered by companies in an early stage of commercial
development in new and rapidly evolving markets such as electronic commerce, or
e-commerce. In order to overcome these risks and difficulties, we must, among
other things, establish and increase awareness of our PaperExchange brand,
attract and retain members at a reasonable cost, strengthen member loyalty,
reliably process transactions through our marketplace, and otherwise
successfully implement our business plan. If we do not successfully implement
our business plan we may not realize sufficient revenues or we may incur too
many costs to succeed. Because of our limited operating history and the early
stage of development of our market, we have limited insight into trends that may
emerge and affect our business.
WE ANTICIPATE THE INCURRENCE OF FUTURE LOSSES, WHICH MAY CAUSE OUR STOCK PRICE
TO DECLINE
We experienced net losses of $14.6 million in the three months ended
March 31, 2000, $9 million in 1999 and $860,000 in 1998. We expect to continue
to incur losses on a quarterly basis through the foreseeable future. Our
profitability will depend on whether we can increase revenues while controlling
expenses. We may not achieve profitability in the future, or sustain any future
profitability.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THROUGH ISSUANCE OF EQUITY AND DEBT
SECURITIES, WHICH MAY CAUSE OUR STOCKHOLDERS TO EXPERIENCE DILUTION TO THE VALUE
OF THEIR EQUITY OWNERSHIP
Since our inception, our operating and investing activities have used
significantly more cash than they have generated. We may not be able to find
additional financing, if required, on favorable terms or at all. Because we will
continue to need substantial amounts of working capital to fund the growth of
our business, we expect to continue to experience significant negative operating
and investing cash flows for the foreseeable future. We may need to raise
additional capital in the future to meet our operating and investing cash
requirements. If we raise additional funds through the issuance of equity,
equity-related or debt securities, these securities may have rights, preferences
or privileges senior to those of the rights of our common stock, and our
stockholders may experience dilution to the value of their equity ownership.
THE UNPREDICTABILITY OF OUR QUARTERLY REVENUES MAY NEGATIVELY AFFECT THE TRADING
PRICE OF OUR COMMON STOCK
As a result of our limited operating history and the emerging nature of the
markets in which we compete, we may be unable to accurately forecast our
revenue. If our revenue for a quarter falls below our expectations and we are
not able to quickly reduce our spending in response, our operating results for
that quarter would be harmed. We currently intend to increase substantially our
operating expenses to develop new service offerings, fund increased sales and
marketing activities, enter into and implement strategic relationships with
buyers and sellers, and further develop our technology and
transaction-processing systems. To the extent these expenses precede or are not
4
<PAGE>
subsequently followed by increased revenue, our operating results will be
significantly below expectations.
As a result of the foregoing factors, our annual or quarterly operating
results may be below the expectations of securities analysts and investors,
which would adversely affect the trading price of our common stock.
OUR BUSINESS MODEL IS UNPROVEN AND MAY NOT BE SUCCESSFUL, WHICH COULD RESULT IN
THE FAILURE OF OUR BUSINESS
Our business-to-business e-commerce model is based on the development of our
marketplace for the purchase and sale of pulp and paper products over the
Internet. This business model is new and unproven, and our business model may
not be successful or we may not achieve or sustain revenue growth or generate
any profits. The success of our business model will require, among other things,
that we develop an e-commerce marketplace with broad market acceptance by buyers
and sellers of pulp and paper products. Business-to-business commerce on the
Internet generally, or our marketplace, services and brand, may not achieve
broad market acceptance. For example, pulp and paper industry participants may
continue transacting business in person or by phone with parties with whom they
may have long-standing personal relationships and may not adopt an electronic
marketplace. The costs and resources required to switch purchasing methods, the
need for products not offered through the marketplace, security and privacy
concerns, or general reluctance to use technology or the Internet may also deter
or discourage some companies from using our marketplace.
IF WE CANNOT BUILD A CRITICAL MASS OF SUPPLIERS AND PURCHASERS, WE WILL NOT BE
ABLE TO INCREASE OUR MARKETPLACE VOLUME AND DRAW MORE MEMBERS, WHICH MAY CAUSE
OUR BUSINESS TO FAIL
Our business model depends in large part on our ability to build a critical
mass of suppliers and purchasers of pulp and paper products. If we are unable to
increase the number of suppliers and draw more purchasers to our online
marketplace to reach this critical mass, we may not be able to continue to grow
our business, which would harm the overall value of our marketplace. Purchasers
must perceive value in our marketplace and other transaction services which, in
part, depends upon the breadth of our product offerings from our suppliers. If
we do not build a critical mass of purchasers and sellers, we also will not be
able to benefit from any network effect, where the value to each member of our
marketplace increases with the addition of each new member.
WE DEPEND ON SUPPLIERS TO PROVIDE THE PRODUCTS THAT WE SELL IN OUR MARKETPLACE
AND THOSE SUPPLIERS MAY NOT ALWAYS UTILIZE OUR MARKETPLACE
We carry no inventory and rely exclusively on the listing of pulp and paper
products by independent suppliers. If we are unable to develop and maintain
relationships with suppliers that will allow us to obtain sufficient quantities
of products on acceptable commercial terms, we will be unable to increase our
revenues. Suppliers who list pulp and paper products for sale on our marketplace
are generally under no contractual obligation to do so. Our current suppliers
may not continue to list products, or new suppliers may not list products, on
acceptable commercial terms. If our suppliers do not deliver quality products to
purchasers in a professional, safe and timely manner, then our service will not
meet expectations and our reputation and brand will be damaged. In addition,
deliveries that are non-conforming or late could expose us to liability or
result in decreased adoption and use of our electronic marketplace.
5
<PAGE>
WE MAY NOT BE ABLE TO MAINTAIN STRATEGIC SUPPLIER AND CUSTOMER RELATIONSHIPS, ON
WHICH WE EXPECT TO BE DEPENDENT FOR THE FORESEEABLE FUTURE, WHICH COULD
SIGNIFICANTLY REDUCE OUR REVENUES
We recently entered into strategic supplier agreements with International
Paper, Asia Pulp & Paper and Bowater, which provide that these suppliers will
use reasonable efforts to list products on our marketplace. We have also
recently entered into a strategic customer agreement with Staples, which
agreement provides that they will use commercially reasonable efforts to list
certain "requests to buy" and purchase paper products on our marketplace. If we
do not maintain these relationships and others, we may not be able to grow our
business, and in particular the loss of one or more of these strategic
relationships without replacement within a short period of time could have a
material adverse effect on our business. Our agreements with these suppliers and
this customer are not exclusive, have a limited term and are generally
terminable at will on fairly short notice. These strategic relationships may not
continue, these suppliers and this customer could enter into similar
relationships with one or more of our competitors or form or participate in
competing marketplaces, or these strategic parties may not renew their
agreements with us at the end of their terms. In particular, the extent of our
continued relationship with International Paper may be adversely affected by the
development of an on line marketplace for buying and selling of paper and forest
products by International Paper, Georgia-Pacific and Weyerhaeuser. These
companies announced their intention to develop such a marketplace in
March 2000.
OUR ABILITY TO MAINTAIN OR INCREASE OUR MEMBER BASE COULD BE HARMED BY ANY
PERCEPTION OF BIAS IN OUR MARKETPLACE
Adoption of our solution by buyers and sellers is dependent on their
perception that we provide a neutral, unbiased marketplace to buy and sell pulp
and paper products. To the extent that we are perceived by our members as
favoring one member over another, members may lose confidence in our marketplace
as a fair and neutral marketplace and choose alternative solutions. Our
relationships with International Paper, Asia Pulp & Paper and others on the
supplier side, and Staples on the customer side, including the fact that each of
International Paper, Asia Pulp & Paper and Staples holds equity interests in us,
may compromise the perception that we provide a neutral and unbiased marketplace
for pulp and paper products. The pulp and paper product industry consists of a
complex set of relationships among manufacturers, suppliers, distributors and
customers. Any bias, whether perceived or actual, could have a negative impact
on our ability to maintain or increase our supplier base, which in turn may
limit our ability to maintain or increase our member base overall and thus
reduce or limit the growth of our revenues.
IF WE ARE UNABLE TO GENERATE SIGNIFICANT SAVINGS FOR OUR MEMBERS, PULP AND PAPER
INDUSTRY PARTICIPANTS MAY NOT TRADE THROUGH OUR MARKETPLACE, WHICH WOULD REDUCE
OUR REVENUES AND INCOME
If our online marketplace does not increase the efficiency of any particular
market for pulp and paper products, the opportunity for significant savings to
our members in that market will decrease, which will make it difficult for us to
attract and retain sufficient numbers of members to trade through our
marketplace. Today's pulp and paper market operates through a distribution
system involving a great many producers, brokers and other intermediaries, and
end-users who depend on personal relationships and one-to-one communication to
transact business. This system results in limited availability of pricing
information about the same or similar products and multiple mark-up and
commission points prior to the receipt of product by the end-user. In order to
succeed, our marketplace will have to provide better results than this current
distribution system.
6
<PAGE>
OUR OPERATING MARGINS ARE LOW AND IF WE ARE NOT ABLE TO INCREASE THE DOLLAR
VOLUME OF TRANSACTIONS MADE THROUGH OUR MARKETPLACE, WE WILL NOT BE ABLE TO
GENERATE A PROFIT
Our transaction-based model is a low operating margin model. In order to
meet our expected earnings targets, we must significantly increase the dollar
volume of transactions on our marketplace or we will not achieve or maintain
profitability. We can achieve this increase by generating significantly higher
and continuously increasing levels of traffic to our online site, increasing the
percentage of visitors to our online site who purchase paper products, or
through some combination of the two. We must also increase the number of repeat
purchasers of products through our online site. Although we have implemented
strategies designed to accomplish these objectives, these strategies may not be
effective in increasing the dollar volume of products purchased through our
online site.
BECAUSE OUR SPENDING ON INCREASED CAPACITY PRECEDES OUR RECEIPT OF REVENUES, OUR
RESULTS OF OPERATIONS ARE LIKELY TO BE VOLATILE
We must hire personnel, acquire equipment and expand our facilities in
anticipation of receiving revenues in future periods. The timing of our expenses
for these activities will cause our results of operations to be volatile. In
addition, unexpected costs or expenses we incur will substantially affect our
ability to achieve or maintain profitability.
THE LOSS OF ANY OF OUR KEY EXECUTIVES WOULD DISRUPT OUR BUSINESS
The loss of any member of our key management team would significantly
disrupt our business. We rely on the leadership and vision of key members of our
senior management team, including:
- Kent Dolby, our President and Chief Executive Officer;
- Robert Brenner, our Executive Vice President of Product Development;
- Jonathan Bloom, our Vice President of Corporate Development;
- Duane DeSisto, our Chief Financial Officer;
- Michael Gozon, our Vice President of Sales, North America;
- Carl Katzeff, our Chief Technical Officer; and
- Rod Parsley, our Vice President of Business Development.
These executives have extensive experience in technology and the pulp and
paper industry and the loss of any of these executives could disrupt the
Company's growth or result in lost revenues. With the exception of our chief
executive officer, none of our key executives have employment agreements. We do
not currently have any "key man" insurance coverage for any of these executives,
and if we obtain any such coverage in the future, any insurance proceeds which
we may have the right to obtain would not sufficiently compensate us for their
loss.
IF WE DO NOT HIRE OR RETAIN QUALIFIED STAFF, WE MAY BE UNABLE TO MANAGE AND GROW
OUR BUSINESS
If we do not attract and retain enough qualified and skilled staff, the
growth of our business may be limited. Our ability to provide services to our
members and grow our business depends, in part, on our ability to attract and
retain staff with college and graduate degrees, as well as professional
experiences that are relevant for market making, technology development and
other functions we perform. As of March 31, 2000 we had 84 employees, and we
plan to grow to more than 150 employees by December 31, 2000. Competition for
personnel with the skill sets we require is intense. Some technical job
categories are under conditions of severe shortage in the United States. In
addition, restrictive immigration quotas could prevent us from recruiting
skilled staff from outside the United States.
7
<PAGE>
IF WE ARE UNABLE TO MANAGE OUR GROWTH, OUR REVENUES MAY DECLINE AND OUR BUSINESS
COULD FAIL
Our current rapid expansion may strain our infrastructure, management,
internal controls and financial systems. If we cannot manage our growth
effectively, it is likely that our revenue and results of operations will not
meet expectations. We have hired the majority of our employees within the last
year, which has strained our ability to integrate and properly train our new
employees. Inadequate integration and training of our employees may result in
underutilization of our workforce and may reduce our revenues and hinder our
ability to achieve or maintain profitability. We expect to continue to hire a
significant number of new employees to support our business. Our current
information systems, procedures and controls may not continue to support our
operations and may hinder our ability to implement successfully our e-commerce
marketplace for the pulp and paper industry. In addition, if we are unable to
undertake new business due to a shortage of staff or technology resources, our
growth will be impeded. Although our revenues have increased, our revenues are
still low and we have never operated profitably.
IF WE DO NOT SUCCEED IN ESTABLISHING AND STRENGTHENING THE PAPEREXCHANGE BRAND,
WE MAY NOT CONTINUE TO ATTRACT BUYERS AND SELLERS TO OUR MARKETPLACE, WHICH WILL
PREVENT US FROM GROWING OUR BUSINESS
We believe that establishing, maintaining and enhancing the PaperExchange
brand is a critical aspect of our efforts to attract and expand our online
traffic. If we are unable to provide high-quality online services or customer
support, or otherwise fail to promote and maintain our brand, or if we incur
excessive expenses in an attempt to promote and maintain our brand, we may not
continue to attract buyers and sellers to our marketplace or retain them as
members, and our business may not succeed. Promotion of the PaperExchange brand
will depend largely on our success in providing a high-quality online experience
supported by a high level of customer service, which cannot be assured. In
addition, to attract and retain online buyers and suppliers, and to promote and
maintain the PaperExchange brand in response to competitive pressures, we may
find it necessary to increase substantially our financial commitment to creating
and maintaining strong brand loyalty among buyers and suppliers.
WE MAY NOT BE ABLE TO IMPLEMENT SUCCESSFULLY NEW TECHNOLOGIES WHICH ARE
ESSENTIAL TO OUR SUCCESS
We regularly need to upgrade the functionality and performance of our
marketplace through the enhancement of current technology or the introduction of
new technology. We may not be successful at enhancing or integrating
technologies into our electronic marketplace on a timely basis, or in accordance
with our objectives. In addition, even if we can integrate the technologies, our
electronic marketplace may not function as expected. Enhancing current and
introducing new technology into our electronic marketplace involve numerous
technical challenges and substantial personnel resources, and often take many
months to complete. If we are unable to enhance existing and integrate new
technologies into our electronic marketplace on a timely basis, buyers and
sellers may discontinue use of our marketplace and we may experience difficulty
attracting new buyers and sellers, which could reduce our revenues and hinder
our ability to achieve or maintain profitability. In addition, our electronic
marketplace is complex and, despite testing and quality control procedures, new
technology that we integrate with our marketplace may contain undetected errors
or "bugs" when first introduced. Any inability to deliver quality services on a
timely basis would reduce or eliminate the demand for our marketplace.
NEW SERVICE INTRODUCTIONS MAY BE UNSUCCESSFUL AND THUS NEGATIVELY IMPACT OUR
BUSINESS
We plan to introduce new and expanded services, including new pricing
methods such as catalog sales, branded storefronts offering particular products
and auction capabilities, to our members and to enter into new relationships
with third parties in order to generate additional
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revenue, attract more members and respond to competition. We may not be able to
offer these services in a cost-effective or timely manner, and some or all of
these new services may not be successfully introduced. Furthermore, any new
service that is not favorably received by our members could damage our
reputation or our brand name. Expansion of services in this manner will also
require significant additional expense and development and may strain
management, financial and operational resources. Inability to generate revenue
from expanded services sufficient to offset their cost would adversely affect
our ability to achieve or maintain profitability.
COMPETITION FROM OTHERS IN THE PULP AND PAPER INDUSTRY WITH GREATER FINANCIAL
RESOURCES MAY PREVENT US FROM COMPETING EFFECTIVELY
We compete with traditional pulp and paper industry suppliers and
distributors who have experience with direct marketing and established brand
names and product lines. Third parties who are already in the pulp and paper
industry and who have greater financial and other resources available to them
may be able to compete more effectively in this highly competitive market.
International Paper, Georgia-Pacific and Weyerhaeuser have announced their
intent to create an on line business-to-business marketplace for the paper and
forest products industry which would compete directly with our marketplace. Each
of them has significant financial resources and industry experience. We may not
be able to grow our business as quickly, or compete as effectively, as these
competitors.
OUR TRANSACTIONS AS PRINCIPAL EXPOSE US TO CREDIT RISK FROM ANY BUYER MEMBERS
WHO DO NOT PAY US FOR THE TRANSACTIONS THEY COMPLETE ON OUR MARKETPLACE
In most transactions effected through our marketplace we act as principal
and purchase products from sellers and resell them to buyers. In these
transactions we bear the risk of non-payment from the buyer and our liquidity
and financial condition would be severely adversely affected if a significant
number of buyers default. In addition, although we rely on third-party credit
insurance to reduce our credit risk in principal transactions, if our
third-party credit insurance were no longer available in amounts or on terms
acceptable to us, we would face additional credit risks or we might be required
to limit the transactions in which we act as principal. Any such limitation
might adversely affect our ability to execute successfully our business model.
WE MAY BE UNABLE TO INTEGRATE ACQUIRED BUSINESSES WITH OUR EXISTING BUSINESS OR
WE MAY INCUR SIGNIFICANT EXPENSES IN CONNECTION WITH SUCH ACQUISITIONS, WHICH
MAY RESTRICT OUR BUSINESS OR IMPAIR OUR FINANCIAL PERFORMANCE
If appropriate opportunities present themselves, we may acquire businesses,
technologies, services or products that we believe are beneficial to our
business. Integrating any acquired business may produce unforeseen operating
difficulties and expenditures and may absorb significant attention of our
management that would otherwise be available for the ongoing development of our
business. We do not currently have any understandings, commitments or agreements
with respect to any significant acquisition, nor are we currently pursuing any
acquisition. We may not be able to identify, negotiate or finance any future
acquisition successfully. Even if we do succeed in acquiring a business,
technology, service or product, we have little experience in integrating an
acquisition into our business. Moreover, we have not made any significant
acquisitions, and we may never achieve any of the benefits that we might
anticipate from a future acquisition. If we make future acquisitions, we may
issue shares of stock that dilute other stockholders, incur debt, assume
contingent liabilities or create additional expenses related to amortizing
goodwill and other intangible assets, any of which might harm our financial
results and cause our stock price to decline. Any financing that we might need
for future acquisitions may only be available to us on terms that restrict our
business or that impose on us other costs.
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OUR PLAN TO EXPAND INTO INTERNATIONAL SALES AND OPERATIONS WILL REQUIRE
SIGNIFICANT MANAGEMENT ATTENTION; AND IF WE FAIL TO EXECUTE ON THIS STRATEGY
SUCCESSFULLY, OUR GROWTH WILL BE LIMITED AND OUR OPERATING RESULTS WILL BE
HARMED
In order to enter international markets, we plan to establish international
operations, hire additional personnel and establish relationships with
additional buyers and suppliers and strategic partners. This expansion will
require significant management attention and financial resources and could have
a negative impact on our business. We may not be able to create or sustain
international demand for our electronic marketplace. In addition, our
international business may be subject to a variety of risks, including
applicable government regulation, difficulties in collecting international
accounts receivable, the introduction of non-tariff barriers and higher duty
rates. Currency fluctuations, price controls, potential adverse tax consequences
and difficulties in enforcement of contractual obligations may also present
problems.
TRAFFIC TO OUR SITE AND TRANSACTION VOLUME ON OUR MARKETPLACE COULD DECREASE IF
OTHERS USE DOMAIN NAMES SIMILAR TO OURS
Others may acquire domain names that are similar to ours, or that infringe
or otherwise decrease the value of our trademarks and other proprietary rights.
This could result in decreased traffic to our site and decreased transaction
volume on our marketplace. We currently hold the Internet domain name
"PaperExchange.com" and several other variations on that domain name. Domain
names generally are regulated by Internet regulatory bodies. The regulation of
domain names in the United States and in foreign countries is subject to change.
Regulatory bodies could establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names. As a result, we may not acquire or maintain the "PaperExchange.com"
domain name or other similar domain names in all of the countries in which we
conduct business. The relationships among regulations governing domain names and
laws protecting trademarks and similar proprietary names are unclear. Also,
there are risks that in the future third parties could prevent us from
continuing to use one or more of our domain names.
THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK AND WE EXPECT THE PRICE OF
OUR COMMON STOCK TO BE VOLATILE
Prior to this offering, you could not buy or sell our common stock publicly
and an active public market for our common stock may not develop or be sustained
after the offering. The market price after the offering may decline from the
initial offering price. In addition, the market price of our common stock may
fluctuate significantly in response to a number of factors, some of which are
beyond our control, including:
- loss of one or more major buyers, sellers or strategic partners as users
of our marketplace;
- reports reflecting slower levels of transaction activity in our
marketplace than expected;
- quarterly variations in our operating results;
- changes in estimates of our financial performance by securities analysts;
- changes in market valuation of Internet commerce companies generally;
- announcements by us of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
- additions or departures of any of our key personnel;
- future sales of our common stock; and
- stock market price and volume fluctuations, which are particularly common
among highly volatile securities of Internet companies.
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IF THE INTERNET DOES NOT CONTINUE TO GROW AS A MEDIUM FOR COMMERCE, OUR BUSINESS
PLAN WILL FAIL
Our long-term viability is substantially dependent upon the development of
the Internet as an effective medium of commerce, especially for the purchase and
sale of pulp and paper products. Our business could suffer dramatically if
e-commerce and Internet solutions are not accepted or not perceived to be
effective by participants in the pulp and paper industry. The growth of the
Internet as a medium for commerce depends upon a number of factors including
continued growth in the number of users, concerns about transaction security,
continued development of the necessary technological infrastructure, development
of enabling technologies, uncertain and increasing government regulation and the
development of complementary services and products.
Use of the Internet as a means of effecting business transactions is at an
early stage of development. For us to be successful, businesses must accept and
utilize novel ways of conducting business and exchanging information. Convincing
businesses to buy and sell pulp and paper products online may be particularly
difficult, as these businesses have historically relied on traditional off-line
distribution channels which depend on personal relationships and contact.
Acceptance and use of the Web may not continue to develop or a sufficiently
broad base of businesses may not adopt, and continue to use, the Internet and
commercial online services as a medium of commerce.
Growth in the demand for our electronic marketplace depends on the adoption
of e-commerce and Internet solutions by pulp and paper industry participants,
who must accept a new way of conducting business and purchasing supplies. The
Internet may not prove to be a viable commercial marketplace for a number of
reasons, including:
- inadequate development of the necessary infrastructure for Internet-based
communications by participants in the pulp and paper industry;
- security and confidentiality concerns of buyers and sellers;
- lack of development of complementary products, such as high-speed modems
and high-speed communication lines;
- implementation of competing purchasing solutions;
- lack of human contact that traditional sellers provide; and
- governmental regulation.
THE ACCELERATED GROWTH AND INCREASING VOLUME OF INTERNET TRAFFIC MAY CAUSE
PERFORMANCE PROBLEMS THAT MAY SLOW ADOPTION OF OUR ELECTRONIC MARKETPLACE
The growth of Internet traffic to very high volumes over a relatively short
period of time has caused frequent periods of decreased Internet performance,
delays and, in some cases, system outages. These problems could reduce our
future revenues and otherwise adversely impact our results of operations.
Decreased performance is caused by limitations inherent in the technology
infrastructure supporting the Internet and the internal networks of Internet
users. If Internet usage continues to grow rapidly, the infrastructure of the
Internet and its users may be unable to support the demands of growing
e-commerce usage, and the Internet's performance and reliability may decline. If
existing or potential members of our marketplace experience frequent outages or
delays on the Internet, the adoption or use of our electronic marketplace may
grow more slowly than we expect or may even decline. Our ability to increase the
speed and reliability of our electronic marketplace is limited by and depends
upon the reliability of both the Internet and the internal networks of our
existing and potential members. As a result, if improvements in the
infrastructure supporting both the Internet and the internal networks of our
members are not made in a timely fashion, we may experience difficulty obtaining
new members or maintaining our existing members.
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IF INTERNET SECURITY CONCERNS HINDER THE ADOPTION OF E-COMMERCE, THE DEVELOPMENT
OF OUR MARKETPLACE WILL BE IMPEDED
Concern about the security of the transmission of confidential information
over public networks is a significant barrier to electronic commerce and
communication. In addition, advances in computer capabilities, new discoveries
in the field of cryptography or other events or developments could result in
compromises or breaches of Internet security systems that protect proprietary
information. If any well-publicized compromises of security were to occur, they
could substantially reduce the use of the Internet for commerce and
communications, which could have a material adverse effect on acceptance of our
marketplace whether or not we have experienced security compromises on our
system.
SYSTEM FAILURE OR DELAY OR SECURITY BREACHES MAY CAUSE INTERRUPTION OF OUR
MARKETPLACE RESULTING IN SUBSTANTIAL LOSSES TO US
Our systems and operations are vulnerable to damage or interruption from
fire, flood, power loss, telecommunications failure and similar events. Despite
our implementation of network security measures, our servers are also vulnerable
to computer viruses, physical or electronic break-ins or attacks and similar
disruptions, which could lead to interruptions, delays, loss of data or the
inability to accept and confirm transactions. In addition, anyone who
circumvents our security measures could misappropriate information that is
proprietary to us or our members. Because our revenue depends on the number of
participants in the pulp and paper industry who use our marketplace to purchase
and sell products, the satisfactory performance, reliability and availability of
our marketplace, transaction-processing systems and network infrastructure are
critical to our operating results. Substantially all of our computer and
communications systems are located in greater Boston, Massachusetts. Any system
interruptions that result in the unavailability of our online site or reduced
performance of the transaction system would reduce the volume of sales and the
attractiveness of our service offerings. We may be required to devote
significant capital and other resources to protect against the threat of, or to
alleviate problems caused by, security breaches and the introduction of computer
viruses.
Any substantial increase in the volume of traffic or the number of
transactions processed through our Web site will require us to expand and to
upgrade further our technology, transaction-processing systems and network
infrastructure. These upgrades may not be adequate to prevent unanticipated
system disruptions, slower response times or degradation in levels of customer
service. Our insurance policies may not adequately compensate us for any issues
or damages that may arise due to any failures or interruptions in our systems.
Our transaction-processing systems and network infrastructure may not be
able to accommodate increases in traffic in the future. In general, we may not
be able to project accurately the rate or timing of these increases or
successfully upgrade our systems and infrastructure to accommodate future
traffic levels on our marketplace. In addition, we may not will be able to, in a
timely manner, effectively upgrade and expand our transaction-processing systems
or successfully integrate any newly developed or purchased modules with our
existing systems.
OUR FAILURE TO MAINTAIN OUR HARDWARE SYSTEMS OR SOFTWARE COULD UNDERMINE OUR
MEMBERS' CONFIDENCE IN OUR RELIABILITY AND HARM OUR BUSINESS
A significant disruption in our online marketplace or other transaction
services could seriously undermine our members' confidence in our business. Any
reduction in our members' confidence in our reliability could harm our business.
Our members hold us to a high standard of reliability and performance. During a
disruption, participants may lose their online connection or we may not receive
their listings or bids in a timely manner. Any interruptions in our service may
undermine existing and potential members' confidence in the reliability of our
business.
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Conducting an online marketplace requires the successful technical operation
of an entire chain of software, hardware and telecommunications equipment. This
chain includes the personal computers and network connections of buyers and
sellers, network servers, operating systems, databases and networking equipment
such as routers. A failure of any element in this chain can partially or
completely disrupt an online transaction. Some of the elements set forth above
are not fully within our control, such as Internet connectivity and software,
hardware and telecommunications equipment we purchase from others. In addition,
we have members from outside North America who may use older or inferior
technologies, which may not operate properly.
OUR FAILURE TO MAINTAIN OUR MEMBERS' CONFIDENTIAL INFORMATION COULD HARM OUR
REPUTATION AND RESULT IN LEGAL LIABILITY
Any breach of security relating to our members' confidential information
could result in legal liability for us and a reduction in use or cancellation of
our online transaction services, either of which could materially harm our
business. If we fail to adequately maintain our members' confidential
information, some of our members could end their business relationships with us
and we could be subject to legal liability. Our personnel receive confidential
information from buyers and sellers that is stored in our files and on our
computer systems. We currently have practices and procedures in place to help
ensure the confidentiality of our members' information. However, our security
procedures to protect against the risk of inadvertent disclosure or intentional
breaches of security might fail to adequately protect information that we are
obligated or otherwise seek to keep confidential. We may not be successful in
adopting more effective systems for maintaining confidential information, so our
exposure to the risk of disclosure of the confidential information of others may
grow with increases in the amount of information we possess.
IF WE DO NOT PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, THEN OUR COMPETITORS MAY
BE ABLE TO DUPLICATE OUR SERVICES, WHICH WOULD IMPAIR OUR ABILITY TO
SUCCESSFULLY COMPETE
We rely in part on our proprietary technology, such as My MarketProfiler, to
operate our electronic marketplace. Our failure to adequately protect our
intellectual property rights could harm our business by making it easier for our
competitors to duplicate our services and eliminate any competitive advantage.
We are in the process of obtaining trademark registrations for some of our brand
names and our marketing materials are copyrighted, but these protections may not
be adequate. Although we require each of our employees to enter into a
confidentiality agreement and some key employees are subject to non-competition
agreements, these agreements may not satisfactorily safeguard our intellectual
property.
In the future, third parties may infringe on or misappropriate our
proprietary rights or may independently develop similar proprietary information.
Any infringement, misappropriation or independent development could harm our
future financial results. In addition, effective patent, trademark, copyright
and trade secret protection may not be available in every country where we
operate our electronic exchange. We may, at times, have to incur significant
legal costs and spend time defending our trademarks, copyrights and other
proprietary information. Any defense efforts, whether successful or not, would
divert both time and resources from the operation and growth of our business.
There is also significant uncertainty regarding the applicability to the
Internet of existing laws regarding matters such as property ownership,
copyrights and other intellectual property rights. Legislatures adopted the vast
majority of these laws prior to the advent of the Internet and, as a result,
these laws do not contemplate or address the unique issues of the Internet and
related technologies. Existing and future laws and regulations may ultimately
negatively affect our business or intellectual property rights.
In the future, we may license some of our intellectual property, such as
trademarks or copyrighted material, to third parties. While we would attempt to
ensure that any licensees maintain
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the quality and value of our brand, we cannot ensure that they would refrain
from actions which might diminish this quality and value.
IF OTHERS ASSERT THAT OUR TECHNOLOGY INFRINGES THEIR INTELLECTUAL PROPERTY
RIGHTS, RESOLVING THE DISPUTE COULD DIVERT OUR MANAGEMENT TEAM AND FINANCIAL
RESOURCES
Recently, many patents have been granted in the United States involving
business methods relating to e-commerce. We may be subject to claims that one or
more of the business methods on our marketplace infringe patents held by others,
which could have a material adverse effect on our ability to operate our
business as currently operated and proposed to be operated. The defense of any
claims of infringement made against us by third parties could involve
significant legal costs and require our management to divert time from our
business operations. If we are unsuccessful in defending any claims of
infringement, we may be forced to obtain licenses or pay royalties to continue
to use our technology. We may not be able to obtain any necessary licenses on
commercially reasonable terms or at all. If we fail to obtain necessary licenses
or other rights, or if these licenses are costly, our operating results may
suffer either from reductions in revenue through our inability to serve clients
or from increases in costs to license third-party technology.
OTHERS MAY REFUSE TO LICENSE IMPORTANT TECHNOLOGY TO US OR MAY INCREASE THE FEES
THEY CHARGE US FOR THIS TECHNOLOGY, WHICH MAY INCREASE OUR COSTS OR HARM OUR
GROWTH
We rely on third parties to provide us with certain software and hardware,
for which we pay fees. If we are unable to obtain required technology at a
reasonable cost, our growth prospects and operating results may be harmed
because our ability to conduct business could be adversely affected or we may
face significantly increased costs for technology. While the software and
hardware we require has been readily available, and to date we have not paid
significant fees for its use, third parties may increase their fees
significantly or refuse to license their software or provide their hardware to
us. While other vendors may provide the same or similar technology, we cannot be
certain that we can obtain the required technology on favorable terms, if at
all.
We also intend to continue to license certain content for our Web site from
third parties, including content which is integrated with internally-developed
content and used on our Web site to provide important services. Third parties
may not continue to license this content to us on commercially reasonable terms
or we may not be able to successfully integrate third party content. Licensing
content from third parties exposes us to risks associated with the assimilation
of new content, the diversion of resources from the development of our content,
the inability to generate revenue from new content sufficient to offset
associated acquisition costs and the maintenance of uniform, appealing content.
The inability to obtain any of these licenses could delay site development or
services until we can identify, license and integrate equivalent content. Any
delays in site development or services could cause members to decrease their use
of our marketplace and could cause our business to fail.
REGULATION OF THE INTERNET OR TAXATION OF TRANSACTING BUSINESS OVER THE INTERNET
MAY INHIBIT THE GROWTH OF OUR ELECTRONIC MARKETPLACE
Due to the increasing popularity and use of the Internet and of e-commerce,
it is possible that governments in the U.S. and abroad may adopt a number of
taxes, laws and regulations with particular applicability to the Internet and
e-commerce transactions. Taxes, laws or regulations may limit the growth of the
Internet, inhibit e-commerce and reduce the number of transactions on our
marketplace, increase our cost of doing business or increase our legal exposure.
Governments may adopt taxes and enact legislation applicable to us in areas such
as content, product distribution and network security. Encryption and the use of
data and privacy protection, electronic authentication or "digital" signatures,
illegal and harmful content, access charges and re-transmission activities may
be regulated in the future. Moreover, the applicability to the Internet of
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existing laws governing issues such as property ownership, content, taxation,
defamation and personal privacy is uncertain.
WE ARE SUBJECT TO GOVERNMENT REGULATION APPLICABLE TO SUPPLIERS THAT EXPOSES US
TO POTENTIAL LIABILITY AND NEGATIVE PUBLICITY
We currently rely upon our suppliers to meet all packaging, distribution,
labeling, hazard information notices to purchasers, record keeping and licensing
requirements applicable to our business during the entire transaction. We could
be fined or exposed to civil or criminal liability, including monetary fines and
injunctions, and we potentially could receive negative publicity if we or our
suppliers have not met or are not meeting applicable governmental regulatory
requirements. We do not maintain any reserve for potential liabilities of this
type. Our reliance on the compliance by suppliers and purchasers with applicable
governmental regulations may not be sufficient if the government requires us to
have our own licenses. For example, if we are held to be a seller or a
distributor of products because we took legal title to the products, we may have
violated some governmental regulations by not having the appropriate license or
permit and may be subject to potentially severe civil or criminal penalties and
fines for each offense. In addition, we are unable to verify that our suppliers
have in the past complied, or will in the future comply, with applicable
governmental regulatory requirements, or that their actions satisfy all
governmental or other legal requirements that may be applicable to our sales.
PRODUCT LIABILITY CLAIMS COULD RESULT IN OUR LEGAL LIABILITY AND FAILURE TO
ACHIEVE PROFITABILITY
We face potential liability for claims based on the nature, use or
merchantability of the products that are posted on our marketplace. This
includes claims for breach of warranty or product liability, misrepresentation,
violation of governmental regulations and other commercial claims, which could
result in legal liability to us. In particular, during periods where we hold
title to products or are otherwise liable for the disposition or transfer of the
products, we bear the risk of liability for product loss and resulting damages
to persons and property. In some instances, we pass through the manufacturers'
warranties on the products we purchase and sell as principal; however, those
warranties are generally limited in terms of scope and liability. Although we
maintain commercial general liability insurance, including products liability,
our insurance may not cover some claims. It is also subject to policy limits and
exclusions, and may not fully indemnify us or our employees for any civil,
governmental or criminal liability that may be imposed. Furthermore, this
insurance may not be available at commercially reasonable rates in the future.
WE MAY BE SUED FOR INFORMATION AND PRODUCTS RETRIEVED FROM THE WEB
As a publisher and distributor of online content, we face potential
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
that we publish or distribute. These claims have been brought, and sometimes
successfully pressed, against online services. We could also be subjected to
claims based upon the content that is accessible from PaperExchange through
links to other Web sites. Although we carry general liability insurance, our
insurance may not cover claims of these types or may not be adequate to
indemnify us for all liability that may be imposed.
OFFICERS AND DIRECTORS AND THEIR AFFILIATES WILL CONTINUE TO HAVE SUBSTANTIAL
CONTROL OVER PAPEREXCHANGE AFTER THE OFFERING
Upon completion of this offering, our executive officers and directors and
their affiliates will beneficially own approximately % of the shares of
common stock ( % if the underwriters exercise the over-allotment option in
full). As a result, our officers, directors and their affiliates will have the
ability to control the election of our board of directors and the outcome of
corporate actions requiring stockholder approval. This concentration of
ownership may have the
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effect of delaying or preventing a change in control of PaperExchange. See
"Principal Stockholders."
OUR MANAGEMENT HAS BROAD DISCRETION OVER HOW TO USE THE PROCEEDS OF THIS
OFFERING. IF OUR PROCEEDS ARE NOT USED EFFECTIVELY, OUR BUSINESS MAY SUFFER
We estimate that our net proceeds from this offering will be $ million, at
an assumed initial public offering price of $ per share and after deducting the
estimated underwriting discount and our estimated offering expenses. Our primary
purposes in making this offering are to increase our working capital, create a
public market for our common stock, facilitate our future access to the public
capital markets and increase our visibility in the marketplace. We have no
specific plans for the net proceeds of this offering other than working capital
and general corporate purposes. Accordingly, our management will have broad
discretion as to how to apply the net proceeds of this offering. If we fail to
use these proceeds effectively, our business may not grow and our revenues and
results of operations will be substantially adversely affected.
PROVISIONS OF OUR CORPORATE CHARTER AND BYLAWS AND DELAWARE LAW MAY DISCOURAGE
OTHER COMPANIES FROM ACQUIRING US, WHICH MAY LIMIT THE PRICE INVESTORS MIGHT BE
WILLING TO PAY IN THE FUTURE FOR OUR COMMON STOCK
Provisions in our Certificate of Incorporation, in our Bylaws and under
Delaware law could make it more difficult for other companies to acquire us,
even if doing so would benefit our stockholders. Our Certificate of
Incorporation and Bylaws contain the following provisions, among others, which
may inhibit an acquisition of our company by a third party:
- a staggered board of directors, where stockholders elect only a minority
of the Board each year;
- advance notification procedures for matters to be brought before
stockholder meetings;
- a limitation on who may call stockholder meetings; and
- a prohibition on stockholder action by written consent.
We are also subject to provisions of Delaware law that prohibit us from
engaging in any business combination with any "interested stockholder", meaning
generally a stockholder who beneficially owns more than 15% of our stock, for a
period of three years from the date this person became an interested
stockholder, unless various conditions are met, such as approval of the
transaction by our board. This could have the effect of delaying or preventing a
change in control. For a more complete discussion of these provisions of
Delaware law, please see "Delaware Law and Certain Certificate of Incorporation
and By-Laws Provisions".
THE TRADING PRICE OF OUR STOCK MAY DECLINE AS A RESULT OF SUBSTANTIAL SALES OF
OUR COMMON STOCK AFTER THE OFFERING
Sales of a substantial number of shares of our common stock after the
offering could negatively affect the market price of our common stock and could
impair our ability to raise capital through the sale of additional equity
securities. Upon completion of this offering, we will have shares of
common stock outstanding ( shares if the underwriters'
over-allotment option is exercised in full). The shares sold in this
offering ( shares if the underwriters' over-allotment option is
exercised in full) will be freely tradable without restriction or further
registration under the federal securities laws unless purchased by our
"affiliates" as that term is defined in Rule 144. The remaining
shares of common stock outstanding upon completion of the offering will be
"restricted securities" as that term is defined in Rule 144. Upon completion of
this offering, we will also have shares of common stock subject to
issuance upon exercise of stock options and warrants that are presently
exercisable or will become exercisable within 180 days after the date of this
prospectus.
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Stockholders holding approximately % of the common stock outstanding
upon completion of this offering and options and warrants to purchase common
stock exercisable within 180 days after the date of this prospectus have
executed lock-up agreements that limit their ability to sell common stock. These
stockholders and option holders have agreed not to sell or otherwise dispose of
any shares of common stock for a period of at least 180 days after the date of
this prospectus without the prior written approval of Goldman Sachs. When the
lock-up agreements expire, these shares and the shares underlying the options
will become eligible for sale, in some cases freely and in other cases only
pursuant to the volume, manner of sale and notice requirements of Rule 144.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
INVESTMENT
The initial public offering price per share will significantly exceed our
net tangible book value per share. If we were to liquidate immediately after the
offering, investors purchasing shares in this offering would receive a per share
amount of tangible assets net of liabilities that would be less than the initial
public offering price per share. Investors purchasing shares in this offering
will suffer dilution of $ per share from their investment. For more
information, please see "Dilution".
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which involve risks and
uncertainties. Our actual results, levels of activity, performance or
achievements could differ materially from those anticipated in the
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this prospectus. In some cases, you
can identify forward-looking statements by terms such as "may", "will",
"should", "expects", "plans", "anticipates", "believes", "estimates",
"predicts", "potential", "continue" or the negative of these terms or other
comparable terms.
Although we believe that the expectations in the forward-looking statements
are reasonable, we cannot guarantee future results, levels of activity,
performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform these
statements to actual results.
USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of the
shares in this offering will be $ million, at an assumed initial public
offering price of $ per share and after deducting the estimated
underwriting discounts and commissions and offering expenses payable by us. If
the underwriters exercise their over-allotment option in full, then we estimate
that the net proceeds we will receive from this offering will be $ million.
We are engaging in this offering in order to increase our working capital,
create a public market for our common stock, facilitate our future access to the
public capital markets and increase our visibility in the marketplace. We have
no specific plans for the use of the net proceeds of this offering other than
for working capital and other general corporate purposes, and our specific use
of these proceeds will be in the discretion of our management. We may in the
future use a portion of the net proceeds to acquire complementary technologies
or businesses, such as distributors or brokers to gain access to key
relationships in the pulp and paper industry; however, we currently have no
commitments or agreements and are not involved in any negotiations involving any
of these transactions. Pending any immediate uses of the net proceeds of this
offering, we intend to invest the net proceeds in interest-bearing, investment
grade securities.
17
<PAGE>
DIVIDEND POLICY
PaperExchange has not declared or paid any cash dividends on its capital
stock since its inception and does not expect to pay any cash dividends in the
foreseeable future. PaperExchange currently intends to retain future earnings,
if any, to finance the expansion of its business.
18
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000:
- on an actual basis; and
- on an as adjusted basis giving effect to the adoption of the amended and
restated certificate of incorporation, the issuance of 503,164 shares of
common stock subsequent to March 31, 2000 at a price of $6.75 per share,
and the receipt of net proceeds from the sale of common stock at an
assumed initial public offering price of $ per share, after
deducting underwritng discounts and commissions and estimated offering
expenses. See "Use of Proceeds."
The table does not reflect options to purchase 3,248,748 shares of common
stock outstanding as of March 31, 2000 under our 2000 Equity Incentive Plan at a
weighted average exercise price of $2.43 per share, 5,000,001 shares of common
stock issuable upon the exercise of warrants at a weighted average exercise
price of $2.00 per share, options to purchase 1,767,020 shares of common stock
at an exercise price of $2.38 per share, options to purchase 450,000 shares of
common stock at an exercise price of $9.74 per share and 519,149 shares of
common stock issuable upon exercise of warrants at an exercise price of $10.00
per share.
You should read the table below together with our financial statements and
the related notes to the financial statements, which are included elsewhere in
this prospectus.
All equity issued by us prior to February 28, 2000 was issued in the form of
limited liability company membership interests, which converted on a one-for-one
basis into shares of common stock when we converted to a corporation at that
time.
<TABLE>
<CAPTION>
MARCH 31, 2000
-----------------------
ACTUAL AS ADJUSTED
-------- ------------
<S> <C> <C>
Long-term debt.............................................. $ 256 $
Stockholders' equity:
Preferred stock, $.001 par value; 1,000,000 shares
authorized (as adjusted); 0 shares issued and
outstanding............................................... --
Common stock, $.001 par value; 60,000,000 shares authorized;
41,901,442 shares issued and outstanding.................. 42
Additional paid in capital................................ 33,793
Deferred compensation..................................... (2,118)
Notes receivable--officers................................ (1,053)
Accumulated deficit....................................... (10,953)
-------
Total stockholders' equity.............................. 19,711
-------
Total capitalization.................................... $19,967
=======
</TABLE>
19
<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 2000, was
approximately $ million, or $ per share. Pro forma net tangible book
value per share represents the amount of our total tangible assets reduced by
the amount of our total liabilities and then divided by the total number of
shares of common stock outstanding on March 31, 2000. Dilution in pro forma net
tangible book value per share represents the difference between the amount per
share paid by purchasers of shares of common stock in this offering and the pro
forma as adjusted net tangible book value per share of common stock immediately
after the completion of this offering. After giving effect to the sale of the
shares of common stock offered by us at an assumed initial public offering
price of $ per share, and after deducting the estimated underwriting
discount and estimated offering expenses payable by us, our pro forma as
adjusted net tangible book value on March 31, 2000, would have been
approximately $ million, or $ per share of common stock. This
represents an immediate increase in pro forma as adjusted net tangible book
value of $ per share to existing stockholders and an immediate dilution of
$ per share to new investors purchasing shares of common stock. The
following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share before this
offering................................................ $
Increase per share attributable to new investors..........
-------
Adjusted pro forma net tangible book value per share after
this offering.............................................
-------
Dilution per share to new investors......................... $
=======
</TABLE>
The following table summarizes, on a pro forma as adjusted basis, after
giving effect to the differences between the existing stockholders and new
investors with respect to the number of shares of common stock purchased from
us, the total consideration paid by investors and the average price per share
paid by existing stockholders and by new investors at an assumed initial
offering price of $ per share before deducting estimated underwriting
discount and offering expenses:
<TABLE>
<CAPTION>
TOTAL AVERAGE
SHARES PURCHASED CONSIDERATION PRICE
------------------- ------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Existing stockholders....................................... % $ % $
New investors...............................................
------ ------ ------- ------ -------
Totals.................................................... 100.0% 100.0%
====== ====== ======= ======
</TABLE>
The preceding tables include 3,248,748 shares of common stock issuable upon
exercise of options outstanding on March 31, 2000 under our 2000 Equity
Incentive Plan at a weighted average exercise price of $2.43 per share,
5,000,001 shares of common stock issuable upon exercise of warrants at a
weighted average exercise price of $2.00 per share, options to purchase
1,767,020 shares of common stock at an exercise price of $2.38 per share,
503,164 shares of common stock issued after March 31, 2000 at a price of $6.75
per share, options to purchase 450,000 shares of common stock at an exercise
price of $9.74 per share and 519,149 shares of common stock issuable upon
exercise of warrants at an exercise price of $10.00 per share.
20
<PAGE>
SELECTED FINANCIAL DATA
When you read this selected financial data, it is important that you read it
together with the historical financial statements and related notes as well as
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". In the table below, we provide you with summary historical
financial data of PaperExchange.com, Inc. We have prepared this information
using the financial statements of PaperExchange.com, Inc. for the period from
April 10, 1998 (date of inception) to December 31, 1998 and the year ended
December 31, 1999, which have been audited by Ernst & Young LLP, independent
auditors, included elsewhere in this prospectus. The statements of operations
data for the three-month periods ended March 31, 1999 and 2000 and the balance
sheet data as of March 31, 2000 are derived from unaudited financial statements
included elsewhere in this prospectus and, in the opinion of management, contain
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the operating results for such periods and the balance
sheet data as of March 31, 2000. The operating results for the quarter ended
March 31, 2000 are not necessarily indicative of the results to be expected for
any other interim period or for the full year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 1998 (INCEPTION) MARCH 31,
THROUGH YEAR ENDED -------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999 1999 2000
---------------------- ------------------- -------------- --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues......................... $ 2 $ 114 $ 1 $ 3,445
Cost of revenues..................... -- 92 -- 3,342
------------- ------------- ------------- -------------
Gross profit......................... 2 22 1 103
Operating costs:
Sales and marketing................ 541 3,376 406 7,747
Technology......................... 141 3,104 266 2,712
General and administrative......... 207 2,116 194 2,768
Write-off of capitalized
software......................... -- 209 -- --
------------- ------------- ------------- -------------
Operating loss....................... (887) (8,783) (865) (13,124)
Interest and other income (expense),
net................................ 27 (268) 4 (38)
------------- ------------- ------------- -------------
Loss before extraordinary items...... (860) (9,051) (861) (13,162)
Extraordinary items:
Loss on debt extinguishment........ -- -- -- 1,423
------------- ------------- ------------- -------------
Net loss............................. $ (860) $ (9,051) $ (861) $ (14,585)
============= ============= ============= =============
Basic and diluted net loss per share:
Loss before extraordinary items.... $ (.03) $ (.26) $ (.03) $ (.32)
Extraordinary items................ -- -- -- (.04)
Net loss........................... $ (.03) $ (.26) $ (.03) $ (.36)
============= ============= ============= =============
Weighted average interests used to
compute basic and diluted loss per
share.............................. 30,000,000 34,881,564 30,000,000 40,319,260
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------- ---------------------
1998 1999 2000
---------- ---------- ---------------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 493 $ 16,279 $ 18,093
Working capital............................................. 444 13,141 17,276
Total assets................................................ 818 18,486 23,909
Long-term debt.............................................. -- 8,468 256
Total liabilities........................................... 52 11,772 4,198
Total stockholders' equity.................................. 765 6,714 19,711
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND
RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT INCLUDE RISKS AND UNCERTAINTY. OUR ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS, SUCH AS THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
PaperExchange provides a business-to-business e-commerce marketplace for
buyers and sellers of pulp and paper and related products. Our marketplace
enables members to efficiently buy and sell products through a secure
Internet-based neutral marketplace tailored to this industry.
We were formed in April 1998 and began offering products for sale on our
marketplace in the fourth quarter of 1998. From inception through December 31,
1999, we were a development stage enterprise and did not have significant
revenue. Our operating activities during this period related primarily to
designing and developing our marketplace, building our corporate infrastructure,
establishing relationships with suppliers and purchasers, and raising capital.
To date, revenues have been derived from transactions executed on the exchange
component of our marketplace. We intend to continue developing our marketplace
to enhance functionality and to add service offerings.
We have not generated significant revenue to date and our ability to
generate significant revenue in the future is uncertain. We have incurred
significant losses since inception and, as of March 31, 2000, we had an
accumulated deficit of approximately $11.0 million. We expect our losses to
increase in the future and we cannot assure you that we will achieve or sustain
profitability.
From inception, we have increased our level of spending to build our
corporate infrastructure, develop our marketplace, and attract an experienced
management team. We believe our success depends on establishing additional key
strategic supplier and purchaser relationships, enhancing the features and
functionality of our marketplace, and accelerating market awareness and demand
for the services we provide. We intend to increase our marketing, sales,
technology, and other operating expenses as required to continue to build our
marketplace, as well as expand internationally. We anticipate that these
expenses could significantly precede any revenues generated by such increased
spending.
REVENUES
Beginning in December 1999 we began to act as a principal in our marketplace
by purchasing products from our seller members and reselling them to our buyer
members, and we expect this model will be the primary method of effecting
transactions in our marketplace in the future. In transactions in which we are
the principal, we recognize revenue from product sales when products are shipped
to customers. We are responsible for selling products, collecting payment from
customers, ensuring that the shipment reaches customers, and processing returns.
In addition, we take title to the product upon shipment and bear the risk of
loss for collection, delivery of goods, and product returns from customers. We
provide an allowance for sales returns at the time of sale, if deemed
appropriate. The Company had a bad debt allowance of approximately $4,000 and an
allowance for sales returns of approximately $31,000 at December 31, 1999.
From inception through December 31, 1999, we derived our revenue primarily
through product sales to customers on our marketplace on an agency basis. Under
these agency-based
22
<PAGE>
transactions, we recognize as revenue our commission equal to a percentage of
the purchase price of products sold at the time the products are shipped to the
buyer. In transactions in which we are the agent, we neither take title to
products nor bear the risk of loss for collection or product returns. While we
expect principal-based transactions to be the primary method of conducting
business on our marketplace, agency-based transactions may continue.
COST OF REVENUES
When we act as the principal in a transaction, our cost of revenues consists
of the cost of acquiring products from our suppliers for sale to our buyers.
When we act as agent, transactional revenue does not have any associated direct
costs of sales. We expect that our overall gross profit as a percent of revenue
will decrease as we derive a larger percentage of our revenue from
principal-based transactions on our exchange.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
advertising and promotion in support of the development of our marketing
strategy and payroll and related expenses for personnel engaged in member
relations and sales activities. Sales and marketing expenses have increased
since inception as we have expanded these efforts. We expect that sales and
marketing expenses will increase significantly in future periods as we incur
additional advertising and promotion expenses, and hire additional sales and
marketing personnel to drive user adoption among buyers and sellers in the pulp
and paper industry, develop our branding strategy, and expand to international
markets.
TECHNOLOGY. Technology expenses consist primarily of payroll, benefits,
consulting fees, amortization of software, and various communication expenses
associated with developing, maintaining, and enhancing our marketplace.
Increased technology spending has resulted from additional staffing and the
associated costs incurred to enhance the features, content, and functionality of
our marketplace. Research and development costs are expensed as incurred.
Software development costs which provide additional functionality to the
marketplace are required to be capitalized. We believe that our success is
dependent in large part on continued enhancement of our marketplace and
therefore expect development costs to increase in future periods.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of payroll, benefits, and professional service fees. The general and
administrative expenses have increased primarily due to the additions to our
executive management team as well as expenses related to increased professional
service fees. We expect general and administrative expenses to increase in
future periods to support our expanded operations and the expenses of being a
public company.
WRITE-OFF OF CAPITALIZED SOFTWARE. We wrote off capitalized software in the
fourth quarter of 1999 in connection with the release of Version 3.0 of our
website software which replaced Version 2.0.
INTEREST AND OTHER EXPENSE, NET
Interest and other expense, net has been derived primarily from interest on
notes payable to shareholders, offset by interest income on cash investments.
INCOME TAXES
In February 2000, we changed our form of organization from a limited
liability company to a corporation and, therefore, are subject to federal and
state income taxes effective February 28,
23
<PAGE>
2000. Prior to this date, we were treated as a partnership for federal and state
income tax purposes and all items of income, expense and tax credits were passed
through to our limited liability company members.
The Company expects to recognize a deferred tax asset for the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Due to the uncertainties regarding the Company's future results of
operations, a full valuation allowance will be recorded against any deferred tax
asset for the foreseeable future.
THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
NET REVENUES
Net revenues increased from $1,200 for the three months ended March 31, 1999
to $3.4 million for the three months ended March 31, 2000. The increase in net
revenue is due primarily to the introduction of principal-based transaction
revenue in December 1999, and to a lesser extent to an increase in the number of
transactions completed through our marketplace. Staples accounted for 82% of
sales in the three months ended March 31, 2000. Staples did not have any
purchases through our marketplace in prior periods.
COST OF REVENUES
Cost of revenues increased from zero for the three months ended March 31,
1999 to $3.3 million for the three months ended March 31, 2000. This was due
primarily to the introduction of principal-based transaction revenue in
December 1999.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing increased from $406,000 for the
three months ended March 31, 1999 to $7.7 million for the three months ended
March 31, 2000. This increase is a result of a noncash charge to operations of
$5.0 million for the fair value of warrants issued to a customer, increased
sales and marketing staffing and our continued investment in advertising and
promotion activities.
TECHNOLOGY. Technology expenses increased from $266,000 for the three months
ended March 31, 1999 to $2.7 million for the three months ended March 31, 2000.
The increase is due to increased staffing and costs associated with operating
our website, including the introduction of Version 3.1 of our website software.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $194,000 for the three months ended March 31, 1999 to $2.8 million for the
three months ended March 31, 2000. The increase is due primarily to a noncash
charge to operations of $1.2 million related to stock options granted to an
affiliate. In addition, the company incurred higher professional services fees,
expenses related to hiring of additional management team and customer service
personnel, and amortization of deferred compensation in connection with certain
stock options granted in 1999.
INTEREST AND OTHER (INCOME) EXPENSE, NET. Interest expense consisted of
$322,000 on notes payable to shareholders, offset by interest income of $287,000
on cash investments for the three months ended March 31, 2000, as compared to
interest income of $4,000 for the three months ended March 31, 1999.
LOSS ON EARLY EXTINGUISHMENTS OF DEBT. A loss on debt extinguishment of $1.4
million was recorded as an extraordinary item to recognize the unamortized
portion of notes payable discounts related to the early repayment of $9.7
million of notes payable to stockholders in March 2000.
24
<PAGE>
PERIODS ENDING DECEMBER 31, 1999 AND 1998
NET REVENUES
From inception through December 1999, PaperExchange was a development stage
enterprise and did not have significant revenues. Net revenues increased from
$1,500 in 1998 to $114,000 in 1999. This increase in net revenue is primarily
attributable to a change in our primary transaction model to principal-based
transactions in December 1999 from what had previously been a model consisting
primarily of agency-based transactions.
COST OF REVENUES
Cost of revenues increased from zero in 1998 to $92,000 for the year ended
December 31, 1999. This was due to the introduction of principal-based
transaction revenue.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased from $541,000 in
1998 to $3.4 million in 1999. The increase resulted primarily from our continued
investment in advertising and promotion activities, and increased staffing
levels to assist our business development.
TECHNOLOGY. Technology expenses increased from $141,000 in 1998 to
$3.1 million in 1999. The increase is due to increased staffing and associated
costs related to the design, development, and maintenance of our marketplace.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $207,000 in 1998 to $2.1 million in 1999. The increase is due to the
amortization of deferred compensation of $516,000 in connection with certain
stock options granted in 1999, additional management team and customer service
personnel, and higher professional service fees.
WRITE-OFF OF CAPITALIZED SOFTWARE. We wrote off $209,000 of capitalized
software in the fourth quarter of 1999 in connection with the release of
Version 3.0 of our website software which replaced Version 2.0.
INTEREST AND OTHER EXPENSE, NET
Interest expense consisted of $334,000 on notes payable to shareholders,
offset by interest income of $56,000 on cash investments and other income of
$10,000. Interest and other expense, net was $268,000 in 1999 as compared to
interest income of $27,000 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through the private sale of our
equity securities and the issuance of notes and related warrants. Since
inception through March 31, 2000, we have raised net proceeds of $35.4 million
through the private sales of our equity securities and $10.0 million from the
issuance of notes and related warrants. At March 31, 2000, our principal source
of liquidity was $18.1 million in cash and cash equivalents.
Net cash used in operating activities was $780,000 in 1998, $5.2 million in
1999 and $9.1 million for the three months ended March 31, 2000. Net cash used
in operating activities primarily resulted from personnel, marketing activities,
and overhead costs.
Net cash used in investing activities was $230,000 in 1998, $1.9 million in
1999 and $429,000 for the three months ended March 31, 2000. We have made
substantial investments in internally developed and purchased software as well
as additional property and equipment.
25
<PAGE>
Net cash provided by financing activities was $1.5 million in 1998,
$22.9 million in 1999 and $11.4 million for the three months ended March 31,
2000. Net cash provided by financing activities in 1998 of $1.5 million resulted
from the sale of equity securities. Net cash provided by financing activities in
1999 was provided primarily by net proceeds of $12.9 million from the sale of
our equity securities and $10.0 million from the issuance of notes and related
warrants. Net cash provided by financing activities in the three months ended
March 31, 2000 was provided by $21.1 million from the sale of our equity
securities, net of $9.7 million used to repay notes payable to stockholders.
We currently anticipate that the net proceeds from this offering, together
with our current cash and cash equivalents, will be sufficient to meet our
anticipated cash needs for working capital, other operating expenses, and
capital expenditures for at least the next 18 months. However, we may need to
raise additional funds in the future through public or private financings or
other arrangements to fund our operations, and potential acquisitions, if any,
until we achieve profitability, if ever. Any additional financing activities, if
needed, might not be available on reasonable terms or at all.
26
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
Due to our limited operating history, we believe that period-to-period
comparisons of results of operations are not meaningful and should not be relied
upon as an indication of future performance. The following table, however, sets
forth our quarterly statement of operations for 1999 and the first three months
of 2000. You should read the following table together with our financial
statements and related notes in this prospectus.
QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1999 1999 1999 1999 2000
---------- --------- -------------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................. $ 1 $ 6 $ 6 $ 101 $ 3,445
Cost of revenues............................. -- -- -- 92 3,342
------- ------- ------- ------- --------
Gross profit................................. 1 6 6 9 103
Operating costs:
Sales and marketing........................ 406 402 1,008 1,560 7,747
Technology................................. 266 171 781 1,886 2,712
General and administrative................. 194 350 417 1,155 2,768
Write off of capitalized software.......... -- -- -- 209 --
------- ------- ------- ------- --------
Total operating costs.................... 866 923 2,206 4,810 13,227
------- ------- ------- ------- --------
Operating loss............................... (865) (917) (2,200) (4,801) (13,124)
Interest and other (income) expense, net..... (4) (1) -- 273 38
------- ------- ------- ------- --------
Loss before extraordinary items.............. (861) (916) (2,200) (5,074) (13,162)
Extraordinary item:
Loss on debt extinguishment................ -- -- -- -- 1,423
------- ------- ------- ------- --------
Net loss..................................... $ (861) $ (916) $(2,200) $(5,074) $(14,585)
======= ======= ======= ======= ========
</TABLE>
YEAR 2000 COMPLIANCE
We have been able to build our internal systems with Year 2000 compliance in
mind and to date we have not suffered any disruptions in our systems following
December 31, 1999. In addition, to date, we have not been made aware that any of
our technology or communications vendors have suffered disruptions in their
systems. Failure of our internal computer systems, third-party equipment or
software, or systems maintained by our suppliers to operate properly with regard
to the Year 2000 could require us to incur significant unanticipated expenses to
remedy any problems.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
All of our revenue to date has been denominated in United States dollars and
is primarily from buyers in the United States. Because we intend to expand our
business operations to international markets, a portion of the revenue we derive
from international operations may be denominated in foreign currencies. As a
result, our operating results could become subject to significant fluctuations
based upon changes in the exchange rates of those currencies in relation to the
United States dollar. Furthermore, to the extent that we engage in international
sales denominated in United States dollars, an increase in the value of the
United States dollar relative to foreign currencies could make our services less
competitive in international markets. Although currency fluctuations are
currently not a material risk to our operating results, we intend to continue to
monitor our
27
<PAGE>
exposure to currency fluctuations and, when appropriate, use financial hedging
to minimize the effect of these fluctuations in the future.
Our interest income is sensitive to changes in the general level of United
States interest rates, particularly since the majority of our investments are in
short-term investments. Our notes payable are also interest rate sensitive,
since the interest rate charged is based on changes in the prime rate of
lending. We believe, however, that we are currently not subject to material
interest rate risk.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designed as part of a
hedge transaction and, if it is, the type of hedge transaction. We do not expect
that the adoption of SFAS No. 133 will have a material impact on its financial
statements.
28
<PAGE>
BUSINESS
COMPANY OVERVIEW
PaperExchange is a leading business-to-business marketplace for the pulp and
paper industry that enables buyers and sellers in the pulp and paper industry to
transact business on the Internet. Our marketplace includes a real time exchange
that enables our members to buy and sell products and services in a secure and
neutral environment. We have attracted and registered more than 4,100 corporate
members to our marketplace from over 80 countries. To date, our members have
completed over 140 transactions representing a total of approximately 9,800 tons
of pulp and paper products. We are led by a management team with extensive
experience in the pulp and paper industry and in technology.
INDUSTRY BACKGROUND
GROWTH OF BUSINESS-TO-BUSINESS COMMERCE ON THE INTERNET
The Internet has emerged as the fastest growing communications medium in
history and is dramatically changing how businesses and individuals communicate
and share information. Initially, the Internet created new opportunities for
conducting commerce, primarily through business-to-consumer and person-to-person
e-commerce. More recently, the widespread adoption of intranets, the acceptance
of the Internet as a business communications platform, and increased and secure
bandwidth have created a foundation for business-to-business e-commerce that
offers the potential for organizations to streamline complex processes and
supply chains, lower costs, and improve productivity. Internet-based
business-to-business e-commerce is poised for rapid growth and, according to
Forrester Research, is expected to grow from $109 billion in 1999 to $2.7
trillion in 2004, accounting for more than 90% of the dollar value of e-commerce
in the United States by 2004. In addition, Forrester estimates that transactions
conducted through electronic marketplaces will account for more than half of the
total estimated business-to-business e-commerce market by 2004.
As business-to-business e-commerce continues to grow, industry-specific or
"vertical" marketplaces are achieving increasing acceptance. These vertical
marketplaces bring together buyers, sellers, and information in open, online
marketplaces that automate complex business processes and supply chains. We
believe business-to-business e-commerce marketplaces are most likely to be
successful in industries characterized by:
- large numbers of buyers and sellers,
- a high degree of fragmentation among buyers, sellers or both,
- inefficient supply chains,
- significant dependence on information exchange,
- large transaction volume, and
- large product selection.
29
<PAGE>
THE PULP AND PAPER INDUSTRY
The pulp and paper industry represents an estimated $500 billion of sales
globally and over an estimated $182 billion in North America. The pulp and paper
industry supply chain is comprised of pulp producers, paper producers,
converters, brokers, distributors, and other intermediaries and end-users, as
illustrated and described below:
THE GLOBAL PULP AND PAPER SUPPLY CHAIN
(Chart indicating the global pulp and paper supply chain.) On the left side
is an oval containing the words "Pulp Mills". To the right of the oval is an
arrow pointing right towards a second oval. The second oval contains the words
"Paper Mills". To the right of the second oval is an arrow pointing right
towards a third oval. The third oval contains the phrase "Converters and
Finishers". To the right of the third oval is an arrow pointing right towards a
fourth oval. The fourth oval contains the words "End Users". A dotted line is
drawn downwards from the bottom of the fourth oval and an arrow is drawn at a
ninety degree angle from the line pointing left. To the left of the arrow is a
fifth oval containing the phrase "Recycled Materials. Underneath the arrow
pointing from the first oval to the second oval are two bullet points. The first
bullet point is "Integrated pulp". The second bullet point is "Market pulp".
Underneath the phrase "Market pulp" is a dashed point which says "Estimated
$26 billion market".
With a dotted line reconnecting to the oval that says "Pulp Mills'.
Underneath the arrow pointing from the second oval to the third oval is one
bullet point which says "Estimated $182 billion market." Underneath the arrow
pointing from the third oval to the fourth oval is a bullet point which says
"Estimated $280 billion market".
- Pulp mills manufacture pulp from trees and recycled fibre. There are
approximately 350 pulp mills in the United States, many of which are owned
by or directly integrated with paper mills. Pulp production in these
integrated mills is known as integrated pulp and is generally not sold in
the open market.
- Market pulp is produced by non-integrated pulp mills, as well as
integrated mills that have excess pulp, and is sold to both paper mills
and end users. Market pulp is typically shipped in bulk quantities by
container. We estimate the size of the global pulp market to be
$26 billion.
- Paper mills use pulp to manufacture various grades of paper products.
These products are typically produced and shipped in large rolls that can
weigh several tons each. For example, a paper mill may manufacture a roll
of white paper suitable for being converted into multiple types of writing
and printing paper.
- Converters specialize in converting paper produced by mills into finished
products such as writing paper, tissue and corrugated boxes. Converters
typically sell to intermediaries, retailers and end users. For example, a
converter may purchase a roll of paper and manufacture note pads.
- End users purchase the paper products for their end use, such as an office
supply store buying photocopy paper in bulk or a food manufacturer buying
corrugated boxes for shipping its food products.
- Brokers, agents and other intermediaries purchase products at any point in
the supply chain and resell down the supply chain. For example, a broker
may purchase containerboard suitable for being converted into corrugated
boxes and resell it to a converter. Although the concentration of sales
through various distribution channels varies by product segment,
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intermediaries play a significant role in the industry, particularly in
connection with sales of products by paper mills to converters.
- Throughout this supply chain, sellers and buyers must obtain or perform
certain fulfillment services to complete transactions, such as logistics
and credit approval. Due to the bulk and weight of both raw materials and
finished products, freight costs can be a significant expense for buyers
and sellers.
Purchases are made either in the spot market or through longer term
negotiated contracts. Intermediaries, brokers and other participants in the
industry typically operate on a one-to-one basis, taking advantage of the
limited amount of market information available. These sales methods restrict the
ability of buyers and sellers to transact business efficiently on a one-to-many
or many-to-many basis. As a result, buyers and sellers often have imperfect
information on market pricing, supply and demand, which leads to less efficient
production and purchasing decisions.
Industry participants often will occupy several roles in the supply chain.
For example, a large box manufacturer may also purchase pulp for its paper mill
on an ongoing basis and may purchase boxboard for its converter mill to satisfy
excess demand that cannot be met by its internal production.
There are six principal product segments in the pulp and paper industry, as
described below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
PULP AND PAPER PRODUCT SEGMENTS
- -------------------------------------------------------------------------------------------------
PRODUCT GRADE DESCRIPTION
<S> <C>
- -------------------------------------------------------------------------------------------------
Pulp - Manufactured by combining wood fibre with water and
chemicals
- Used to produce all of the grades of paper described
below and consumer goods such as diapers
- -------------------------------------------------------------------------------------------------
Recovered Fibre - Recycled newspaper, office waste and corrugated boxes
- Used as a supplement or as an alternative to virgin
pulp
- -------------------------------------------------------------------------------------------------
Printing and Writing - Paper in various grades for home and office use as
well as printed communications including brochures,
photocopies, magazines and catalogs
- -------------------------------------------------------------------------------------------------
Newsprint - Paper used for producing newspapers and other short
shelf life publications
- -------------------------------------------------------------------------------------------------
Towel and Tissue - Products for home and commercial sanitary use
- -------------------------------------------------------------------------------------------------
Containerboard/Boxboard - Corrugated and folding carton packaging materials in
numerous grades used for all types of packaging
products
- -------------------------------------------------------------------------------------------------
</TABLE>
LIMITATIONS OF TRADITIONAL MARKETING AND PROCUREMENT METHODS IN THE PULP AND
PAPER INDUSTRY
Traditional marketing and procurement methods in the pulp and paper industry
are inefficient, costly, and time consuming for both sellers and buyers. The
typical connection between a buyer and a seller occurs through a match-making
process dependent on personal relationships and one-to-one dialogues through
phone calls, faxes and phone messages. The effectiveness of these procurement
methods depends on the availability and reach of the selling and buying
personnel and often includes a third party intermediary such as a broker,
merchant or distributor. This third party intermediary charges a commission and
often increases the price with a mark-up based on
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market conditions and the ability to leverage the limited information available
in the industry. The result can be significant costs for limited value added.
The current pulp and paper market environment is characterized by the following
limitations:
FRAGMENTATION OF SUPPLIERS AND BUYERS. The pulp and paper industry is
extremely fragmented, with approximately 2,000 producer mills and approximately
300,000 converting and printing plants worldwide. The large number of producers
and the unavailability of relevant pricing information make it cumbersome for
buyers to determine which sellers are offering the products and prices that most
closely match the needs of buyers. In addition the large number of buyers of
pulp and paper products make it difficult for sellers to locate potential
customers and provide them with relevant product and pricing information.
LIMITED MARKET INFORMATION. Industry fragmentation, the role of
intermediaries in the supply chain and the lack of an active futures market has
limited the information available to industry participants. The absence of
widely available pricing and other market information has resulted in pulp and
paper products often being offered and sold with significant pricing disparities
within similar grades, despite limited product differentiation and low brand
loyalty. In addition, producers have operated with a limited ability to discern
future market demand which has resulted in inefficient production processes.
SIGNIFICANT CAPITAL COMMITMENTS WHICH DRIVE OVERPRODUCTION. The pulp and
paper industry is characterized by significant capital requirements with new
paper mills, new paper machines and equipment upgrades often costing hundreds of
millions of dollars. However, capital available for the industry has been
limited, due to a relatively poor historical return on invested capital. In
these circumstances, manufacturers face constant pressure to maximize asset
utilization and return on capital employed. Also, shutting down and restarting a
paper machine when it is running can cost millions of dollars. As a result,
producers often will overproduce products when production is running well, even
when the producer does not have present demand for its products. This production
to inventory rather than production to demand is one of the principal causes of
excess inventories, market oversupply, and price volatility in the industry.
According to Fortune Magazine, the forest and paper products industry ranked
second to last in return on equity out of 38 different industries surveyed for
1998.
INEFFICIENT PRODUCTION PROCESSES. Paper machines are typically built to
produce a standard width sheet of paper. If the type of products demanded do not
match this standard width, a portion of the paper produced will be excess
structural trim. The manufacturer must either find a market for this excess
structural trim or recycle it back into pulp. In addition, some produced
material does not meet the required specifications for its intended use,
resulting in non-prime product for which there is a more limited market demand
and which consequently is often sold through more costly sales methods. For
producers, the costs of these sales methods can absorb any profit margin, and
these sales are often made to brokers and other intermediaries that add their
own mark-ups.
POOR TECHNOLOGY ADOPTION. Because of the huge capital requirements for
producers of pulp and paper and the associated significant maintenance costs,
there is little capital available for internal investments in information
technology, including e-commerce solutions. Many producers are burdened with
outdated or poorly integrated business and manufacturing systems. Given the
recent trend in industry consolidation, these problems are exacerbated by the
many different systems inherited by companies through mergers and acquisitions.
GLOBAL MARKET LIMITATIONS. The fragmented and inefficient state of the pulp
and paper industry in North America also exists at a global level. In
international markets, buyers and suppliers encounter difficulty in obtaining
reliable, timely information about product, pricing, supply, and demand across
regions and national borders.
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OPPORTUNITY FOR A BUSINESS-TO-BUSINESS E-COMMERCE SOLUTION IN THE PULP AND PAPER
INDUSTRY
The supply chain complexities and fragmentation of the pulp and paper
industry create the opportunity for a business-to-business e-commerce
marketplace that streamlines procurement methods, improves industry
participants' sales and marketing channels, improves access to information, and
reduces inefficiencies across the supply chain. Specifically, buyers would
benefit from a solution that provides direct access to broader supply sources
for all their pulp and paper needs, reduces procurement costs, and reduces
intermediary transaction costs and markups. Sellers would benefit from a
solution that provides direct access to broader markets for their products,
reduces transaction and selling costs, improves operating efficiencies, and
reduces working capital costs through better inventory and receivables
management. Both buyers and sellers would benefit from a solution that
facilitates more rational decisions from better and more timely market
information.
THE PAPEREXCHANGE SOLUTION
Our solution is a vertically-focused electronic marketplace that enables our
members to list offers to sell or requests to purchase products and services in
a secure and neutral environment and allows more efficient access to a larger
number of industry participants. We have developed proprietary technology that
enables our members to review products offered online, negotiate pricing, and
consummate transactions on our exchange. We also offer several fulfillment
services, including logistics, credit clearing for qualified buyers, and quality
inspection, as well as industry specific content.
BENEFITS TO SELLERS
BROADER MARKET ACCESS. Our marketplace allows sellers to market and
distribute products through a single forum that is capable of reaching a large
universe of buyers. Because of the highly fragmented nature of the industry and
the lack of valuable market information, sellers have typically reached only a
limited portion of the possible buyers for their products. In addition, our
technology allows sellers to customize their offers to this broader market in a
manner that helps them preserve existing business relationships and distribution
channels.
REDUCED COSTS. We enable sellers to negotiate and conduct transactions
directly with buyers, thus lowering overall transaction costs. This process may
reduce a seller's reliance on traditional, more expensive distribution channels
and sales and marketing efforts. Sellers are also able to list non-prime
products for sale through our marketplace, allowing them an efficient means to
sell these products. In addition, because we act as principal in most
transactions, sellers effectively deal with only one customer in our marketplace
and do not bear the administrative costs associated with credit checks for
multiple customers.
PRODUCTION TO ORDER RATHER THAN TO INVENTORY. Our marketplace enables
producers to actively pre-sell machine time and respond to requests for
quotations from prospective buyers. By producing to order rather than to
inventory, sellers can improve machine productivity and reduce raw material
waste and excess trim. These operating efficiencies can enable producers to
improve working capital and reduce cost of goods sold.
ACCESS TO INTERNET SOLUTIONS. Sellers are able to access our marketplace
through an Internet connection and a standard web browser. Our sophisticated
transaction software designed specifically for the pulp and paper industry
requires minimal set-up costs and reduces the need for sellers to develop their
own Internet e-commerce solution. We believe that equivalent technology tailored
for this industry is not commercially available.
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FULFILLMENT SERVICES. Our fulfillment services enable sellers to close
transactions efficiently with a large universe of buyers, especially buyers with
whom they have not previously done business. By offering a full line of
competitively priced logistics solutions, we provide efficient access to
potential new buyers, new channels of distribution and new geographic markets.
In addition, our credit clearing and payment processing services enable sellers
to market products efficiently to a larger group of buyers without increased
administrative costs or credit risk to the seller.
BENEFITS TO BUYERS
BETTER ACCESS TO SUPPLY. Our marketplace provides buyers with access to
suppliers and products across multiple product categories on a global basis.
Buyers typically purchase products through long term replenishment contracts and
spot purchases in the market. Our marketplace enables buyers to contract with a
much larger universe of sellers. In addition, buyers will make more efficient
spot purchases because of the broad range of sellers offering products through
our marketplace.
REDUCED COSTS. We enable buyers to access sellers directly, thereby reducing
transaction fees and intermediary markups. In addition, use of our marketplace
can simplify transactions and reduce administrative costs because buyers are
able to consolidate invoices and replace existing paper based functions. In
addition, because certain buyers undergo a single credit approval process,
multiple credit checks are no longer necessary.
FULFILLMENT SERVICES. Our logistics, credit approval and other fulfillment
services enable buyers to close transactions efficiently with a large universe
of sellers. Our marketplace eliminates the current administrative burden and
expense of credit approving significant numbers of additional buyers, and the
costs associated with developing and obtaining logistics services for new
geographic regions. As a result, buyers can gain access to sellers with whom
they previously may not have been able to transact business.
In addition, we currently provide all members with industry-specific
content, including news, feature articles, case studies and interviews provided
by VerticalNet and its PulpandPaperOnline web-site. We also offer real time
stock quotes and industry news provided by News Alert, an online news service.
Through the calendar of events and bulletin board sections, users may both post
events and receive up-to-date information on upcoming industry expositions and
conferences. We believe that this content attracts industry participants, drives
increased membership, and encourages repeat business.
THE PAPEREXCHANGE STRATEGY
We seek to be the leading provider of business-to-business e-commerce
solutions for the pulp and paper industry. Our strategy includes the following
key elements:
CAPITALIZE ON FIRST MOVER ADVANTAGE. We plan to capitalize upon our position
as the first company to offer an Internet-based e-commerce solution across all
product categories within the pulp and paper industry. We intend to gain market
share aggressively by continuing to expand the selection of pulp and paper
products, services, and related content offered through our marketplace. We plan
to leverage our strategic relationships with several industry-leading
participants, including International Paper, Asia Pulp & Paper, and Staples. We
are continuing to pursue other key strategic alliances around the world thereby
increasing our market share while maintaining our position as a neutral
marketplace for the industry.
As we add more suppliers and purchasers to our marketplace, we believe they
will increasingly view our marketplace as the primary point of contact among a
broad array of sellers and buyers within the pulp and paper industry. We believe
this growth cycle creates a network effect, where the
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value to each member in the network increases with the addition of each new
member, increasing the overall value of our marketplace. We also believe that
once members become integrated into our e-commerce solution, its ongoing
benefits and the costs of switching to alternative marketplaces will encourage
them to continue to use our marketplace.
ACCELERATE USER ADOPTION. We will continue to concentrate our efforts on
attracting new participants to our marketplace through a targeted sales and
marketing effort. Our sales strategy focuses on educating industry participants
on the benefits of the marketplace as well as actively recruiting new buyers and
seller to enroll as members. Our marketing and branding campaign will include
event sponsorships, advertising in trade publications and participation in trade
shows and industry conferences. In addition, we will continue to drive user
adoption and awareness of the marketplace by leveraging the relationships,
reputation and expertise of members of our management team. We believe that
these focused efforts will continue to lead to increased use of our marketplace
offerings and services.
ENHANCE PLATFORM SOLUTION. We intend to continue to enhance our e-commerce
solution. These enhancements will be designed to support large-scale growth over
time, allowing us to be responsive to market conditions and provide superior
performance for our members. Additional tools and features may also be
developed, such as My MarketProfiler, which improve the transacting experience
of marketplace participants. In addition, we intend to enhance our platform so
that it can be integrated with our members' existing information systems in a
seamless manner. We also intend to offer participants the ability to transact
using a variety of pricing models, including the exchange, catalog sales,
branded storefronts and both forward and reverse auctions.
DEVELOP STRATEGIC RELATIONSHIPS. We intend to continue to develop strategic
relationships to build our marketplace. These strategic relationships may
include alliances with new buyers and sellers to increase the number and size of
transactions on our marketplace, as well as alliances that establish links with
other business-to-business e-commerce providers in the industry.
EXPAND INTERNATIONALLY. We believe the global reach of many of our members,
the worldwide demand for pulp and paper products, and the international scope of
the Internet present opportunities to expand our marketplace globally. We
recently opened an office in London and have plans to expand into continental
Europe, Asia and Latin America. We plan to leverage our technology, logistics
services, industry expertise, and existing strategic relationships to expand the
reach of our marketplace to these new geographic markets.
THE PAPEREXCHANGE MARKETPLACE
Our marketplace currently includes our exchange, which enables sellers and
buyers to negotiate pricing and transact with one another in a secure, neutral
and customizeable environment. Both buyers and sellers access the marketplace
using standard Internet connections and browsers. We also provide fulfillment
services that help our members take full advantage of the opportunities
available in our marketplace and rich industry-specific content that encourages
buyers and sellers to visit our marketplace on an ongoing basis.
TRADING FLOOR EXCHANGE
Our marketplace is open to buyers and sellers who become members. In order
to gain access to our marketplace, a prospective member fills out a registration
application that includes background information on the prospective member and
the member's organization. If the prospective member is from an organization
that has not previously registered, we perform a limited review before trading
rights are granted to confirm that the prospective member is a buyer or seller
of pulp and paper products. If the review is satisfactory, we activate the
member with trading rights.
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In addition, prospective members wishing to obtain credit approval in connection
with purchases in our marketplace undergo a credit review.
Sellers post prime and non-prime product, excess inventory and future
machine time on our marketplace. Sellers must designate the quality of their
product and list core product attributes. With respect to pricing of a product,
sellers either provide an offer price at the time of listing or allow potential
buyers to begin the bidding. Buyers can search for listings by product category
or by using specific criteria. Buyers can also list current and future demand in
the form of "requests to purchase". Members are notified via e-mail of bids on
their listings and then can reply by "accepting" the bid price or making a
counterproposal to one party or multiple parties. Neither buyers nor sellers are
provided with the identity of the other party until the transaction has been
consummated, though a credit approved buyer is designated with an icon. After a
transaction has been consummated on the site, the buyer and seller receive
confirmation by e-mail of their transaction and are given instructions on the
next action items.
In most transactions on our marketplace we act as principal. Where we act as
principal, we buy products from suppliers and resell them to buyers, taking
responsibility for invoicing, collecting payments from customers, ensuring that
the shipment reaches customers, and processing sales returns.
For transactions where we act as agent, if the parties have agreed on price
we notify them by e-mail and they are responsible for the negotiation of terms
and conditions. For all transactions, once the seller ships the products it
notifies us and we invoice the seller for a commission based on the dollar
volume of the order shipped.
"MY MARKETPROFILER"
The My MarketProfiler feature helps members to preserve existing business
relationships and distribution channels and to market new products. Our members
can customize their use of our marketplace by defining their specifications,
including geography, type of paper, producer and price on a
transaction-by-transaction basis. Through this feature, sellers may elect to
target their product offerings to a broad marketplace or to block certain buyers
from viewing their product offerings. Similarly, buyers can elect to view all
product offerings or to exclude product offerings from selected sellers. We
believe that this tool is a significant factor in influencing sellers to try our
marketplace without fear of disrupting their existing business. We have
additional tools that enable members to create customizeable environments
including My PaperExchange, which acts as the control center for individual
users, and My ProductProfiler, which is a series of customizable templates
providing members with a means of standardizing repetitive tasks to save time.
FULFILLMENT SERVICES
We offer our members several key fulfillment services that significantly
increase transaction efficiency and reduce transaction risk.
CREDIT APPROVAL AND PAYMENT PROCESSING. In transactions in which we act
as principal, buyers must become credit approved, pay in advance, or post a
letter of credit. Members seeking credit approval must complete a credit
application. Our credit clearing service evaluates the credit of a buyer
using third-party credit facilities and ratings. This credit verification
feature enables buyers to position themselves more favorably in the bidding
process by allowing sellers to know that a particular buyer with a "Credit
Approved" icon has open credit on our marketplace. For all credit approved
transactions, we assume the risk that the buyer will not make payments. We
reduce our credit exposure arising from credit-approved transactions through
credit insurance with a third party insurance company. We currently do not
charge our members a fee for this service.
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We expect to continue to act as principal in substantially all of the
transactions conducted through our marketplace. By establishing a
credit-approved relationship with us, members can expand trading
relationships with our growing membership base without continually
undergoing credit checks with individual buyers.
LOGISTICS SERVICES. We provide domestic logistics services to members
through our exclusive relationship with C.H. Robinson, one of the largest
third party logistics providers in North America. C.H. Robinson will provide
to participants in our marketplace real time estimates, real time
transactable quotes, tracking capabilities and online access to shipping
documentation.
Our fulfillment services may enable buyers and sellers to reduce their
logistics costs because of our access to competitive freight rates, and may
permit them to sell efficiently through new channels and in new geographic
markets. We permit our members to access our logistics services even if not
related to a transaction through our exchange. For example, some members
could use our services to move products internally from one plant to
another. We may in the future charge a fee for utilizing our logistics
services.
QUALITY ASSURANCE PROGRAMS. We have developed a relationship with SGS
Societe Generale de Surveillance SA, a world leader in inspection, testing
and verification. SGS currently acts as the independent third party in
disputes between our members regarding product quality, basing its decisions
on inspection and lab testing reports. We are expanding our relationship
with SGS to include a program whereby SGS will provide our members with
quality and inspection services online. We believe that these services will
facilitate increased transaction volume because buyers can be assured that
the products being purchased come from a company with the ability to meet
specifications.
FUTURE SERVICE OFFERINGS
We plan to expand our value-added services, which should provide additional
revenue and profit opportunities. We intend to provide additional transaction
capabilities that will facilitate sales through branded and unbranded online
catalogs and auctions. In addition, we intend to enable producers to operate
branded storefronts offering their branded products through our marketplace.
These branded storefronts will be accessible directly or from the host company's
web site. We will incorporate each of these pricing models within each of the
product segments on our marketplace.
We also intend to leverage the data we collect to offer new and value added
information-based products. Access to this information will allow our customers,
for example, to evaluate historical and current pricing situations in a given
market for a given product. We intend to make this information available to our
members on a subscription basis with additional analytical reporting on a
premium subscription basis.
CONTENT AND COMMUNITY
Our marketplace features a broad range of industry specific information,
including feature articles, case studies and interviews provided through our
relationship with VerticalNet and its PulpandPaperOnline.com web-site. We also
offer real time stock quotes and industry news provided by News Alert. Through
the calendar of events and bulletin board sections, members may both post events
and receive up-to-date information on upcoming industry expositions and
conferences. We also offer a career center that allows members to post and
explore job opportunities in the pulp and paper industry.
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STRATEGIC AGREEMENTS
INTERNATIONAL PAPER COMPANY. In February 2000, we entered into a strategic
agreement with International Paper Company, the world's largest paper and forest
products company. Under the terms of this agreement, International Paper will
use good faith reasonable efforts to list prime paper products at specified
monthly target volume levels and to increase these levels when commercially
practicable. The term of this agreement expires on January 31, 2002 unless
earlier terminated, including the right of International Paper to terminate upon
30 days written notice if it makes a good faith determination that the services
provided by our website are not meeting International Paper's business needs. In
addition, we have also agreed with International Paper to work together to link,
at a specific facility or production unit, International Paper's internal
information technology systems to our systems in order to facilitate
Internet-based transactions through our marketplace. International Paper has
agreed to promote our working relationship internally; however, our agreement is
mutually non-exclusive. International Paper has invested in our common stock,
which we believe gives International Paper an additional incentive to use our
marketplace. We believe that International Paper's investment does not affect
our mission to serve as a neutral marketplace for the entire industry.
International Paper announced in March 2000 that it intends to co-develop with
Georgia-Pacific and Weyerhaeuser a global business-to-business marketplace to
enable buying and selling of paper and forest products on-line. As part of this
announcement International Paper also announced that its relationship with us
will remain part of International Paper's e-commerce strategy. However, there
can be no assurances that this proposed marketplace, if successfully developed,
will not have a material adverse effect on our relationship with International
Paper. See "Competition in our Industry" below.
ASIA PULP & PAPER LTD. In February 2000, we entered into a supply agreement
with Asia Pulp & Paper, a leading supplier of pulp and paper products in Asia.
Under the terms of this agreement, Asia Pulp & Paper has agreed to use
reasonable commercial efforts to list at specified target volume levels its
products for sale through our marketplace. Asia Pulp & Paper has also agreed to
list a portion of its market pulp purchase requirements in our marketplace
during the term of our agreement. The initial term of our agreement will expire
in February 2001, subject to early termination by either party without cause
upon 30 days prior written notice. Our agreement with Asia Pulp & Paper is
mutually non-exclusive. Asia Pulp & Paper has invested in our common stock
through a wholly-owned subsidiary, which we believe gives Asia Pulp & Paper an
additional incentive to use our marketplace. We believe that Asia Pulp & Paper's
investment does not affect our mission to serve as a neutral marketplace for the
entire industry.
BOWATER INCORPORATED. In April 2000, we entered into a listing and strategic
alliance agreement with Bowater, one of the world's top newsprint producers.
Under this agreement, Bowater will use commercially reasonably efforts to list
for sale on our marketplace certain specified target volumes of first quality
newsprint and to list requests for purchase for wastepaper. Bowater has agreed
that for two years our marketplace will be Bowater's exclusive third-party
provider of e-commerce services for the sale of newsprint. The parties have
further agreed in principle to develop an integration project which would link
Bowater's internal information technology system for a specific facility or
production unit to our marketplace in order to facilitate transactions occurring
in our marketplace. The agreement is for an initial term of two years with
automatic one year renewal periods, unless either party gives 30 days prior
written notice, and is subject to termination by Bowater on 30 days prior
written notice if in its good faith judgment the services provided by our
marketplace are not meeting Bowater's business needs. Bowater has made an
investment in our common stock, which we believe gives Bowater an additional
incentive to use our marketplace. We believe that Bowater's investment does not
affect our mission to serve as a neutral marketplace for the entire industry.
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STAPLES, INC. In March 2000, we entered into a listing agreement with
Staples, Inc., a nationwide chain of retail stores that sells office supplies,
including cut sheet paper. Under the terms of this agreement, Staples has agreed
to use commercially reasonable efforts to list "offers to purchase" for a
portion of its requirements for cut sheet paper and paper stock for advertising
and catalogues, and has agreed to buy on our marketplace a certain tonnage of
paper product, to the extent available, during the initial term of the
agreement. The initial term of our agreement will expire in March 2002, with
automatic one-year renewal periods, and is subject to termination after the
initial term by either party upon 30 days prior written notice. Our agreement
with Staples is mutually non-exclusive. Staples has made an investment in our
common stock, which we believe gives Staples an additional incentive to use our
marketplace. We believe that Staples' investment does not affect our mission to
serve as a neutral marketplace for the entire industry.
C.H. ROBINSON WORLDWIDE, INC. In January 2000, we entered into an alliance
agreement on an exclusive basis with C.H. Robinson Worldwide, Inc., one of the
largest third-party logistics providers in North America. Under the terms of our
agreement, C.H. Robinson will provide to members of our marketplace real time
price estimates, real time transactable quotes, tracking capabilities and online
access to shipping documentation. Real time transactable quotes are delivered on
a point-to-point basis, from any postal code to any postal code in the United
States and Canada. During the term of this agreement and for a period of two
years following the expiration or termination of this agreement, C.H. Robinson
has agreed that it will not enter into a strategic partnership or integrate
electronically with or offer its logistics services to any other entity offering
or performing similar Internet exchange, auction or reverse auction services for
the sale, purchase or exchange of pulp, paper and paper packaging products. This
exclusivity provision does not prohibit C.H. Robinson from offering and
providing logistics services directly to customers. In return, during the term
of the agreement, unless either the buyer or seller in a particular transaction
want to use a particular carrier, we will generally use C.H. Robinson for all
shipments originating and ending in the United States or Canada, unless certain
circumstances arise. The initial term of this agreement will expire in
June 2001 and will automatically renew for successive 12 month terms unless
either party receives 30 day prior written notice that the other party does not
wish to renew the agreement for an additional term. Either party may terminate
the agreement for breach of any material obligation which remains uncured for 30
days. We believe that our exclusive right to offer these logistic services
within the pulp and paper Internet exchange and auction industry will create
significant incentives to purchase and sell pulp and paper products through our
marketplace and is a key competitive advantage.
IMPRESSE CORPORATION. In February 2000, we entered into an alliance
agreement with Impresse Corporation, a leading provider of business-to-business
e-commerce solutions for the creation and procurement of commercially printed
materials. Under the terms of this agreement, the parties will integrate their
web sites to allow Impresse customers to buy paper in our marketplace, to submit
requests for quotes in the marketplace and to complete transactions in our
marketplace. Impresse agreed it will promote our marketplace to its customers
who buy and distribute paper products and will list our marketplace as the
primary option for paper procurement on its website. Our agreement with Impresse
provides for a revenue sharing arrangement under which we will pay Impresse a
portion of the revenues generated on our marketplace by Impresse-sourced
customers. This agreement also provides for content sharing. Subject to the
arrangements described above, our agreement is mutually non-exclusive. The
initial term of this agreement will expire in August 2001 and will automatically
renew for successive 12 month terms unless either party receives 30 day prior
written notice that the other party does not wish to renew the agreement for an
additional term. Either party may terminate the agreement for breach of any
material obligation which remains uncured for 30 days.
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VERTICALNET, INC. In September 1999, we entered into an agreement with
VerticalNet, Inc., an Internet leader in business-to-business vertical
communities of commerce. This alliance includes rights to VerticalNet's
proprietary pulp and paper related content, as well as a jointly developed
career center for industry participants. During the term of this agreement and
for four years following the termination of this agreement, VerticalNet has
agreed that it will not compete against us as an e-commerce marketplace for pulp
and paper. In return for its agreements, we paid VerticalNet a one-time fee and
agreed that if we achieve a specified revenue level we will pay VerticalNet a
small portion of the margin realized on transactions. The initial term of this
agreement will expire in September 2003, and will automatically renew for
successive 12 month terms unless either party receives 30 day prior written
notice that the other party does not wish to renew the agreement for an
additional term. Either party may terminate the agreement upon written notice in
the event of a material breach.
NOOSH, INC. In March 2000, we entered into an integration and marketing
agreement with Noosh Inc., a leading provider of business-to-business commerce
solutions for the printing industry. Under this agreement, the parties will use
reasonable commercial efforts to integrate their Web sites, the goal of which is
to give the current users of the Noosh service the ability to procure and manage
paper requisitions using our marketplace and give our current users the ability
to access the resources of Noosh. The parties also agreed to promote each others
service to their customers. PaperExchange will pay to Noosh fees based upon the
dollar volume of transactions occuring on our marketplace that are generated
through Noosh's service. The agreement is non-exclusive after June 2000 and
Noosh may terminate the agreement on and after August 1, 2000 if certain
development schedules and specifications have not been agreed upon. The initial
term of the agreement is for 18 months with automatic one-year renewal periods,
unless either party gives 90 days prior written notice. Either party may
terminate the agreement for a material breach by the other that remains uncured
for 30 days, upon a change of control of the other party, or upon the rejection
by Noosh of certain resubmitted deliverables.
OUR MEMBERS
Our members are associated with every type of participant in the pulp and
paper industry and are located all over the world. As of April 12, 2000, we had
approximately 4,100 registered corporate members, including the 10 largest paper
producing companies in the world. As of April 12, 2000, we had approximately 250
corporate members who listed a request to purchase or sell, or bid on a listed
request to purchase or sell, product within the last year. During the first
fiscal quarter of 2000, Staples accounted for over 82% of our revenues and 89%
of our accounts receivable balance as of March 31, 2000. We have a listing
agreement with Staples, as described above, which became effective as of
April 1, 2000. If we lost a significant number of members who have completed
transactions on our marketplace, or if Staples failed to continuing purchasing
paper and paper products on our marketplace, and we did not replace those
members or Staples with new, active members, we would experience a decline in
revenues.
SALES, MARKETING AND SUPPORT
We market our products and services through various coordinated sales and
marketing initiatives. These activities include a field sales force, customer
support, Internet marketing programs and traditional marketing methods. We
target our marketing efforts primarily on buyers and sellers of bulk quantities
of pulp and paper products throughout the world.
We currently employ 20 sales professionals. Collectively, these employees
have significant expertise with markets, customers and products in all areas of
the pulp and paper industry and have an average of 12 years of industry
experience. The sales force is organized according to defined product segments
such as printing and office supplies, containerboard, and packaging and
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pulp. These segments are further divided into the geographic areas of North
America, Europe, Asia and Latin America. The goal of our sales team is to
educate buyers and sellers on the functionality and merits of our electronic
marketplace, drive industry participants to enroll as members and encourage
members to initiate offers to buy or sell that will ultimately lead to completed
transactions.
Our customer service department supports existing members, potential
customers and our field sales representatives. This inbound sales support
function is available to process needs, questions and issues that arise from
members using the products and services offered through our marketplace. We
currently have eight employees in this department.
We also leverage a variety of marketing channels to build further awareness
of our PaperExchange marketplace in the pulp and paper industry. These channels
include direct marketing, trade shows, seminars, online communications, and
trade publication advertising and articles.
OUR TECHNOLOGY
Our marketplace can be accessed with a standard Internet connection and
browser. The architecture has been designed to be highly scalable to accommodate
our expected growth in transactions and other offerings.
The four principal layers of the PaperExchange architecture are:
PRESENTATION AND COMMUNICATION LAYER. This layer is responsible for
rendering content and transmitting it to users' browsers based on standard
Internet protocols. Our web architecture provides standard inter-enterprise
communication capability and security functions. Our web technology is built
with commercially available tools that allow us to provide customer specific
storefronts while maintaining a consistent set of back end processes and data.
APPLICATION LAYER. Our application layer houses the majority of our custom
developed business processes. These processes include our trading floor exchange
service and our customizable market and product profilers.
DATABASE LAYER. Our database layer, built on a Microsoft SQL Server V7.0,
contains a number of critical components, including:
- Product data architecture--the data representation of all grades of pulp
and paper is defined and stored in the PaperExchange database. It is this
ability to accurately define and then transact in all the different grades
of pulp and paper products that provides industry participants a
customized trading solution.
- Transaction repository--We capture all actual transaction data in our
database. Our ability to provide real price data for actual transactions
across all grades of pulp and paper should provide the industry the
ability to understand actual price movements over time.
INTEGRATION LAYER. Our integration layer, which is currently under
development, will be composed of industry standard XML schema to facilitate
simple and cost effective communication with our customers. In addition, our
integration layer will be composed of the key Application Programming Interfaces
to and from the PaperExchange applications to allow our customers to write
interfaces into their legacy systems. This integration layer is composed of a
number of components, the work for which is scheduled to occur in several
phases. The first phase is scheduled for completion in late June 2000 and will
include a number of customer pilots, and the integration layer will continue to
evolve with our products and in response to our customer needs.
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We currently host our web site from Exodus in Waltham, Massachusetts, which
provides 24-hour systems support and connectivity to major Internet backbones
and provides bandwidth via redundant high-speed connections. Our backup location
is US Data Centers which is in Marlboro, Massachusetts.
Our web site has been designed to provide multiple levels of security. We
safeguard the confidentiality of our customers' information through the use of
firewalls, digital certificates, and extensive authentication procedures. By
incorporating transaction security using Secure Sockets Layer (SSL) technology,
we maintain an environment where privacy and confidentiality are of paramount
importance. Also, in order to execute any transaction, password verification is
necessary. In addition to maintaining the confidentiality of information between
organizations, the primary user/administrator in an organization may set
security/access levels for employees and others by clicking on our Security in
My Organization feature.
From our inception in April of 1998 through March 31, 2000 we have spent
approximately $7.1 million in technology costs relating to the development and
maintenance of our web site and other activities associated with conducting our
Internet-based marketplace.
PROPRIETARY RIGHTS AND LICENSING
Our success and ability to compete depend on our ability to develop and
maintain the proprietary aspects of our technology. We rely on a combination of
copyright, trademark and trade secret laws and contractual restrictions to
establish and protect the proprietary aspects of our technology. We seek to
protect our source code for our software, documentation and other written
materials under trade secret and copyright laws. Finally, we seek to avoid
disclosure of our intellectual property by requiring employees and consultants
with access to our proprietary information to execute confidentiality agreements
with us and by restricting access to our source code.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets, and to
determine the validity and scope of the proprietary rights of others. Any
resulting litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on our operating results.
Our success and ability to compete are also dependent on our ability to
operate without infringing upon the proprietary rights of others. In the event
of a successful claim of infringement against us and our failure or inability to
license the infringed technology, our business and operating results would be
significantly harmed.
We currently have applied for the registration of the trademark
"PAPEREXCHANGE" in the United States, Brazil, Canada, the European Union,
Indonesia, Korea and Mexico. Once the trademark is issued in these various
countries, its expected duration in each country will vary according to the laws
that govern registration duration in that particular country. In the U.S., the
duration of this trademark is expected to be at least ten years and this period
could be extended indefinitely if the trademark continues to be used. As with
our other intellectual property, we regard our trademark as critical to our
success.
COMPETITION IN OUR INDUSTRY
The market for business-to-business e-commerce and Internet ordering and
purchasing is new and rapidly evolving, and competition is intense and expected
to increase significantly in the future. The principal competitive factors that
affect our business are the strength and breadth of existing
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partnerships and alliances, the ability to offer a comprehensive e-commerce
solution, and the development and maintenance of brand loyalty within the pulp
and paper industry. In addition, we expect additional competition from other
established and emerging companies as the market continues to grow and expand.
Although we believe that our solution competes favorably, business-to-business
e-commerce in the pulp and paper industry is new.
We may not be able to maintain our competitive position against current and
potential competitors, especially those with greater financial and other
resources. We face current and potential competition from:
- large paper producers that may develop sites to trade pulp and paper
products, either individually or as part of an industry consortium,
- traditional off-line suppliers and distributors of pulp and paper
products,
- other Internet start-up exchange and e-commerce companies,
- software and consulting companies, and
- companies offering pulp and paper futures products.
For example, International Paper, Georgia Pacific and Weyerhauser announced
in March 2000 that they intend to develop a global business-to-business
marketplace to enable buying and selling of paper and forest products on-line.
In addition, emerging enterprise software companies, such as Ariba, Inc. and
Commerce One, Inc., offer purchasing solutions that could be customized to link
to suppliers of pulp and paper products. Additionally, traditional enterprise
software companies, such as Oracle, SAP and IBM, could in the future develop and
offer a competitive purchasing solution that our customers could customize to
link to their suppliers. Accordingly, it is possible that new companies may
emerge and develop a solution for the pulp and paper industry that competes with
ours.
GOVERNMENT REGULATIONS
We are unaware of any current investigations, inquiries, citations, fines,
or allegations of violations or noncompliance pending by government agencies or
by third parties against us. It is possible that there may be investigations or
allegations we are not aware of or future investigations or allegations. We are
currently reviewing applicable requirements with regard to past, present and
continuing compliance. The risk that any noncompliance may be discovered in the
future is currently unknown. Although any potential impact on us for
noncompliance cannot currently be established, it could result in significant
civil or criminal penalties, including monetary fines and injunctions, for
noncompliance and negative publicity, and have a material adverse impact on our
business, revenues, results of operations and financial condition.
Due to the increasing popularity and use of the Internet, it is possible
that a number of laws and regulations may be adopted or interpreted in the
United States and abroad with particular applicability to the Internet. It is
also possible in addition to the above-listed examples of existing laws and
regulations, as well as new tax laws and regulations, that new laws and
regulations may be adopted or interpreted by the United States and foreign
governments, to address the sale and distribution of pulp and paper products
utilizing the Internet. In addition, it is possible that governments will enact
legislation that may be applicable to us in areas such as content, product
distribution, network security, encryption and the use of key escrow, data and
privacy protection, electronic authentication or "digital" signatures, illegal
and harmful content, access charges and re-transmission activities. Moreover,
the applicability to the Internet of existing laws governing issues such as
property ownership, content, taxation, defamation, personal privacy, product
liability and environmental protection, as well as the necessity for
governmental permits, labeling, certifications and the need to supply
information to relevant parties, is uncertain. Most of these laws were
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adopted before the widespread use and commercialization of the Internet and, as
a result, do not contemplate or address the unique issues of the Internet and
related technologies. Any export or import restrictions, new legislation or
regulation or governmental enforcement of existing regulations may limit the
growth of the Internet, increase our cost of doing business or increase our
legal exposure. Any of these factors could have a negative effect on our
business, revenues, results of operations and financial condition.
EMPLOYEES
As of March 31, 2000, we had 84 full-time employees, including 33 in
technology, 31 in sales and marketing, 5 in business development and 15 in
general and administrative functions. We also employ independent contractors to
support our engineering, marketing, sales and support, and administrative
organizations. None of our employees is represented by a collective bargaining
agreement, and we believe that we have good relations with our employees.
FACILITIES
We are in the process of relocating our executive, administrative and
operating offices to a new facility in approximately 25,000 square feet of
office space located in Boston, Massachusetts under a lease expiring in
July 2005. We are currently using temporary space in that facility while
renovations are being made to our new leased space. We also maintain sales
offices in London and North Carolina. We may add additional offices in the
United States and other countries.
LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings.
CORPORATE HISTORY
We were originally organized in 1998 as a Delaware limited liability company
under the name "PaperExchange.com, LLC". In February 2000 we converted our form
of organization to a Delaware corporation under the name
"PaperExchange.com, Inc." In connection with this conversion, each then
outstanding membership and economic interest was exchanged for one share of our
common stock, and each outstanding option, warrant or other right to acquire a
membership or economic interest was substituted in full with an option, warrant
or other right to acquire one share of our common stock.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information regarding the directors and executive
officers of PaperExchange as of April 1, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- -------- -----------
<S> <C> <C>
Kent Dolby............................. 48 President, Chief Executive Officer and
Director
Robert Brenner......................... 42 Executive Vice President of Product
Development
Jonathan Bloom......................... 53 Vice President of Corporate Development
Carl Katzeff........................... 47 Chief Technology Officer
Rod Parsley............................ 33 Vice President of Business Development
Michael Gozon.......................... 36 Vice President of Sales, North America
Duane DeSisto.......................... 45 Chief Financial Officer and Secretary
Robert K. Kraft(1)..................... 58 Director and Chairman of the Board
Walter Buckley(1)...................... 40 Director
Gregory W. Haskell(2).................. 43 Director
Jonathan A. Kraft(2)................... 36 Director
Nathan Leight.......................... 41 Director
Roger Warren Stone(2).................. 65 Director
David Wetherell(1)..................... 45 Director
</TABLE>
- ---------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
KENT DOLBY has served as President, Chief Executive Officer and a director
since December 1999. Prior to joining our company, Mr. Dolby had been with
Andersen Consulting for 26 years, where he served as the global managing partner
of Andersen's Global Natural Resources practice, which included forest products,
metals and mining clients. During Mr. Dolby's 16 years as a partner at Andersen
he led the development of business-to-business e-commerce capabilities within
Andersen's $700 million Energy and Natural Resources practices, and directed
multiple strategic engagements and implementations for industrial clients in the
fields of distribution, manufacturing and technology. Mr. Dolby also had
responsibility for the Asia Pacific practice for natural resources and utilities
and previously headed the Americas Chemical practice. In addition, Mr. Dolby was
a member of the Resources Executive Committee. Mr. Dolby received a BS degree in
Industrial Engineering & Operations Research (IE&OR) and an MBA from Cornell
University.
ROBERT BRENNER has served as Executive Vice President of Product Development
since January 2000. Mr. Brenner joined PaperExchange from Andersen Consulting
where he was employed for 13 years, including two years as an associate partner.
During his time with Andersen, Mr. Brenner concentrated on the planning, design,
and implementation of enterprise level order management, production, and
financial systems. He also implemented several large-scale technology solutions
in the forest products industry. Mr. Brenner received a BS degree in Business/
Economics and Accounting from Linfield College and an MBA from Oregon State
University.
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JONATHAN O. BLOOM joined PaperExchange.com in April of 2000 as Vice
President of Corporate Development, bringing over twenty years of paper industry
experience to our company. Prior to PaperExchange.com, Mr. Bloom spent seven
years at xpedx, formerly known as the ResourceNet International group of
International Paper, an operating division of International Paper that does
marketing and distribution of paper products, initially as Vice President and
subsequently as Director of Strategic Initiatives. From December 1993 to
August 1995, Mr. Bloom served as Vice President of the ResourceNet International
group of International Paper. From 1979 to 1993, he was employed by JB Papers
where he assumed the position of President in 1989. In 1993, he negotiated the
sale of the business to International Paper. Mr. Bloom has served as Chairman of
the National Paper Trade Association (1992-1993), Chairman of the Paper
Distribution Council (1994-1995). Mr. Bloom received an AB degree from Princeton
University and an MBA from the Harvard Business School.
CARL KATZEFF has served as Chief Technology Officer since January 1999.
Mr. Katzeff has been involved in the computer and information industry for
twenty-five years. From 1993 to 1999, Mr. Katzeff served as the Chief
Information Technology Officer for The Kraft Group and its portfolio of
companies. Mr. Katzeff is a graduate of Bentley College where he earned a BS in
Accounting and a MS in Computer Information Systems.
ROD PARSLEY has served as Vice President of Business Development since
January 1999. From 1998 to January 1999, Mr. Parsley was Vice President of
Financial Risk Management at International Forest Products where he was
responsible for developing swaps, options, and other financial hedging products
for the pulp and paper industry. From 1997 to 1998, Mr. Parsley was a consultant
with McKinsey & Company, where he specialized in advising media and technology
organizations. From 1996 to 1997, Mr. Parsley attended graduate school at
Harvard University. From 1991 to 1995, he was a consultant with Analysis Group
Economics and Integral Inc. Mr. Parsley received his MBA from Harvard
University, and received a BA in Economics from Pomona College.
MICHAEL GOZON has served as Vice President of Sales, North America since
February 2000. Mr. Gozon brings fifteen years of paper industry experience to
our company. From January 1999 to September 1999, Mr. Gozon was President of
MPX, an e-commerce, business-to-business, third party exchange for the trading
of cut-size paper that PaperExchange acquired in September 1999. Prior to
co-founding MPX, Mr. Gozon was a National Sales Manager at Boise Cascade from
August 1996 to December 1998, where he managed the western region sales force
for cut-size sales to merchant distribution partners. Prior to that Mr. Gozon
spent twelve years at Unisource in Sales & Marketing.
DUANE DESISTO has served as Chief Financial Officer since October 1999.
Mr. DeSisto brings over twenty years of accounting and finance experience to our
company. From 1995 to 1999, Mr. DeSisto was the Chief Financial Officer of
AAI-Foster Grant where he had overall responsibility for the accounting,
information technology, and human resource departments. From 1986 to 1995,
Mr. DeSisto was CFO at publicly-held Zoll Medical Corporation. Mr. DeSisto
received a BS from Providence College and an MBA from Bryant College.
ROBERT K. KRAFT has served as a director since April 1998. Since 1995, he
has been the Founder, Chairman, and Chief Executive Officer of The Kraft Group,
which is a holding company with interests concentrated in three specific areas:
paper and packaging; sports and entertainment; and private equity venture
investing. Mr. Kraft graduated from Columbia University and the Harvard School
of Business where he earned a master's degree in business administration. Robert
Kraft is the father of Jonathan Kraft, who is also a director of our company.
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WALTER W. BUCKLEY, III has served as a director since June 1999.
Mr. Buckley is a co-founder of Internet Capital Group and has served as the
President and Chief Executive Officer and as one of the directors since
March 1996. Prior to co-founding Internet Capital Group, Mr. Buckley worked for
Safeguard Scientifics, Inc. as Vice President of Acquisitions from 1991 to
February 1996. Mr. Buckley directed many of Safeguard Scientifics' investments
and was responsible for developing and executing Safeguard Scientifics'
multimedia and Internet investment strategies. Mr. Buckley also serves as
director of VerticalNet, Inc., Sky Alland Marketing, Who?Vision Systems, Inc.,
Syncra Software, Inc., PrivaSeek, Inc., Breakaway Solutions, Inc., and
e-Chemicals, Inc.
GREGORY W. HASKELL has served as a director since June 1999. Mr. Haskell has
served as Internet Capital Group's Managing Director of Operations since June
1999. In this role, Mr. Haskell is responsible for assisting Internet Capital
partner companies with corporate strategy, hiring management teams, and company
operations. Prior to joining Internet Capital Group, Mr. Haskell served from
January 1994 to June 1999 as President and Chief Operating Officer of XL Vision,
Inc., a business and technology incubator that builds companies and spins them
out into stand-alone public companies. Mr. Haskell also serves as a director of
several Internet and technology companies including Asset Trade.com, Axcess,
Inc., ComputerJobs.com, CyberCrop.com,
e-Chemicals, Internet Healthcare Group, Logistics.com, Presideo, and XL Vision,
Inc.
JONATHAN A. KRAFT has served as a director since April 1998. Mr. Kraft has
been President and Chief Operating Officer of The Kraft Group since 1995. Prior
to that Mr. Kraft was a consultant with Bain Company where he worked on projects
for clients in the consumer products and automotive industries. Mr. Kraft is a
graduate of Williams College and received his MBA from Harvard Business School.
Jonathan Kraft is the son of Robert Kraft, who is also a director of our
company.
NATHAN LEIGHT has served as a director since April 1998. Mr. Leight is a
co-founder and managing member, since January 1999, of Terrapin Partners L.L.C.,
an incubator for entrepreneurial ventures, such as e-STEEL. From 1995 through
1998 Mr. Leight was the Chief Investment Officer of Gabriel Capital LP, a hedge
fund with assets exceeding $1 billion in special situation investing,
under-valued securities, emerging markets, private equity and merger arbitrage.
Prior to Gabriel, Mr. Leight was a managing director at Dillon Read & Co where
he established the proprietary trading department. Mr. Leight is on the board of
directors of PaperExchange and Fastparts.com, an Internet-based market for the
trading of electronic components. Mr. Leight graduated cum laude from Harvard
College in 1981.
ROGER WARREN STONE has served as a director since August 1999. He was
Chairman, President and CEO of Stone Container Corporation from 1979 until its
merger with Jefferson Smurfit Corporation on November 18, 1998. He became
President and Chief Executive Officer of the merged corporation, Smurfit-Stone
Container Corporation, until his resignation, effective March 31, 1999.
Smurfit-Stone is a Chicago-based Fortune 500 major international pulp and paper
packaging company. Mr. Stone is a graduate of the University of
Pennsylvania--Wharton School of Finance. Besides PaperExchange, Mr. Stone is a
Director of Autoliv, Inc., McDonald's Corporation, Option Care, Inc., Continere
Corporation, and Prairie Packaging, Inc.
DAVID WETHERELL has served as a director since February 2000. Mr. Wetherell
has served as Chairman, CEO & President of CMGI since he effected a leveraged
buyout of the company in 1986. Prior to CMGI Mr. Wetherell co-founded the
software development firm Softrend, Inc., and he has held senior management
positions in application software development and marketing management in the
healthcare and transportation industries. He is the chairman and a member of the
board of
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directors of several companies, including Engage Technologies, Inc., NaviSite,
Inc. and AltaVista Company. Mr. Wetherell holds a BA in Mathematics and
Education from Ohio Wesleyan University.
BOARD COMPOSITION
Our board of directors currently consists of eight members. Each director is
elected for a period of one year at our annual meeting of stockholders and
serves until the next annual meeting or until his successor is duly elected and
qualified. Effective upon this offering, the Board will be divided into three
classes, with each class serving a staggered three-year term. See "Description
of Capital Stock--Delaware Law and Certain Certificate of Incorporation and
By-Laws Provisions".
BOARD COMMITTEES
Our board of directors has established an Audit Committee and a Compensation
Committee. The Audit Committee of the board of directors consists of
Messrs. Roger Warren Stone, Jonathan Kraft and Gregory W. Haskell. The Audit
Committee reviews our financial statements and accounting practices and makes
recommendations to the board of directors regarding the selection of independent
accountants. It also reviews the results and scope of audit and other services
provided by our independent accountants, and reviews and evaluates our control
functions.
The Compensation Committee of the board of directors consists of
Messrs. Robert Kraft, Walter Buckley and David Wetherell. The Compensation
Committee reviews and recommends to the board of directors the compensation,
salaries and benefits of all of our executive officers, administers our employee
benefit plans, and establishes and reviews general policies relating to
compensation and benefits to our employees.
DIRECTOR COMPENSATION
Directors of PaperExchange have not received compensation for their services
as directors, although directors are reimbursed for reasonable expenses incurred
in attending board or committee meetings. Our officers are appointed by the
board of directors and serve at its discretion. Directors who are also employees
are eligible to participate in our 2000 Equity Incentive Plan and, as of the
offering, they will also be eligible to participate in our 2000 Employee Stock
Purchase Plan.
Under our proposed 2000 Director Stock Option Plan, at the discretion of the
board of directors, non-employee directors are eligible to receive options to
purchase shares of common stock at the fair market value on the date of grant.
PaperExchange maintains directors' and officers' liability insurance and our
by-laws provide for indemnification of directors and officers to the fullest
extend permitted by Delaware law. In addition, our certificate of incorporation
limits the liability of directors to us and our stockholders for breaches of the
directors' fiduciary duties to the fullest extent permitted by Delaware law. See
"Description of Capital Stock--Delaware Law and Certain Certificate of
Incorporation and By-Laws Provisions".
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of our Compensation Committee has been an officer or
employee of PaperExchange. None of our executive officers serves as a member of
the board of directors or compensation committee of any entity that has one or
more executive officers serving on our board of directors or compensation
committee.
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EMPLOYMENT AGREEMENTS
We have an employment agreement with Mr. Dolby, dated as of December 20,
1999, providing for Mr. Dolby to be employed as our President and Chief
Executive Officer. Under the terms of the employment agreement, Mr. Dolby is
paid an annual base salary of $300,000, subject to increases as determined by
the board of directors, and is eligible for a bonus of not less than $200,000 at
the end of 2000 to be determined after discussions between Mr. Dolby and the
board of directors. Bonuses in subsequent years shall be at the discretion of
the board of directors and shall be based on a target bonus of $200,000.
Mr. Dolby was granted options to purchase an aggregate of 1,767,020 shares of
common stock, outside of the 1998 Equity Option Plan, which vest on a monthly
basis over a four-year period. Mr. Dolby is also entitled to life insurance,
with a minimum coverage of $1,200,000, health insurance and other employee
fringe benefits to the extent that we make benefits of this type available to
our other executive officers or employees. If we terminate Mr. Dolby's
employment without cause or if he resigns for good reason within the first year
of his employment, we must pay him a severance of $500,000. This severance
amount decreases to $150,000 if either event occurs in the second year of
Mr. Dolby's employment. If upon a change of control Mr. Dolby is terminated
without cause or if he resigns for good reason within 12 months after such
change of control, then all of Mr. Dolby's stock options will become immediately
exercisable and fully vested. In addition, we made a loan to Mr. Dolby in the
amount of $1,052,632 which he used to purchase 441,754 membership interests,
which are now 441,754 shares of our common stock. The loan matures on
December 20, 2003 and accrues interest at a rate of 6.2% annually, payable on
maturity. The employment agreement also contains a non-compete agreement that is
intended to survive termination of employment for 2 years.
We have an employment agreement, dated as of April 9, 1998, as amended, with
Hilton Plein, our former Chief Technology Officer. Under the terms of the
employment agreement, Mr. Plein is paid an annual base salary of $120,000 and is
eligible for a bonus to be determined by the board in its sole discretion. The
initial term of this agreement expires in April 2003 and is automatically
renewable for consecutive one year terms unless the company provides 90 day
prior written notice of non-renewal. If we terminate Mr. Plein's employment
without cause, he will continue to be paid his base salary for two years. The
employment agreement also contains a two year non-compete agreement.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
of our Chief Executive Officer and our two most highly compensated executive
officers whose total salary and bonus exceeded $100,000 for the year ended
December 31, 1999.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARD
(OPTION AWARDS)
ANNUAL --------------------
COMPENSATION NUMBER OF SECURITIES
------------ UNDERLYING OPTION
NAME AND PRINCIPAL POSITION SALARY GRANTED(1)
- --------------------------- ------------ --------------------
<S> <C> <C>
Kent Dolby(2)............................................ $ 8,654 1,767,020
President and Chief Executive Officer
Carl Katzeff............................................. 116,667 300,000
Chief Technology Officer
Rod Parsley.............................................. 110,000 600,000
Vice President of Business Development
Duane DeSisto (3)........................................ 31,250 100,000
Chief Financial Officer and Secretary
Jason Weiss.............................................. 137,500 --
Executive Vice President and Senior Strategist
Hilton Plein............................................. 126,562 --
</TABLE>
- ---------
(1) Granted originally as options to purchase economic interests in our company
pursuant to the 1998 Equity Option Plan when we were a limited liability
company. In connection with the conversion to a corporation the company
issued options to purchase common stock under the Company's 2000 Equity
Incentive Plan in full substitution for all outstanding options to purchase
economic interests under our 1998 Equity Option Plan.
(2) Kent Dolby became President and Chief Executive Officer in December 1999;
his options which were for membership interests were granted outside of the
1998 Equity Option Plan.
(3) Duane DeSisto became the Chief Financial Officer in October 1999.
50
<PAGE>
STOCK OPTION GRANTS
The following table sets forth options granted in 1999 to each of the
officers named in the summary compensation table above. Options granted in 1999
were granted as options to purchase membership or economic interests in
PaperExchange.com, LLC. In connection with our conversion from a limited
liability company to a corporation, each option to purchase a membership or
economic interest was substituted in full with an option to purchase one share
of our common stock. In 1999, we generally granted stock options at 100% of the
fair market value of the common equity as determined by our board of directors
as of the date of grant. In determining the fair market value on each grant
date, the board of directors considered a range of factors, including
PaperExchange's levels of revenues and operating results, the state of
PaperExchange's technology development, increases in operating expenses, the
absence of a public trading market for our securities, and the valuation of
comparable companies.
OPTION GRANTS IN THE FISCAL YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED ANNUAL
---------------------------------------------------------------- RATES OF STOCK PRICE
NUMBER OF APPRECIATION FOR OPTION
SECURITIES PERCENT OF TOTAL EXERCISE TERM(2)
UNDERLYING OPTIONS GRANTED TO PRICE PER EXPIRATION -----------------------
NAME OPTIONS GRANTED(1) EMPLOYEES IN 1999 SHARE DATE 5% 10%
- ---- ------------------ ------------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Kent Dolby(3)........ 1,767,020 38.72% $2.38 Dec - 04 $5,374,177 $6,781,549
Carl Katzeff......... 300,000 6.57 0.20 May - 04 76,577 96,631
Rod Parsley.......... 900,000 19.72 0.20 May - 04 153,154 193,261
Duane DeSisto........ 100,000 2.19 1.33 Oct - 04 170,256 214,842
Jason Weiss.......... -- -- -- -- -- --
Hilton Plein......... -- -- -- -- -- --
</TABLE>
- ---------
(1) Shares underlying options granted through October 1999 generally vest over a
3 year period, with one-third ( 1/3) of the shares vesting on each
anniversary of the grant date, until fully vested. Shares underlying options
granted after October 1999 generally vest over a 4 year period, with
one-fourth ( 1/4) of the shares vesting on the first anniversary of the
grant date, and one-thirty-sixth ( 1/36) of the balance of the original
grant per month thereafter, until fully vested. For further information
regarding terms of the stock options, see "Management--2000 Equity Incentive
Plan".
(2) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the rules of the Securities and Exchange Commission and do
not represent an estimate or projection of our future stock prices. The
actual value realized may be greater or less than the potential realizable
values set forth in the table.
(3) Shares underlying options granted to Mr. Dolby vest at a rate of 1.041667%
per month for the first year after grant and at a rate of 2.604166% per
month during the second and third years after grant. No further options vest
during the fourth year after grant but on the fourth anniversary of the
grant the remaining 25% vest. Mr. Dolby's stock options were granted outside
of the 1998 Equity Option Plan.
51
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table contains information concerning option holdings for the
year ended December 31, 1999 with respect to each of the officers named in the
summary compensation table.
<TABLE>
<CAPTION>
1999 YEAR-END OPTION VALUES
---------------------------------------------------------
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT YEAR OPTIONS AT YEAR
END END(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Kent Dolby................................. -- 1,767,020 $ $
Carl Katzeff............................... 75,000 225,000
Rod Parsley................................ -- 600,000 -- --
Duane DeSisto.............................. -- 100,000 -- --
Jason Weiss................................ -- -- -- --
Hilton Plein............................... -- -- -- --
</TABLE>
- ---------
(1) Value is determined by subtracting the exercise price from the proposed
initial public offering price of common stock, multiplied by the number of
shares underlying the options.
EMPLOYEE STOCK PLANS
2000 EQUITY INCENTIVE PLAN
In February, 2000, our board of directors and stockholders approved the 2000
Equity Incentive Plan, which is to be amended prior to the closing of this
offering as described below. This plan provides for the issuance of our shares
pursuant to incentive stock options and nonqualified stock options, or as
restricted stock awards or stock grants, to employees (including officers and
employee directors) and consultants. A maximum of 8,000,000 shares of common
stock will be reserved for issuance pursuant to this plan, of which a maximum of
5,000,000 shares may be issued pursuant to incentive stock option grants. The
8,000,000 maximum will increase on January 1 of each year commencing on
January 1, 2001 by an amount equal to the least of:
- 3,000,000 shares,
- 5% of our outstanding common stock on the preceding December 31, or
- a lesser number determined by our Board of Directors.
In connection with the conversion to a corporation the 2000 Equity Incentive
Plan replaced the 1998 Equity Option Plan, which had previously been adopted by
us when we were a limited liability company. Stock options to acquire
approximately 2,841,000 shares were issued under the 2000 Equity Incentive Plan
in full substitution for options previously issued under the 1998 Equity Option
Plan.
The board of directors administers the incentive plan and has the authority
to determine which eligible individuals are to receive awards under the plan of
options, restricted stock awards or stock grants and the terms of such options,
awards or grants. In the case of options, those terms would include the status
of any option granted to an employee as either an incentive or nonqualified
stock option under the federal income tax laws, and the number of shares,
exercise prices and times at which the options become and remain exercisable. In
the case of restricted stock awards those terms would include the price, if any,
at which the eligible individuals may acquire the stock awarded and the
circumstances in which the shares vest.
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<PAGE>
Generally, the board has complete discretion over the terms of the various
awards which may be made under this plan. However, the exercise price of
incentive stock options granted under the 2000 Equity Incentive Plan may not be
less than 100% of the fair market value of a share of common stock on the date
of grant (110% in the case of incentive stock options issued to an employee who
at the time of grant owns more than 10% of the combined voting power of all
classes of our stock) and the term of any incentive stock option, may not exceed
ten (10) years (five (5) years, in the case of a ten percent owner).
If we are dissolved or liquidated or have a "change of control" transaction,
outstanding options and awards may be assumed or substituted by the successor
corporation, if any. In such a case the holders of these options or awards will
receive one year's additional vesting, except with respect to options
outstanding at the completion of this offering, which generally provide for one
year's additional vesting only if the optionee's employment is terminated
without cause within one year of a change of control. However, if a successor
corporation does not assume or substitute the awards, the vesting of all
outstanding options and awards will be accelerated in full.
In addition, the board of directors may, in its sole discretion, accelerate
the date or dates on which all or any particular option or options or restricted
stock awards granted under this plan may be exercised or extend the date during
which all, or any particular, option or options granted under the incentive plan
may be exercised. The board may also modify other terms of outstanding awards,
subject to the holder's consent if the change would be adverse.
From and after the closing of this initial public offering, the compensation
committee will exercise the board's authorities described above under this plan.
The board of directors may amend or modify this plan at any time, subject to
the rights of holders of outstanding options and restricted stock awards. This
plan will terminate on the tenth anniversary of the adoption of the plan by the
board of directors.
1998 EQUITY OPTION PLAN
The management board of PaperExchange.com, LLC approved the 1998 Equity
Option Plan, as amended, in April 1999. The 1998 Equity Option Plan provided for
the grant of options to acquire economic interests in the limited liability
company. When we converted from a limited liability company to a corporation in
February 2000, the Company issued options to purchase common stock under the
Company's 2000 Equity Incentive Plan in full substitution for all outstanding
options to purchase economic interests under the Company's 1998 Equity Option
Plan. The 1998 Equity Option Plan and the options granted thereunder no longer
have any force or effect and there are currently no outstanding options under
this plan.
2000 DIRECTOR OPTION PLAN
Prior to the closing of this offering, our board of directors and
stockholders will approve the 2000 Director Option Plan. This plan provides for
the grant of nonqualified stock options to directors of PaperExchange who are
not employees of PaperExchange. Under this plan, each director of PaperExchange
who is not an employee, and excluding our current directors and any future
directors affiliated with The Kraft Group or PE.com Holdings, will receive upon
the completion of this offering, or upon later initial election to
PaperExchange's board of directors, an option to purchase a pre-determined
number of shares of common stock at an exercise price equal to 100% of the fair
market value of our common stock on the date of grant. Each such option will
have a term of five years and will become exercisable quarterly in equal
installments. If we are dissolved or liquidated or have a "change of control"
transaction, outstanding options may be assumed or substituted by the successor
corporation, if any, in which case the holders of these options will receive one
year's additional vesting. If a successor corporation does not assume or
substitute the
53
<PAGE>
awards, the vesting of the options will be accelerated in full. A maximum of
500,000 shares will be authorized for issuance pursuant to the director option
plan.
2000 EMPLOYEE STOCK PURCHASE PLAN
Prior to the closing of this offering, our board of directors and
stockholders will approve the 2000 Employee Stock Purchase Plan. This plan
allows eligible employees to acquire shares of our common stock through payroll
deductions. Our employee stock purchase plan is intended to qualify as an
employee stock purchase plan under Section 423 of the Internal Revenue Code. The
initial offering period will start on July 1, 2000, unless otherwise determined
by the board of directors. Subsequent offerings under the employee stock
purchase plan are planned to start on January 1 and July 1 of each year and end
on June 30 and December 31 of each year. During each offering period, an
eligible employee may select a rate of payroll deduction of from 1% to 10% of
each offering period, which payroll deductions may then be used at the end of
the offering period to purchase up to $12,500 worth of our stock (valued at the
beginning of the offering period). The purchase price for our common stock
purchased under our employee stock purchase plan is 85% of the fair market value
of the shares on the first day, or on the last day if lower, of the offering
period. An aggregate of 1,000,000 shares of common stock will be reserved for
issuance under the employee stock purchase plan. The amount of reserved shares
will increase on January 1 of every year, commencing in January 2001, by an
amount equal to the least of:
- 1,000,000 shares;
- 1.5% of our total outstanding common stock on the preceding December 31;
or
- a lesser amount as determined by our board of directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we shall indemnify
our directors and executive officers and shall indemnify other officers and
employees and our agents to the fullest extent permitted by law.
Our by-laws provide for indemnification of our directors and executive
officers for judgments, fines, settlement amounts and expenses, including
attorneys' fees, incurred by any of these persons in any action or proceeding,
including any action by or in the right of us, arising out of that person's
services as a director or executive officer of ours, any subsidiary of ours, or
any other company or enterprise to which the person provides services at our
request. We believe that these provisions are necessary to attract and retain
qualified persons as directors and executive officers. We are not aware of any
pending or threatened litigation or proceeding that might result in a claim for
indemnification.
54
<PAGE>
RELATED PARTY AND OTHER TRANSACTIONS
From April 1998 (inception) until February 28, 2000, all issuances of equity
by us were in the form of limited liability company membership or economic
interests or options, warrants or other rights to acquire such membership or
economic interests. While we were a limited liability company, we consummated a
3-for-1 split of our limited liability company interests in November 1999. On
February 28, 2000 we converted from a limited liability company to a corporation
whereupon each membership or economic interest automatically became, and each
option, warrant or other right to acquire one membership or economic interest
was substituted in full for an option, warrant or other right to acquire, one
share of our common stock. On and after February 28, 2000 all of our equity
issuances were in the form of shares of common stock or options, warrants or
other rights to acquire shares of our common stock.
SALES OF STOCK TO INSIDERS
In 1998, Kraft Group LLC acquired 50% of the membership interests of the
company. Kraft Group made $2,000,000 in aggregate capital contributions for
these membership interests. Robert Kraft and Jonathan Kraft, two of our
directors, have an interest in Kraft Group.
In April 1999, we issued 6,000,000 membership interests at price of $0.17 a
share to Kraft Group, a holder of more than 5% of our voting securities.
In August 1999, we issued and sold an aggregate of 966,714 membership
interests at a price of approximately $1.39 per share, which included the
following issuances:
- 576,000 membership interests to Kraft Group;
- 65,253 membership interests to Terrapin Holdings, a holder of more than 5%
of our voting securities; Nathan Leight, one of our directors, has an
interest in Terrapin Holdings;
- 48,336 membership interests to Roger Stone, one of our directors, and
certain members of his immediate family; and
- 247,320 membership interests to PE.com Holdings, LLC, which is a holder of
more than 5% of our voting securities and which is 50% owned by Internet
Capital Group, Inc., of which Walter Buckley, one of our directors, is
also a director; Walter Buckley and Gregory W. Haskell, two of our
directors, are members of the management board of PE.com Holdings.
In December 1999, we issued and sold 441,754 membership interests to Kent
Dolby at $2.38 per share which he paid for using a loan extended to him by us in
the amount of $1,052,632. The loan to Mr. Dolby is for a term of four years at
an annual interest rate of 6.2%. At that time we also granted Mr. Dolby an
option to purchase 1,767,020 shares of common stock at an exercise price of
$2.38 per share. In connection with the foregoing, we recorded deferred
compensation of approximately $2,500,000 for the aggregate differences between
the sale or exercise price and the deemed fair value of the common stock as of
such date.
Also in December 1999, we issued and sold 1,729,767 membership interests at
a purchase price of $6.36 per share, which included the sale of 629,006
membership interests to a trust of which family members of David Wetherell, one
of our directors, are the beneficiaries, for an aggregate purchase price of
approximately $4,000,000.
In February 2000, we granted options to purchase 450,000 shares of our
common stock to Kraft Group for an aggregate exercise price of $4,383,000.
55
<PAGE>
OTHER TRANSACTIONS
In October 1999, we issued $10,000,000 of five year promissory notes at an
interest rate of 4% over the base rate of BankBoston, N.A. and warrants to
purchase an aggregate of 5,000,001 membership interests at an exercise price of
$2.00 per share, which included the issuance of:
- a note for $5,958,333 and a warrant to purchase up to 2,979,168 membership
interests to Kraft Group;
- a note for $675,000 and a warrant to purchase up to 337,500 membership
interests to Terrapin Holdings;
- a note for $300,000 and a warrant to purchase up to 150,000 membership
interests to Roger Stone;
- three notes in the aggregate of $200,000 and warrants to purchase up to
100,000 membership interests to Roger Stone and certain members of
Mr. Stone's immediate family; and
- a note for $2,558,334 and a warrant to purchase up to 1,279,167 membership
interests to PE.com Holdings LLC.
We repaid $9,700,000 of these notes in March 2000.
In 1999, we purchased approximately $90,000 of paper products from
International Forest Products, or IFP, and reimbursed IFP for approximately
$90,000 of expenses paid on our behalf during our start-up phase. International
Forest Products is owned by Robert Kraft, one of our directors who is also the
founder and chief executive officer of Kraft Group, one of our significant
shareholders.
In 1999, we executed a strategic alliance agreement with, and made a
$500,000 payment in connection therewith to, VerticalNet, Inc., which is
approximately 34% owned by Internet Capital Group, Inc., of which Walter
Buckley, one of our directors, is also a director. Internet Capital Group also
owns 50% of PE.com Holdings, one of our significant shareholders.
In January 2000, we made a commitment to loan $300,000 to Robert Brenner,
our Executive Vice President of Product Development, to facilitate his
relocation to Boston.
Since inception, we have from time to time issued and sold membership
interests or shares of our common stock, and granted options to purchase
membership interests or common stock, to our employees, directors and
consultants.
In addition, in the first three months of 2000, we sold (on behalf of one of
our members as principal) approximately $53,000 of paper products to Caribbean
Container, an affiliate of Kraft Group.
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to PaperExchange with
respect to the beneficial ownership of our common stock as of April 11, 2000,
unless otherwise indicated, by the following individuals or groups:
- each stockholder known by us to be the beneficial owner of more than 5% of
our common stock;
- each director of PaperExchange;
- the executive officers listed in the summary compensation table; and
- all executive officers and directors as a group.
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<PAGE>
The percentage ownership in the following table is based on 42,673,254
shares of common stock outstanding as of April 11, 2000, together with
applicable options and warrants for that stockholder.
We have determined beneficial ownership in the table in accordance with the
rules of the Securities and Exchange Commission. The table includes all shares
of common stock issuable within 60 days of April 11, 2000 upon the exercise of
options and other rights beneficially owned by the indicated stockholders on
that date. These shares, however, are not deemed outstanding for the purposes of
computing the percentage of ownership of each other person. To our knowledge
except as set forth in the footnotes below, each stockholder identified in the
table possesses sole voting and investment power with respect to the shares
shown as beneficially owned by that stockholder. The table assumes that the
underwriters' over-allotment to purchase shares of common stock is
not exercised. Percentage ownership figures after the offering do not include
shares that may be purchased by each person in the offering.
The address of each officer and director listed in the table is c/o
PaperExchange.com, Inc., 31 St. James Avenue, 3(rd) Floor, Boston,
Massachusetts. The address of Kraft Group LLC is One Boston Place, Boston,
Massachusetts 02108. The address of PE.com Holdings LLC is c/o Internet Capital
Group, Inc., 435 Devon Park Drive, Wayne, Pennsylvania 19087.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
--------------------------------
PERCENT
-------------------
NUMBER OF BEFORE AFTER
NAME OF BENEFICIAL OWNER SHARES OFFERING OFFERING
- ------------------------ ---------- -------- --------
<S> <C> <C> <C>
Kraft Group LLC (1)......................................... 25,455,168 55.2%
PE.com Holdings LLC (2)..................................... 10,736,487 24.4
Terrapin Holdings LLC (3)................................... 2,832,753 6.6
Robert K. Kraft (4)......................................... 25,455,168 55.2
Jonathan A. Kraft (5)....................................... 25,455,168 55.2
David Wetherell (6)......................................... 629,006 1.47
Roger Stone (7)............................................. 1,259,001 2.9
Nathan Leight (8)........................................... 2,832,753 6.6
Walter Buckley (9).......................................... 10,736,487 24.4
Gregory W. Haskell (10)..................................... 10,736,487 24.4
Kent A. Dolby (11).......................................... 533,786 1.2
Robert Brenner (12)......................................... 16,667 *
Carl Katzeff (13)........................................... 175,000 *
Rod Parsley (14)............................................ 482,061 1.1
Michael Gozon............................................... -- --
Duane DeSisto............................................... -- --
Jonathan Bloom (15)......................................... 30,729 *
All directors and executive officers as a group (14 persons)
(16)...................................................... 41,521,652 85.6%
</TABLE>
- ---------
* Less than 1% of our outstanding common stock.
(1) Includes warrants to purchase 2,979,168 shares of common stock and options
to purchase 450,000 shares of common stock issued or allocated to Kraft
Group LLC which are currently exercisable. Robert Kraft, one of our
directors, has an ultimate controlling interest in Kraft Group.
(2) Includes warrants to purchase 1,279,167 shares of common stock issued to
PE.com Holdings LLC which are currently exercisable. Messrs. Buckley and
Haskell, two of our directors, are also members of the management board of
PE.com Holdings, LLC.
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<PAGE>
(3) Includes warrants to purchase 337,500 shares of common stock issued to
Terrapin Holdings LLC which are currently exercisable. Mr. Leight, one of
our directors, is a member of Terrapin Holdings, LLC.
(4) Represents the 25,455,168 options to purchase shares held by Kraft Group
LLC. Robert Kraft has an ultimate controlling interest in Kraft Group LLC.
(5) Represents the 25,455,168 options to purchase shares held by Kraft Group
LLC of which Jonathan Kraft is the President and Chief Operating Officer.
Although Jonathan Kraft may be deemed to be a beneficial holder of such
shares, he disclaims all such beneficial ownership except to the extent of
his financial interest therein.
(6) Represents shares held by the DSCKW Irrevocable Trust, of which
Mr. Wetherell's spouse is one of the trustees. Mr. Wetherell disclaims
beneficial ownership with respect to these shares.
(7) Includes warrants to purchase 150,000 shares of common stock issued to
Roger Stone which are currently exercisable.
(8) Represents the 2,832,753 shares and options to purchase shares held by
Terrapin Holdings LLC, of which Nathan Leight is a senior partner.
Although Mr. Leight may be deemed to be a beneficial holder of such
shares, he disclaims all such beneficial ownership except to the extent of
his financial interest therein.
(9) Represents the 10,736,487 shares and options to purchase shares held by
PE.com Holdings LLC, of which Walter Buckley, one of our directors, is
also a member of the management board. Although Mr. Buckley may be deemed
to be a beneficial holder of such shares, he disclaims all such beneficial
ownership except to the extent of his financial interest therein.
(10) Represents the 10,736,487 shares and options to purchase shares held by
PE.com Holdings LLC, of which Gregory Haskell, one of our directors, is
also a member of the management board. Although Mr. Haskell may be deemed
to be a beneficial holder of such shares, he disclaims all such
beneficial ownership except to the extent of his financial interest
therein.
(11) Includes 92,032 shares issuable upon the exercise of options previously
granted to Kent Dolby and which are exercisable within 60 days of
April 11, 2000.
(12) Represents the 16,667 shares issuable upon the exercise of options
previously granted to Robert Brenner and which are exercisable within
60 days of April 11, 2000.
(13) Represents the 175,000 shares issuable upon the exercise of options
previously granted to Carl Katzeff and which are exercisable within
60 days of April 11, 2000.
(14) Includes 332,061 shares issuable upon the exercise of options previously
granted to Rod Parsley and which are exercisable within 60 days of
April 11, 2000.
(15) Includes 30,729 shares issuable upon the exercise of options to be
granted to Jonathan Bloom and which are exercisable within 60 days of
April 11, 2000.
(16) Includes an aggregate of 5,842,324 shares issuable to all directors and
executive officers upon the exercise of warrants which are warrants
currently exercisable and options which are exercisable within 60 days of
April 11, 2000.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the closing of this offering, the authorized capital stock of
PaperExchange will consist of 250,000,000 shares of common stock, $0.001 par
value, and 1,000,000 shares of undesignated preferred stock, $0.001 par value.
There will be no preferred stock outstanding immediately after the closing of
this offering.
COMMON STOCK
As of December 31, 1999, there were 39,280,983 limited liability company
membership interests outstanding, which were exchanged for 39,280,983 shares of
our common stock when we converted from a limited liability company to a
corporation in February, 2000. These shares are currently held of record by
approximately 19 stockholders. This number assumes no exercise of any of the
outstanding common stock warrants. Based upon the number of shares of common
stock outstanding as of March 31, 2000 and giving effect to the shares of common
stock offered by this prospectus, and assuming the underwriters do not exercise
their over-allotment option, there will be shares of common stock
outstanding upon the closing of this offering.
Holders of common stock are entitled to receive dividends in proportion to
the number of shares they hold, if they are declared by PaperExchange's board of
directors out of funds that are legally available for that purpose. Each holder
of common stock is entitled to one vote for each share of common stock held on
all matters submitted to a vote of the stockholders, and are not able to
multiply the number of shares they own by the number of directors up for
election for purposes of electing directors. Accordingly, holders of a majority
of the shares of common stock entitled to vote in any election of directors may
elect all of the directors standing for election. Holders of the common stock
have no preferential right to buy shares being offered in any future debt or
equity offerings by us, right to have their shares redeemed, or right to convert
their shares into any other type of security. Upon the liquidation, dissolution
or winding-up of PaperExchange, the holders of shares of common stock are
entitled to receive the net assets of PaperExchange after payment of all debts
and other liabilities. The outstanding shares of common stock are, and the
shares of common stock to be issued upon completion of this offering will be,
when issued and paid for, fully paid and non-assessable.
COMMON STOCK WARRANTS
As of February 28, 2000, we had warrants outstanding to purchase a total of
5,000,001 limited liability company membership interests, which were replaced
with warrants to purchase an equal number of shares of common stock when we
converted from a limited liability company to a corporation in February, 2000,
all of which are currently exercisable. These warrants were issued to 9 persons
who were also stockholders on October 15, 1999, the date that these warrants
were issued. The exercise price for all of these warrants is $2.00 per share and
they expire on October 15, 2006. As of April 11, 2000, we also had warrants
outstanding to purchase up to an aggregate of 519,149 shares of our common stock
which may be exercised on or after March 2015, provided that the ability to
exercise may be accelerated based upon the number of tons of paper product that
are purchased by the holder of such warrant through our marketplace. These
warrants were issued to one strategic investor, have an exercise price equal to
$11.56 and expire in April 2015. In addition, we had warrants outstanding to
purchase up to an aggregate of 268,648 shares of our common stock which may be
exercised on or after April 2015, provided that the ability to exercise may be
accelerated based upon the number of tons of paper product that are
59
<PAGE>
purchased by the holder of such warrant through our marketplace. The warrants
were issued to one strategic investor, have an exercise price equal to $11.56
and expire in April 2015.
The rights, preferences and privileges of holders of common stock are
subject to, and may be adversely affected by, the rights of the holders of
preferred stock that we may designate and issue in the future because the
holders of such preferred stock may have priority over the common stock with
respect to certain matters. These matters include the right to receive dividends
and the right to receive net assets upon a liquidation, dissolution or winding
up of PaperExchange. There will be no shares of preferred stock outstanding
immediately after the closing of this offering.
PREFERRED STOCK
Our board of directors is authorized, subject to limitations imposed by
Delaware law, without further stockholder approval, from time to time to issue
up to an aggregate of 1,000,000 shares of preferred stock in one or more series
and to fix or alter the designations, preferences and rights, and any
qualifications, limitations or restrictions of such preferred stock, of the
shares of each such series. Thus, the board of directors may fix the number of
shares constituting any such series of preferred stock, as well as the dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
including sinking fund provisions, redemption price or prices and liquidation
preferences of those shares of preferred stock. The issuance of preferred stock
may have the effect of delaying, deferring or preventing a change of control of
PaperExchange. PaperExchange has no present plans to issue any shares of
preferred stock.
REGISTRATION RIGHTS
As of the date hereof, none of the holders of our outstanding capital stock
or common stock warrants have registration rights under the Securities Act with
respect to those shares or the shares issuable upon the exercise of those
warrants.
DELAWARE LAW AND CERTAIN CERTIFICATE OF INCORPORATION AND BY-LAWS PROVISIONS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to certain exceptions, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a certain period of time. That period is three
years from the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained such status with the
approval of the board of directors or unless the business combination is
approved in a prescribed manner. A "business combination" includes certain
mergers, asset and stock sales, and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with his or her affiliates
and associates, owns, or owned within three years prior, 15% or more of the
corporation's voting stock.
Our certificate of incorporation and by-laws provide for the division of the
board of directors into three classes, as nearly equal in size as possible, with
each class beginning its three-year term in different years. See
"Management--Board Composition". A director may be removed only for cause by the
vote of a majority of the shares entitled to vote for the election of directors.
Our by-laws provide that for nominations for the board of directors or for
other business to be properly brought by a stockholder before a meeting of
stockholders, the stockholder must first have given timely notice of the matter
in writing to our secretary. To be timely, a notice of nominations or other
business to be brought before an annual meeting must be delivered between
120 days and 150 days prior to the date one year after the date of the preceding
year's proxy statement. If the
60
<PAGE>
date of the current year's annual meeting is more than 30 days before or
60 days after such anniversary, or if no proxy statement was delivered to
stockholders for the preceding year's annual meeting, a stockholder's notice
will be timely if it is delivered not earlier than 90 days prior to the current
year's annual meeting and not later than 60 days prior to the annual meeting or
10 days following the date on which public announcement of the date of the
annual meeting is first made by us, whichever is later. For special meetings,
notice must generally be delivered not more than 90 days prior to such meeting
and not later than 60 days prior to such meeting or 10 days following the day on
which public announcement of the date of the special meeting is first made by
us, whichever is later. The notice must contain, among other things, certain
information about the stockholder delivering the notice and, as applicable,
background information about each nominee or a description of the proposed
business to be brought before the meeting.
All of the provisions described above could make it more difficult for a
third party to acquire, or discourage a third party from acquiring, control of
our company.
Our certificate of incorporation also provides that any action required or
permitted to be taken by our stockholders may be taken only at duly called
annual or special meetings of the stockholders, and that special meetings may be
called only by the chairman of the board of directors, a majority of the
directors or our president. These provisions could have the effect of delaying
until the next annual stockholders meeting stockholder actions that are favored
by the holders of a majority of the common stock. These provisions may also
discourage a third party from making a tender offer to our stockholders for the
common stock. This is because the person or entity making the offer, even if it
acquired a majority of our outstanding voting securities, would be unable to
call a special meeting of the stockholders or to take action by written consent.
As a result, any desired actions they would like to take, such as electing new
directors or approving a merger, would have to wait until the next duly called
stockholders meeting.
The Delaware General Corporation Law provides that the affirmative vote of a
majority of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or by-laws, unless the corporation's
certificate of incorporation or by-laws, as the case may be, requires a greater
percentage. Our certificate of incorporation requires the affirmative vote of
the holders of at least 67% of our outstanding voting stock to amend or repeal
any of the provisions of our certificate of incorporation described above, or to
reduce the number of authorized shares of common stock and preferred stock. The
67% stockholder vote is also required to amend or repeal any of the provisions
of our by-laws that are described above. Our by-laws may also be amended or
repealed by a majority vote of the board of directors. The 67% stockholder vote
would be in addition to any separate class vote that might in the future be
required pursuant to the terms of any preferred stock that might be outstanding
at the time any amendments are submitted to stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is American Stock
Transfer.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could adversely affect prevailing market prices. Sales of substantial amounts of
our common stock in the public market after any restrictions on sale lapse could
adversely affect the prevailing market price of the common stock, and impair our
ability to raise equity capital in the future.
61
<PAGE>
Upon completion of the offering, we will have outstanding
shares of common stock, outstanding options to purchase shares of common
stock and outstanding warrants to purchase shares of common stock,
assuming no additional option or warrant grants or exercises after
. Of the shares sold in the offering, shares will be
subject to the lock-up agreements described below assuming that we sell all
shares reserved under our directed share program to the entities or persons for
whom these shares have been reserved. We expect that the remaining shares,
plus any shares issued upon exercise of the underwriters' over-allotment option,
will be freely tradable without restriction under the Securities Act, unless
purchased by our "affiliates" as that term is defined in Rule 144 under the
Securities Act. In general, affiliates include officers, directors and 10% or
greater stockholders.
The remaining shares outstanding and shares subject to
outstanding options and warrants are "restricted securities" within the meaning
of Rule 144. Restricted securities may be sold in the public market only if the
sale is registered or if it qualifies for an exemption from registration, or if
the securities can be sold under Rules 144, 144(k) or 701 promulgated under the
Securities Act, which are summarized below. Sales of restricted securities in
the public market, or the availability of such shares for sale, could adversely
affect the market price of the common stock.
LOCK-UP AGREEMENTS
Our directors, officers, employees and various other stockholders, who
together hold substantially all of our securities, have entered into lock-up
agreements in connection with this offering. These lock-up agreements generally
provide that these holders will not offer, sell, contract to sell, grant any
option to purchase or otherwise dispose of our common stock or any securities
exercisable for or convertible into our common stock owned by them for a period
of 180 days after the date of this prospectus without the prior written consent
of Goldman Sachs, as representative for the underwriters. The lock-up agreements
executed by our employees and directors also cover any shares they may acquire
through our directed share program. Notwithstanding possible earlier eligibility
for sale under the provisions of Rules 144, 144(k) and 701, shares subject to
lock-up agreements may not be sold until these arrangements expire or are waived
by Goldman Sachs, as representative for the underwriters. Assuming that Goldman
Sachs does not release any security holders from the lock-up agreements, the
following shares will be eligible for sale in the public market at the following
times:
- Beginning on the effective date of the registration statement of which
this prospectus forms a part, of the shares sold in this
offering, and additional shares not subject to lock-up agreements
and eligible for sale under Rule 144(k), will be immediately available for
sale in the public market.
- Beginning 90 days after the effective date, an additional shares not
subject to lock-up agreements will be eligible for sale pursuant to
Rule 144 and Rule 701.
- Beginning 180 days after the effective date, an additional shares
will be eligible for sale pursuant to Rule 144, Rule 144 (k) and
Rule 701.
62
<PAGE>
RULE 144
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- one percent of the number of shares of common stock then outstanding,
which will equal approximately shares immediately after this
offering; and
- the average weekly trading volume of our common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to manner
of sale, notice and the availability of current public information about us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, may sell these
shares without complying with the manner of sale, public information, volume
limitation or notice requirements of Rule 144.
RULE 701
Rule 701, as currently in effect, permits our employees, officers, directors
or consultants who purchased shares pursuant to a written compensatory plan or
contract to resell such shares in reliance upon Rule 144, but without compliance
with certain restrictions. Rule 701 provides that affiliates may sell their
Rule 701 shares under Rule 144 ninety days after the closing of this offering
without complying with the holding period requirement and that non-affiliates
may sell such shares in reliance on Rule 144 ninety days after the closing of
this offering without complying with the holding period, public information,
volume limitation or notice requirements of Rule 144.
EMPLOYEE PLANS
In addition, we intend to file a registration statement under the Securities
Act after the effective date of this offering to register shares to be issued
pursuant to our employee benefit plans and with respect to certain outstanding
options not issued under our 2000 Equity Incentive Plan. As a result, any shares
of common stock acquired upon exercise of options or rights granted under the
2000 Equity Incentive Plan, the 2000 Directors Option Plan and the Employee
Stock Purchase Plan will also be freely tradable in the public market. However,
shares held by affiliates will still be subject to the volume limitation, manner
of sale, notice and public information requirements of Rule 144, unless
otherwise resaleable under Rule 701. As of April 11, 2000, we had granted
options to purchase 3,248,748 shares of common stock that had not been
exercised, of which options to purchase 367,960 shares were exercisable. In
addition, we have reserved 500,000 shares for possible issuance under our
Directors Option Plan and 1,000,000 shares for possible future issuance under
our Employee Stock Purchase Plan.
63
<PAGE>
UNDERWRITING
PaperExchange and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase the number
of shares indicated in the following table. Goldman, Sachs & Co., Chase
Securities Inc., FleetBoston Robertson Stephens Inc. and Banc of America
Securities LLC are the representatives of the underwriters.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ -----------------
<S> <C>
Goldman, Sachs & Co......................................
Chase Securities Inc.....................................
FleetBoston Robertson Stephens Inc.......................
Banc of America Securities LLC...........................
----------------
Total..........................................
================
</TABLE>
Goldman, Sachs & Co., Chase Securities Inc., FleetBoston Robertson Stephens
Inc., and Banc of America Securities LLC will jointly manage the order books for
the offering.
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
shares from PaperExchange to cover these sales. They may exercise
that option for 30 days. If any shares are purchased pursuant to this option,
the underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.
The following tables show the per share and total underwriting discounts and
commissions to be paid to the underwriters by PaperExchange. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
NO FULL
PAID BY PAPEREXCHANGE EXERCISE EXERCISE
--------------------- -------- --------
<S> <C> <C>
Per Share............................................. $ $
Total.................................................
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters to
other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and the
other selling terms.
PaperExchange and its directors, officers, employees and other holders of
substantially all its securities have agreed, with the underwriters, subject to
limited exceptions, not to dispose of or hedge any of their common stock or
securities convertible into or exchangeable for shares of common stock during
the period from the date of this prospectus through the date 180 days after the
date of this prospectus, except with the prior written consent of the
representatives. See "Shares Eligible for Future Sale" for a discussion of
certain transfer restrictions.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock has been
negotiated among PaperExchange and the representatives of the underwriters.
Among the factors considered in determining the initial public offering price of
the shares, in addition to prevailing market conditions, were PaperExchange's
64
<PAGE>
historical performance, estimates of PaperExchange's business potential and
earnings prospects, an assessment of PaperExchange's management and the
consideration of the above factors in relation to the market valuation of
companies in related businesses.
PaperExchange's common stock has been approved for quotation on the Nasdaq
National Market under the symbol "PPEX".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to other underwriters a portion of the
underwriting discount received by it because the representatives have
repurchased shares sold by or for the account of such underwriter in stabilizing
or short-sale covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
An investment partnership affiliated with Goldman, Sachs (lead manager of
this offering) holds 86,525 shares of our common stock. The aggregate beneficial
ownership interest of PaperExchange shares held by the investment partnership
attributable to Goldman, Sachs (as determined in accordance with the Conduct
Rules of the National Association of Securities Dealers, Inc.) is approximately
5%.
At the request of PaperExchange, the underwriters are reserving up to
shares of common stock for sale at the initial public offering price to
directors, officers, employees and friends through a directed share program. The
number of shares of common stock available for sale to the general public in the
public offering will be reduced to the extent these persons purchase these
reserved shares. Any shares not so purchased will be offered by the underwriters
to the general public on the same basis as the other shares offered hereby.
PaperExchange estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $ million.
PaperExchange has agreed to indemnify the underwriters against various
liabilities, including liabilities under the Securities Act of 1933.
65
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
PaperExchange by Bingham Dana LLP, Boston, Massachusetts. Legal matters in
connection with this offering will be passed upon for the underwriters by
Ropes & Gray, Boston, Massachusetts.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements and schedule at December 31, 1998 and 1999, and for the period from
April 10, 1998 (date of inception) to December 31, 1998, the year ended
December 31, 1999, and the period from April 10, 1998 (date of inception) to
December 31, 1999, as set forth in their report. We have included our financial
statements and schedule in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission for the common stock we are offering by this prospectus.
This prospectus does not contain all of the information contained in the
registration statement and the exhibits. You should refer to the registration
statement and its exhibits for additional information. Statements contained in
this prospectus regarding the contents of any contract or any other document to
which reference is made constitute summaries of the material provisions only and
you should refer to the exhibits attached to the registration statement for
copies of the actual contract, agreement or other documents. When we complete
this offering, we will also be required to file annual, quarterly and special
reports, proxy statements and other information with the Securities and Exchange
Commission.
You can read our Securities and Exchange Commission filings, including the
registration statement, over the Internet at the Securities and Exchange
Commission's web site at http://www.sec.gov. You may also read and copy any
document we file with the Securities and Exchange Commission at its public
reference facilities at 450 Fifth Street, N.W., Washington, D.C. 20549; Seven
World Trade Center, Suite 1300, New York, New York 10048; and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You may also
obtain copies of these documents at prescribed rates by writing to the Public
Reference Section of the Securities and Exchange Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the Securities and Exchange Commission
at 1-800-SEC-0330 for further information on the operation of the public
reference facilities.
66
<PAGE>
PAPEREXCHANGE.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
--------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Financial Statements:
Balance Sheets............................................ F-3
Statements of Operations.................................. F-4
Statements of Changes in Stockholders' Equity............. F-5
Statements of Cash Flows.................................. F-6
Notes to Financial Statements............................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders' of
PaperExchange.com, Inc.
We have audited the accompanying balance sheets of PaperExchange.com, Inc. as of
December 31, 1998 and 1999, and the related statements of operations, changes in
stockholders' equity, and cash flows for the period from April 10, 1998 (date of
inception) to December 31, 1998 and for the year ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PaperExchange.com, Inc. at
December 31, 1998 and 1999, and the results of its operations and its cash flows
for the period from April 10, 1998 (date of inception) to December 31, 1998 and
the year ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
Ernst & Young LLP
Boston, Massachusetts
February 11, 2000, except for
Notes 5 and 8, as to which the date
is March 9, 2000
F-2
<PAGE>
PAPEREXCHANGE.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, MARCH 31,
------------------------------- --------------
1998 1999 2000
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 492,842 $ 16,278,777 $ 18,092,994
Accounts receivable, net of allowances of $35,385 and
$17,667 at December 31, 1999 and March 31, 2000,
respectively............................................ -- 86,167 2,764,200
Prepaid expenses.......................................... 3,640 80,370 360,377
------------- ------------- -------------
Total current assets...................................... 496,482 16,445,314 21,217,571
------------- ------------- -------------
Property and equipment:
Software.................................................. 268,990 1,250,489 1,345,074
Computer and office equipment............................. 67,816 572,000 898,186
Furniture and fixtures.................................... 14,869 76,395 76,395
Leasehold improvements.................................... -- 41,087 8,439
------------- ------------- -------------
351,675 1,939,971 2,328,094
Less: accumulated depreciation............................ 31,942 228,454 447,030
------------- ------------- -------------
Property and equipment, net................................. 319,733 1,711,517 1,881,064
Intangible assets, net of accumulated amortization of
$29,728 and $59,455 at December 31, 1999 and March 31,
2000, respectively........................................ -- 320,272 290,545
Other assets, net of accumulated
amortization of $181 at December 31, 1998................. 1,323 8,800 520,072
------------- ------------- -------------
Total assets................................................ $ 817,538 $ 18,485,903 $ 23,909,252
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 37,672 $ 1,921,181 $ 1,411,208
Accrued professional fees................................. 4,904 87,764 1,352,350
Accrued expenses.......................................... 9,798 385,732 768,494
Accrued relocation expenses............................... -- -- 400,000
Payable to officer........................................ -- 657,133 --
Interest payable.......................................... -- 252,588 9,463
------------- ------------- -------------
Total current liabilities................................... 52,374 3,304,398 3,941,515
------------- ------------- -------------
Notes payable to stockholders, net of discount of $1,532,500
and $43,550 at December 31, 1999 and March 31, 2000,
respectively.............................................. -- 8,467,650 256,450
Stockholders' equity:
Common Stock, $.001 par value; 60,000,000 shares
authorized; 41,901,442 shares issued and outstanding
(unaudited)............................................. -- -- 41,901
Membership Interests, 30,000,000 issued and outstanding in
1998, 39,280,983 issued and outstanding in 1999
(including 142,748 Economic Interests outstanding in
1999)................................................... 1,625,000 15,580,290 --
Additional paid-in-capital.................................. -- 4,245,693 33,793,221
Deferred compensation....................................... -- (2,116,900) (2,117,921)
Notes receivable--officers.................................. -- (1,084,082) (1,052,632)
Accumulated deficit......................................... (859,836) (9,911,146) (10,953,282)
------------- ------------- -------------
Total Stockholders' equity.................................. 765,164 6,713,855 19,711,287
------------- ------------- -------------
Total liabilities and Stockholders' equity.................. $ 817,538 $ 18,485,903 $ 23,909,252
============= ============= =============
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
PAPEREXCHANGE.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM APRIL 10 THREE MONTHS ENDED
1998 (INCEPTION) TO YEAR ENDED MARCH 31,
DECEMBER 31 DECEMBER 31 -------------------------------
1998 1999 1999 2000
-------------------- -------------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues......................... $ 1,500 $ 114,191 $ 1,178 $ 3,444,635
Cost of revenues..................... -- 91,766 -- 3,341,642
------------- ------------- ------------- -------------
Gross profit......................... 1,500 22,425 1,178 102,993
Expenses:
Sales and marketing expense:
Non-cash compensation expense.... -- -- -- 5,212,380
Other sales and marketing........ 541,072 3,376,116 405,813 2,534,276
Technology expense:
Non-cash compensation expense.... -- -- -- 3,250
Other technology expense......... 141,207 3,103,858 266,201 2,708,797
General and administrative expense:
Non-cash compensation expense.... -- 515,793 -- 1,277,398
Other general and
administrative................. 206,960 1,600,024 193,996 1,490,939
Write-off of capitalized
software......................... -- 209,294 -- --
------------- ------------- ------------- -------------
Total operating expenses......... 889,239 8,805,085 866,010 13,227,040
------------- ------------- ------------- -------------
Operating loss....................... (887,739) (8,782,660) (864,832) (13,124,047)
Other income and expense:
Interest expense................... -- (334,423) -- (322,250)
Interest income.................... 27,903 55,739 4,960 284,076
Other miscellaneous income
(expense)........................ -- 10,034 (790) --
------------- ------------- ------------- -------------
Loss before extraordinary items...... (859,836) (9,051,310) (860,662) (13,162,221)
Extraordinary items
Loss on debt extinguishment........ -- -- -- 1,422,672
------------- ------------- ------------- -------------
Net loss............................. $ (859,836) $ (9,051,310) $ (860,662) $ (14,584,893)
============= ============= ============= =============
Basic and diluted net loss per share:
Loss before extraordinary items.... $ (.03) $ (.26) $ (.03) $ (.32)
Extraordinary items................ -- -- -- (.04)
------------- ------------- ------------- -------------
Net loss............................. $ (.03) $ (.26) $ (.03) $ (.36)
============= ============= ============= =============
Weighted average interests
outstanding used to compute basic
and diluted net loss per share..... 30,000,000 34,881,564 30,000,000 40,319,260
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
PAPEREXCHANGE.COM, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
LLC INTERESTS COMMON STOCK ADDITIONAL
-------------------------- ------------------------ PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
----------- ------------ ---------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Membership Interests at
inception, April 10, 1998............... 30,000,000 $ 1,625,000
Net loss.................................. -- --
----------- ------------
Balance at December 31, 1998.............. 30,000,000 1,625,000
Capital contribution...................... 500,000
Issuance of Membership Interests on April
5, 1999................................. 6,000,000 1,000,000
Deferred compensation related to
options................................. $ 135,960 $ (135,960)
Issuance of Membership Interests on August
13, 1999................................ 966,714 1,342,658
Exercise of options on August 14, 1999.... 142,748 28,550
Issuance of warrants related to Members'
promissory notes dated October 15,
1999.................................... 1,613,000
Issuance of Membership Interests on
December 20, 1999....................... 441,754 1,052,632
Deferred compensation related to
options................................. 1,996,733 (1,996,733)
Deferred compensation related to stock.... 500,000 (500,000)
Exercise of options on December 30, 1999.. 157,252 31,450
Issuance of Membership Interests on
December 30, 1999....................... 1,572,515 10,000,000
Amortization of deferred compensation
related to options...................... 515,793
Net loss..................................
----------- ------------ ----------- -----------
Balance at December 31, 1999.............. 39,280,983 $ 15,580,290 $ 4,245,693 $(2,116,900)
Deferred compensation related to options
(unaudited)............................. 78,000 (78,000)
Issuance of Membership Interests, net of
issuance expenses, on February 16, 2000
(unaudited)............................. 1,479,894 $ 9,935,062
Conversion of LLC to C Corp (unaudited)... (40,760,877) $(25,515,352) 40,760,877 $ 40,761 11,931,834
Issuance of warants to purchase common
stock (unaudited)....................... 6,416,049
Issuance of common stock, net of issuance
expenses, on March 6, 2000 (unaudited).. 527,639 528 5,104,452
Issuance of common stock, net of issuance
expenses, on March 7, 2000 (unaudited).. 519,149 519 5,022,328
Proceeds from stock options exercised on
common stock on March 11, 2000
(unaudited)............................. 7,272 7 1,443
Issuance of common stock, net of issuance
expenses, on March 20, 2000
(unaudited)............................. 86,525 86 993,422
Amortization of deferred compensation
related to options (unaudited).......... 76,979
Repayment of shareholder loans
(unaudited).............................
Net loss (unaudited)
----------- ------------ ---------- ----------- ----------- -----------
Balance at March 31, 2000 (unaudited)..... -- -- 41,901,462 $ 41,901 $33,793,221 $(2,117,921)
=========== ============ ========== =========== =========== ===========
<CAPTION>
NOTES TOTAL
RECEIVABLE-- ACCUMULATED STOCKHOLDERS'
OFFICERS DEFICIT EQUITY
------------- ------------- --------------
<S> <C> <C> <C>
Issuance of Membership Interests at
inception, April 10, 1998............... $ 1,625,000
Net loss.................................. $ (859,836) (859,836)
------------ ------------
Balance at December 31, 1998.............. (859,836) 765,164
Capital contribution...................... 500,000
Issuance of Membership Interests on April
5, 1999................................. 1,000,000
Deferred compensation related to
options................................. --
Issuance of Membership Interests on August
13, 1999................................ 1,342,658
Exercise of options on August 14, 1999.... 28,550
Issuance of warrants related to Members'
promissory notes dated October 15,
1999.................................... 1,613,000
Issuance of Membership Interests on
December 20, 1999....................... $(1,052,632) --
Deferred compensation related to
options................................. --
Deferred compensation related to stock.... --
Exercise of options on December 30, 1999.. (31,450) --
Issuance of Membership Interests on
December 30, 1999....................... 10,000,000
Amortization of deferred compensation
related to options...................... 515,793
Net loss.................................. (9,051,310) (9,051,310)
----------- ------------ ------------
Balance at December 31, 1999.............. $(1,084,082) $ (9,911,146) $ 6,713,855
Deferred compensation related to options
(unaudited)............................. --
Issuance of Membership Interests, net of
issuance expenses, on February 16, 2000
(unaudited)............................. 9,935,062
Conversion of LLC to C Corp (unaudited)... 13,542,757 --
Issuance of warants to purchase common
stock (unaudited)....................... 6,416,049
Issuance of common stock, net of issuance
expenses, on March 6, 2000 (unaudited).. 5,104,980
Issuance of common stock, net of issuance
expenses, on March 7, 2000 (unaudited).. 5,022,847
Proceeds from stock options exercised on
common stock on March 11, 2000
(unaudited)............................. 1,450
Issuance of common stock, net of issuance
expenses, on March 20, 2000
(unaudited)............................. 993,508
Amortization of deferred compensation
related to options (unaudited).......... 76,979
Repayment of shareholder loans
(unaudited)............................. 31,450 31,450
Net loss (unaudited) (14,584,893) (14,584,893)
----------- ------------ ------------
Balance at March 31, 2000 (unaudited)..... $(1,052,632) $(10,953,282) $ 19,711,287
=========== ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
PAPEREXCHANGE.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 10
1998 THREE MONTHS ENDED
(INCEPTION) TO YEAR ENDED MARCH 31,
DECEMBER 31 DECEMBER 31 -----------------------------
1998 1999 1999 2000
-------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................................................. $ (859,836) $ (9,051,310) $ (860,662) $ (14,584,893)
------------- ------------- ------------- -------------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................... 31,942 216,686 14,690 259,663
Amortization........................................... 181 31,051 218 29,727
Non-cash compensation charges.......................... -- 515,793 -- 6,493,028
Amortization of debt discount.......................... -- 80,650 -- 66,128
Write-off of capitalized software...................... -- 209,294 -- --
Loss on debt extinguishment............................ -- -- -- 1,422,672
Changes in operating assets and liabilities:
Accounts receivable.................................. -- (86,167) -- (2,678,033)
Prepaid expenses and other current assets............ (3,640) (76,730) 1,326 (280,007)
Accounts payable..................................... 42,576 1,868,807 (3,380) (509,973)
Accrued expenses..................................... 9,798 473,496 192,860 2,047,348
Interest payable..................................... -- 252,588 -- (243,125)
Payable to officer................................... -- 657,133 -- (657,133)
Other assets......................................... (1,504) (258,800) -- (511,272)
------------- ------------- ------------- -------------
Total adjustments........................................ 79,353 3,883,801 205,714 5,439,023
------------- ------------- ------------- -------------
Net cash used in operating activities.................... (780,483) (5,167,509) (654,948) (9,145,870)
------------- ------------- ------------- -------------
INVESTING ACTIVITIES:
Acquisition of MPX assets................................ -- (100,000) -- --
Purchase of property and equipment....................... (82,685) (606,796) (42,362) (429,210)
Purchase of internal use software........................ (146,990) (1,260,968) -- --
Proceeds from disposal of software....................... -- 50,000 -- --
------------- ------------- ------------- -------------
Net cash used in investing activities.................... (229,675) (1,917,764) (42,362) (429,210)
------------- ------------- ------------- -------------
FINANCING ACTIVITIES:
Proceeds from Members' capital contributions............. 1,503,000 12,871,208 500,000 9,935,062
Prodeeds from issuance of Common Stock................... -- -- -- 11,122,785
Proceeds from notes payable to members................... -- 10,000,000 --
Repayment of notes payable............................... -- -- -- (9,700,000)
Repayment of notes receivable--shareholders.............. -- -- -- 31,450
------------- ------------- ------------- -------------
Net cash provided by financing activities................ 1,503,000 22,871,208 500,000 11,389,297
------------- ------------- ------------- -------------
Increase (decrease) in cash and cash equivalents......... 492,842 15,785,935 (197,310) 1,814,217
Cash and cash equivalents, beginning of period........... -- 492,842 492,842 16,278,777
------------- ------------- ------------- -------------
Cash and cash equivalents, end of period................. $ 492,842 $ 16,278,777 $ 295,532 $ 18,092,994
============= ============= ============= =============
Interest paid............................................ $ -- $ 81,835 $ -- $ 565,376
NON-CASH TRANSACTION:
Software contributed in exchange for equity interest..... $ 122,000 $ -- $ -- $ --
============= ============= ============= =============
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
PAPEREXCHANGE.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
1. NATURE OF BUSINESS
PaperExchange.com, Inc. (the Company) is a provider of e-commerce solutions
to producers and customers of pulp and paper products. The Company enables these
parties to efficiently buy and sell products through a secure Internet-based
neutral marketplace tailored to this industry. The Company operates solely in
one operating segment, the development and marketing of an online marketplace
for the purchase and distribution of pulp and paper products.
The Company was organized as a Delaware limited liability company on
April 10, 1998. The Company headquarters are located in Boston, Massachusetts.
On February 28, 2000, the Company converted from a limited liability company to
a corporation. Under the Agreement and Plan of Conversion, all outstanding
Membership Interests and Economic Interests were converted into shares of common
stock.
The Company, from its inception through December 31, 1999, was a development
stage enterprise devoting its efforts to product development, marketing and
securing financing, with no significant revenue derived from operations. The
Company ceased to be a development stage company in the first quarter of 2000.
The accompanying financial statements have been presented on the assumption
that the Company is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.
During 1998 and 1999, the Company incurred significant operating losses and
utilized significant amounts of cash to fund the design and development of the
Company's online marketplace and the establishment of relationships with
suppliers and customers. The Company is reaching a critical stage in its growth
as it transforms to a commercial company with complete sales and marketing
capabilities. During this time, the Company increased its overall operating
expenses and overhead to be positioned to further increase its sales and
marketing capabilities. In order to be adequately positioned to meet these
demands, the Company obtained debt and equity financing.
The Company expects to continue to utilize significant amounts of cash to
fund operations as it implements its business plan. The Company continues to
seek equity financing as its primary means of funding operations during this
transition. The Company's largest stockholders have represented that they will
provide the Company with such additional financing, as may be necessary, in
order to enable the Company to continue to sustain operations.
As a result of the above actions, management believes that its existing cash
resources (including the financing commitments) and cash from operations should
meet working capital requirements over the next twelve months.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The financial information as of March 31, 2000 and for the three months
ended March 31, 1999 and 2000 are unaudited and includes all adjustments,
consisting only of normal recurring adjustments, that the Company's management
considers necessary for a fair presentation of the Company's operating results
and cash flows for such period. Results for the three month period March 31,
2000 are not necessarily indicative of results expected for the full fiscal year
of 2000 or for any future period.
F-7
<PAGE>
PAPEREXCHANGE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
REVENUE RECOGNITION
Net revenues consist primarily of product sales to customers and charges to
customers for outbound freight and other logistical services. Under most
supplier agreements, the Company acts as a principal when purchasing products
from suppliers and reselling them to customers. Products are shipped directly to
customers by suppliers based on customer delivery date specifications. Under
principal-based agreements, the Company is responsible for selling products,
collecting payment from customers, ensuring that the shipment reaches customers
and processing sales returns. In addition, the Company takes title to the
product upon shipment and bears the risk of loss for collection, delivery and
product returns from customers. The Company recognizes revenues from product
sales when products are shipped to customers. The Company provides an allowance
for sales returns, if deemed appropriate, at the time of sale. During 1999, the
Company recorded an allowance for sales returns of approximately $31,000.
To date, an insignificant amount of revenues are from agreements with
suppliers for which the Company is acting as an agent. Under agency-based
supplier agreements, the Company recognizes a percentage share of revenues
generated by suppliers when products are shipped to customers.
CASH AND CASH EQUIVALENTS
The Company considers short-term investments with original maturity dates of
90 days or less at the date of purchase to be cash equivalents. The Company's
cash and cash equivalents as of December 31, 1999 consisted primarily of
commercial paper and money market funds held by large financial institutions in
the United States and their carrying value approximated fair value. The Company
has pledged approximately $70,000 of cash equivalents to secure two letters of
credit for operating leases.
FINANCIAL INSTRUMENTS
Cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses are carried at cost which approximates fair value due to the short-term
maturity of these instruments. Carrying amounts of long-term debt approximate
fair value as the debt bears interest at rates approximating current market
rates.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company provides for
depreciation using accelerated and straight-line methods over the estimated
useful lives of the related assets which range from 2 to 7 years.
CAPITALIZED SOFTWARE DEVELOPMENT FOR INTERNAL USE
The Company accounts for software developed for internal use under Statement
of Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," ("SOP 98-1"). SOP 98-1 provides guidance for
determining whether computer software is internal-use software and on
capitalization of the costs incurred for computer software developed or obtained
for internal use. Expenses incurred by the Company to enhance, manage, monitor
and
F-8
<PAGE>
PAPEREXCHANGE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
operate the Company's web site are expensed as incurred, except for costs which
provide additional functionality, which are capitalized in accordance with SOP
98-1.
In 1998, the Company capitalized $268,990 of software that was internally
developed or purchased. In November 1999, the software version was replaced with
a substantially modified version. Accordingly, capitalized internal-use software
costs of $209,294 that had no future benefit to the Company were deemed impaired
and charged to expense.
As of December 31, 1999, the Company had capitalized $1,260,968 of
internally developed and purchased software costs related to the new software
version. This cost is being depreciated on a straight-line basis over the useful
life of the software (estimated at two years).
In 1998 and 1999 and the three months ended March 31, 2000, depreciation
expense relating to capitalized software costs was $20,174, $96,002 and
$144,000, respectively.
INTANGIBLE ASSETS
The Company incurred costs of $500,000 in connection with a co-branding
marketing agreement with another internet entity. Costs of $250,000 related to
the execution of the agreement, the terms of which include a non-compete
agreement and exclusivity rights, are being amortized on a straight line basis
over the four-year life of the agreement. The balance of costs have been
expensed.
In connection with an acquisition of certain assets of MPX, the Company
obtained two non-compete agreements that aggregate $100,000. The non-compete
agreements are being amortized on a straight line basis over the life of the
agreements, which range from 18 to 26 months.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations
in accounting for its employee stock options. Under APB Opinion No. 25, when the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized. See pro forma disclosures of applying Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation,
("FAS 123") included in Note 5. The Company accounts for stock-based
compensation issued to non-employees in accordance with the provisions of SFAS
No. 123 and Emerging Issues Task Force No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."
ADVERTISING COSTS
Advertising costs are expensed in the period in which they are incurred. The
Company incurred $69,000, $545,000 and $323,000 in advertising costs in 1998,
1999 and the three months ended March 31, 2000, respectively.
F-9
<PAGE>
PAPEREXCHANGE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
INCOME TAXES
During 1998 and 1999 the Company was treated as a partnership for federal
and state income tax purposes. Therefore, all items of income, expense and tax
credits are passed through to the Company's Members. As more fully discussed in
Note 5, effective with the conversion from a limited liability company to a
corporation, the Company is subject to federal and state income taxes. The
Company expects to recognize a deferred tax asset for the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Due
to the uncertainties regarding the Company's future results of operations, a
full valuation allowance will be recorded against any deferred tax asset for the
forseeable future. Pro forma information with respect to income taxes, net loss
and net loss per share, assuming the Company had been taxed as a corporation,
would not be meaningful due to the significance of the Company's operating loss
and the fact that no income tax benefit will be recognized.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CONCENTRATIONS OF CREDIT RISK AND OTHER RISKS
Financial instruments that potentially subject the Company to credit risk
consist primarily of uninsured cash and cash equivalents. Cash and cash
equivalents are deposited with a federally insured commercial bank in the United
States or in higher grades of commercial paper with durations of under 90 days
at the time of purchase.
The Company sells primarily to converters, printers, wholesalers and
retailers of paper and related products. The Company performs ongoing credit
evaluations of its customers and may or may not require collateral. The Company
analyzes the need for reserves for potential credit losses and records reserves
when necessary. The Company has obtained credit insurance to mitigate any
potential losses, and to date, has not had significant bad debt losses. The
Company has a bad debt allowance of approximately $4,000 and $16,000 at
December 31, 1999 and March 31, 2000, respectively.
At December 1999, one customer accounted for 100% of the accounts receivable
balance and 76% of the Company's net revenue for the year ended December 31,
1999. A second customer accounted for 89% of the accounts receivable balance at
March 31, 2000 and 82% of the Company's revenue for the three months then ended.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value.
F-10
<PAGE>
PAPEREXCHANGE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designed as part of a hedge transaction and, if it is, the type of hedge
transaction. The Company does not expect that the adoption of SFAS No. 133 will
have a material impact on its financial statements.
3. NET LOSS PER SHARE
Net loss per share (prior to February 28, 2000 limited liability company
interests were used to compute net loss per share and include both Membership
Interests and Economic Interests) has been computed in accordance with the
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("FAS 128"), which requires disclosure of basic and diluted earnings per share.
Basic earnings per share excludes any dilutive effects of options, shares
subject to repurchase, warrants, and convertible securities.
Diluted earnings per share includes the impact of potentially dilutive
securities. The Company's potentially dilutive securities were antidilutive and
therefore were not included in the computation of weighted-average shares used
in computing diluted loss per share. Following the guidance given by the
Securities and Exchange Commission Staff Accounting Bulletin No. 98, common
stock and convertible preferred stock that has been issued or granted for
nominal consideration prior to the anticipated effective date of the initial
public offering date must be included in the calculation of basic and diluted
net loss as if these shares had been outstanding for all periods presented. To
date, the Company has not issued or granted shares for nominal consideration.
The following table presents the calculation of basic and diluted and
diluted net loss per share:
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 10, 1998
(INCEPTION) TO YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31, -------------------------------
1998 1999 MARCH 31, 1999 MARCH 31, 2000
-------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Numerator:
Net loss................... $ (859,836) $(9,051,310) $ (860,662) $(14,584,893)
Denominator:
Weighted average shares
outstanding (for basic
and diluted)............. 30,000,000 34,881,564 30,000,000 40,319,260
Basic and diluted net loss
per share................ $ (.03) $ (.26) $ (.03) $ (.36)
</TABLE>
The Company has excluded all outstanding stock options and warrants from the
calculation of diluted net loss per share because all such securities are
antidilutive for all periods presented. The total number of shares excluded from
the calculation of diluted net loss per share was 9,231,771 for the year ended
December 31, 1999. Such securities, had they been dilutive, would have been
included in the computation of diluted net loss per share using the treasury
stock method.
F-11
<PAGE>
PAPEREXCHANGE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
4. NOTES PAYABLE TO STOCKHOLDERS
On October 15, 1999, the Company issued promissory notes to the stockholders
of the Company and obtained additional financing aggregating $10,000,000. Each
note was in proportion to the individual stockholder's equity interest. In
connection, and simultaneously with the issuance of the promissory notes, the
Company issued 5,000,001 fully vested warrants, each of which is to purchase one
share of common stock in the Company at an exercise price of $2 per share. (See
Note 5)
The Company determined the fair value of the warrants at the date of
issuance. The fair value of the warrants was determined using an option pricing
model with the following assumptions: expected life of seven years; risk-free
interest rate of 5.9%; no dividends during the expected term and a volatility of
134%.
Based upon this determination, $1,613,000 of the proceeds has been assigned
to the value of the warrants and $8,387,000 has been assigned to the notes. The
value of the warrants has been credited to additional paid-in capital. The
difference between the face value of the notes and the carrying value is
reflected as a discount and is being amortized over the term of the notes. The
notes bear interest on the face amount of the notes at the Company's bank prime
rate plus 4.0%. As of December 31, 1999, the interest rate on these loans was
12.5%. The weighted average effective interest rate during 1999, including the
effect of amortizing the warrant, was 16%. Interest is payable quarterly, and
the notes mature upon the earlier of October 15, 2004 or the date of an
acceleration pursuant to the promissory note agreement. The agreement defines an
acceleration event to include, among other events, failure to make timely
interest payments, sale of substantially all of the Company's assets,
bankruptcy, or issuance of debt and/or equity from which the gross proceeds
exceed $30,000,000. Any acceleration other than bankruptcy is subject to the
election of the holders of a majority of the notes.
In March 2000, the Company repaid $9,700,000 of the notes payable and
recognized the unamortized discount of approximately $1,423,000 as a loss on the
debt extinguishments. The remaining $300,000 note payable to a shareholder was
repaid in April 2000.
5. STOCKHOLDERS' EQUITY
DESCRIPTION OF SECURITIES
At December 31, 1999, the Company's Members' Equity consisted of Membership
Interests and Economic Interests. Each Membership Interest consists of an
Economic Interest and other rights (primarily the right to vote on, or
participate in, the management of the Company). All holders of Economic
Interests have the right to receive distributions of the Company's assets and
allocations of profits and losses.
CONVERSION TO A C CORPORATION
On February 28, 2000, the Company converted from a limited liability company
to a corporation. Under the Agreement and Plan of Conversion, all outstanding
Membership Interests and Economic Interests were converted into shares of common
stock. Each share of common
F-12
<PAGE>
PAPEREXCHANGE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
stock is entitled to one vote. The holders of common stock are also entitled to
receive dividends from legally available funds when, and if, declared by the
Board of Directors.
The Company's accumulated deficit of $13,542,757 at February 28, 2000, the
date of such conversion, was reclassified as additional paid-in-capital.
Further, the Company issued options to purchase common stock under the
Company's 2000 Equity Incentive Plan in full substitution for all outstanding
options to purchase Economic Interests under the Company's 1998 Equity Option
Plan. The Company also issued warrants and options in full substitution for all
outstanding warrants and options to purchase Membership Interests.
Concurrent with the conversion to a corporation, all of the stockholders
executed a Stockholders' Agreement. Under the terms of the Stockholders'
Agreement, the stockholders have agreed to set the number and composition of the
Board of Directors of the Company. In addition, each stockholder has granted to
the Board of Directors an irrevocable proxy to vote all common stock held by
such stockholder. With the exception of the majority owner, all stockholders
must give the other holders the right of first refusal when selling stock.
Proposed sales of greater than a 5% ownership by a holder triggers an automatic
right for the other holders to participate as a seller in a proposed sale in
proportion to their ownership interests. If the majority owner enters into a
transaction to sell all of its stock, it can compel all stockholders to sell
outstanding shares. This Stockholders' Agreement expires upon the dissolution of
the Company or an initial public offering of the Company's common stock.
MEMBERSHIP INTEREST SPLIT
On September 14, 1999, the Company's Board of Directors authorized a
three-for-one Membership Interest split effective November 1, 1999. All
Membership Interests and per share amounts in the financial statements for all
periods presented have been retroactively adjusted to reflect the Membership
unit splits.
1998 EQUITY OPTION PLAN
In April 1999, the Company adopted the Amended 1998 Equity Option Plan (the
"Plan"). The Plan authorizes the grant of options to employees to purchase
Economic Interests. Options may only be granted to persons who are employees of
the Company. A total of 4,550,000 units of Economic Interests have been reserved
for issuance under the Plan.
The exercise price of options granted under the Plan may not be less than
85% of the fair value of the Economic Interests as of the grant date, as
determined by the Board of Directors. The term of options granted under the Plan
may not exceed five years.
The Company issued options to purchase common stock under the Company's 2000
Equity Incentive Plan in full substitution for all outstanding options to
purchase Economic Interests under the Company's 1998 Equity Option Plan.
F-13
<PAGE>
PAPEREXCHANGE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
2000 EQUITY INCENTIVE PLAN
In February 2000, the Company's Board of Directors adopted the 2000 Equity
Incentive Plan (the "2000 Plan") for issuance of common stock to eligible
participants. The Plan provides for the granting of incentive stock options and
non-qualified stock options. In the case of incentive stock options, options may
be granted under the 2000 Plan at prices not less 100% of the fair value at the
date of grant. Generally, the options expire after ten years from the initial
date of grant. Options generally vest over a period of four years from the date
of grant. A total of 8,000,000 shares have been reserved for issuance under the
2000 Plan.
STOCK COMPENSATION
Pro-forma information regarding net loss is required by FAS 123, and has
been determined as if the Company had accounted for its employee options under
the fair value method provided for under FAS 123. The fair value of options was
estimated at the date of grant using a minimum value option pricing model for
1999 with the following weighted-average assumptions: risk-free interest rate
ranging from 5.30% to 6.5%, a dividend yield of 0% and an expected life of the
option of three years.
The option valuation models were developed for use in estimating the fair
value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of the employee equity
options.
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------
AS REPORTED PRO FORMA
----------- -----------
<S> <C> <C>
Net loss.................................................... $(9,051,310) $(9,120,014)
Basic and diluted loss per share............................ $ (.26) $ (.26)
</TABLE>
The effects on pro forma net loss of expensing the estimated fair value of
stock options, are not necessarily representative of the effects on reported net
loss for future years, due to such things as the vesting period of the stock
options, and the potential for issuance of additional stock options in future
years.
F-14
<PAGE>
PAPEREXCHANGE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Option activity (1998 Equity Option Plan) during 1999 was as follows:
<TABLE>
<CAPTION>
1999
------------------------------
WEIGHTED
AVERAGE EXERCISE
SHARES PRICE
----------- ----------------
<S> <C> <C>
Outstanding at beginning of year............................ -- $ --
Granted..................................................... 2,796,250 .42
Exercised................................................... (300,000) .20
Canceled.................................................... (31,500) .20
----------- -----------
Outstanding at end of year.................................. 2,464,750 $ .45
=========== ===========
Options exercisable at end of year.......................... 234,500
===========
Weighted-average fair value of options granted during
year...................................................... $ .13
===========
</TABLE>
The following table summarizes information about these stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
RANGE OF DECEMBER 31 CONTRACTUAL EXERCISE DECEMBER 31 EXERCISE
EXERCISE PRICES 1999 LIFE (YRS.) PRICE 1999 PRICE
- --------------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
0.20$............. 1,926,750 3.8 $ .20 204,500 $ .20
1.33$............. 538,000 4.8 1.33 30,000 1.33
----------- --------- ------- ----------
.20 $to $1.33..... 2,464,750 4.0 $ .45 234,500 $ .34
=========== ========= ======= ==========
</TABLE>
In addition, in connection with a certain officer's employment arrangements,
the Company issued 1,767,020 options to purchase common stock at an exercise
price of $2.38 per share. The options vest over four years and are exercisable
for five years from the date of grant. None of the options were exercisable at
December 31, 1999. The weighted average fair value of this option was $1.67
using a minimum value option pricing model with assumptions similar to options
granted under the 1998 Equity Option Plan.
Also in connection with these arrangements, 441,754 shares of common stock
were issued for a note receivable of $1,052,632 due and payable on December 20,
2003. The note receivable bears interest at a rate of 6.2% and is secured by the
underlying common stock. Interest compounds annually and is due and payable on
December 20, 2003.
In December 1999, the Company authorized the acceptance of a full recourse
promissory note, which was repaid in January 2000, in the amount of $31,450,
from an employee in exchange for exercise of the vested options under the 1998
Equity Option Plan. Both of these notes are recorded as a reduction of
Stockholders' Equity.
F-15
<PAGE>
PAPEREXCHANGE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
DEFERRED COMPENSATION
In connection with the grant of options to employees under the 1998 Equity
Option Plan through December 31, 1999, the Company recorded deferred
compensation of $135,960 for the aggregate differences between the exercise
prices of options at their dates of grant and the deemed fair value for
accounting purposes of the common stock subject to these options.
In connection with the sale of common stock and grant of options to purchase
common stock to an officer through December 31, 1999, the Company recorded
deferred compensation of $2,496,733 for the aggregate differences between the
common stock sale price and the deemed fair value of the common stock on the
date of the transaction (for sale of common stock) and exercise price of the
options at their date of grant and the deemed fair value of the common stock
subject to these options (for grant of options).
The amount of deferred compensation is included as a reduction of
stockholders' equity and is being amortized on a straight-line vesting method
over the option vesting periods, which are generally between three to four
years. Total amortization of $515,793 was included in general and administrative
expenses as the compensation to such employees is reported in this category.
Amortization of deferred compensation is expected to be approximately $295,000
in 2000, $669,000 in 2001, $654,000 in 2002, and $499,000 in 2003.
In February 2000 the Company granted options to purchase 450,000 shares of
common stock to the majority stockholder. A charge of approximately $1,200,000
was recorded for the three months ended March 31, 2000.
WARRANTS
In connection with the notes payable to the stockholders (Note 5), the
Company issued 5,000,001 fully vested warrants that entitle the holder thereof
to purchase one share of common stock of the Company at $2.00 per share of
common stock. The warrants expire on October 15, 2006. As of December 31, 1999,
all of the warrants were outstanding (see Note 5).
SHARES OF COMMON STOCK RESERVED FOR ISSUANCE
Approximately 11,767,021 and 14,499,314 shares of common stock have been
reserved for future issuance upon the exercise of options or warrants at
December 31, 1999 and March 31, 2000, respectively.
F-16
<PAGE>
PAPEREXCHANGE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
6. LEASE COMMITMENTS
The Company has entered into operating leases for office space in Boston,
Massachusetts. Future minimum rental payments (excluding any estimate of
operating costs) under non-cancelable operating leases as follows:
<TABLE>
<S> <C>
2000........................................................ $299,484
2001........................................................ 243,626
2002........................................................ 128,338
2003........................................................ 87,733
--------
$759,181
========
</TABLE>
In addition to the lease commitments set forth above, in March 2000, the
Company entered into a five year operating lease for office space in Boston,
Massachusetts. Future minimum rental payments (excluding any estimate of
operating costs) under this lease are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 666,192
2001........................................................ 1,082,002
2002........................................................ 1,082,002
2003........................................................ 1,082,002
2004........................................................ 1,082,002
2005........................................................ 541,002
----------
$5,535,202
==========
</TABLE>
In March 2000 the Company entered into two consulting contracts related to
the development of the Company's web-site and management information systems.
Total amounts due under the contracts are approximately $1,950,000 and are
expected to be charged to operations in 2000.
Rent expense totaled $19,329 for 1998 and $202,415 for 1999.
7. TRANSACTIONS WITH AFFILIATES
The Company has a joint marketing agreement with an affiliate of a
shareholder. The Company incurred costs of $500,000 in connection with this
agreement in 1999. See Note 2.
In addition to the transactions discussed in Note 8, the Company purchased
approximately $90,000 of product from an affiliate during 1999.
During the three month period ended March 31, 2000, the Company had sales of
$53,000 with an affiliate.
During 1999 the Company reimbursed an affiliate approximately $90,000 for
expenses paid on behalf of the Company.
F-17
<PAGE>
PAPEREXCHANGE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
8. STRATEGIC ALLIANCES
In February 2000, the Company sold approximately 1,500,000 common shares for
$10,000,000. Also in February 2000, the Company sold approximately 500,000
common shares for $3,400,000. The closing for this second transaction occurred
in April.
The Company also entered into strategic agreements with these investors
whereby these investors will use reasonable good faith efforts to list first run
paper products at specified target volume levels for purchase by the Company and
ultimate resale by the Company to the Company's customers. The term of the
agreements expire on January 31, 2002 and February 2001 unless earlier
terminated by each investor. The agreements are non-exclusive.
In March 2000, the Company sold approximately 500,000 common shares for
approximately $5,100,000. In connection with this transaction the Company issued
fully vested warrants to purchase approximately 500,000 additional common shares
for $11.56 per share. These warrants were immediately vested on the date of
grant, in that they are not subject to any forfeiture for any reason and expire
in April 2015. These warrants will become exercisable at the earlier of fifteen
years or over two years based upon the number of tons of paper product that are
purchased by the holder of such warrant through the Company's marketplace.
The Company also entered into a strategic agreement with this investor
whereby this investor will use commercially reasonable efforts: (a) to list a
portion of its paper products purchase requirements on the Company's Web site;
and (b) purchase at specified target volume levels of paper products from the
Company, provided certain criteria are achieved by the Company, through
March 31, 2002. Such criteria are very restrictive and include: (a) product
quality; (b) product price; and (c) specific logistics requirements.
The fair value of these warrants is measured at the date of grant due to the
fully-vested, nonforfeitable nature of these warrants. The terms of the
strategic agreement do not require any performance commitments in order to earn
the right to exercise these warrants. However, if specified levels of purchases
are made by the investor, the investor may earn the right to exercise these
warrants earlier. In addition, the agreement is non-exclusive and allows the
investor to participate in programs similar to PaperExchange. Accordingly, the
Company recognized a charge to sales and marketing expense in the first quarter
for approximately $5,000,000.
The Company determined the fair value of the warrants at the date of
issuance. The fair value of the warrants was determined using an option pricing
model with the following assumptions: expected life of fifteen years; risk-free
interest rate of 6.7%; no dividends during the expected term and a volatility of
127%.
Also in March 2000, the Company sold approximately 500,000 shares of common
stock for approximately $5,200,000 to an investor, which is in the pulp and
paper industry.
9. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT
STRATEGIC ALLIANCES
In April 2000, the Company sold approximately 270,000 shares of common stock
for approximately $3,100,000 to an investor, which is in the pulp and paper
industry. In connection with
F-18
<PAGE>
PAPEREXCHANGE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
9. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT (CONTINUED)
this transaction the Company issued fully vested warrants to purchase
approximately 270,000 additional common shares for $11.56 per share. These
warrants were immediately vested on the date of grant, in that they were not
subject to any forfeiture for any reason and expire in May 2015. These warrants
will become exercisable at the earlier of fifteen years (April, 2015) or over
two years based upon the number of tons of paper product that are purchased by
holder of such warrant through the Company's marketplace.
The Company also entered into a strategic agreement with this investor
whereby this investor will use commercially reasonable efforts: (a) to list, for
purchase by the Company and ultimate resale by the Company to the Company's
customers, first quality newsprint; and (b) purchase wastepaper products from
the Company at specified target volume levels on a non-exclusive basis; through
June 30, 2002, unless earlier terminated by this investor.
The fair value of these warrants is measured at the date of grant due to the
fully-vested, nonforfeitable nature of these warrants. The terms of the
strategic agreement do not require any performance commitments in order to earn
the right to exercise these warrants. However if specified levels of purchases
are made by the investor, the investor may earn the right to exercise these
warrants earlier. In addition, the agreement is non-exclusive, may be terminated
at the election of the investor with minimal notice and allows the investor to
participate in programs similar to PaperExchange. Accordingly, the Company
expects to recognize a charge to sales and marketing expense in the second
quarter of 2000 for approximately $3,000,000.
F-19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-------
<S> <C>
Prospectus Summary................ 1
Risk Factors...................... 4
Special Note Regarding Forward-
Looking Statements.............. 17
Use of Proceeds................... 17
Dividend Policy................... 18
Capitalization.................... 19
Dilution.......................... 20
Selected Financial Data........... 21
Management's Discussion and
Analysis of Financial Condition
and Results of Operations....... 22
Business.......................... 29
Management........................ 45
Related Party and Other
Transactions.................... 55
Principal Stockholders............ 56
Description of Capital Stock...... 59
Shares Eligible for Future Sale... 61
Underwriting...................... 64
Legal Matters..................... 66
Experts........................... 66
Additional Information............ 66
Index to Financial Statements..... F-1
</TABLE>
------------------------
Through and including , 2000 (the 25(th) day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.
Shares
PAPEREXCHANGE.COM, INC.
Common Stock
------------------
[LOGO]
------------------
GOLDMAN, SACHS & CO.
CHASE H&Q
ROBERTSON STEPHENS
BANC OF AMERICA SECURITIES LLC
Representatives of the Underwriters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in connection
with the sale of the securities being registered. All amounts are estimates
except the SEC registration fee, the NASD fee and the Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
------------
<S> <C>
SEC registration fee........................................ $ 30,360
NASD fee.................................................... *
Nasdaq National Market listing fee.......................... $ 5,000
Printing expenses........................................... *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer agent and registrar fees........................... *
Miscellaneous............................................... *
--------
Total................................................. *
========
</TABLE>
- ------------------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act").
As permitted by the Delaware General Corporation Law, our Certificate of
Incorporation includes a provision that eliminates the personal liability of our
directors for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to us
or our stockholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) under
section 174 of the Delaware General Corporation Law (regarding unlawful
dividends and stock purchases) or (iv) for any transaction from which the
director derived an improper personal benefit.
As permitted by the Delaware General Corporation Law, our Bylaws provide
that (i) we are required to indemnify our directors and officers to the fullest
extend permitted by the Delaware General Corporation Law, subject to certain
very limited exceptions, (ii) we may indemnify our other employees and agents as
set forth in the Delaware General Corporation Law, (iii) we are required to
advance expenses, as incurred, to our directors and executive officers in
connection with a legal proceeding to the fullest extend permitted by the
Delaware General Corporation Law, subject to certain very limited exceptions and
(iv) the rights conferred in the Bylaws are not exclusive.
Reference is also made to Section of the Underwriting Agreement, which
provides for the indemnification of officers, directors and controlling persons
of us against certain liabilities. The indemnification provision in the
Registrant's Certificate of Incorporation and Bylaws entered into
II-1
<PAGE>
between us and each of our directors and executive officers may be sufficiently
broad to permit indemnification of our directors and executive officers for
liabilities arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the period from April 1998 (inception) through April 12, 2000, we
sold and issued the following securities:
1. On or about April 10, 1998, one accredited investor agreed to purchase
50% of the membership interests of PaperExchange.com, LLC. That investor
contributed $2,000,000 in aggregate capital contributions for 15,000,000
membership interests, $1,500,000 of which was paid in April 1998 and
$500,000 which was paid in January 1999. Also in April of 1998, four
other accredited investors contributed an aggregate of $125,000 in cash
and other assets in exchange for the remaining 50% of the membership
interests (15,000,000 membership interests). These issuances and sales
were made in reliance upon Section 4(2) of the Securities Act, as a
transaction not involving any public offering.
2. On April 5, 1999, PaperExchange issued 6,000,000 membership interests to
one accredited investor for aggregate consideration of $1,000,000. This
issuance and sale was made in reliance upon Section 4(2) of the
Securities Act, as a transaction not involving any public offering.
3. On August 13, 1999, PaperExchange issued 966,714 membership interests to
nine accredited investors for aggregate consideration of approximately
$1,300,000. These issuances and sales were made in reliance upon
Section 4(2) of the Securities Act, as a transaction not involving any
public offering.
4. On October 15, 1999, PaperExchange issued warrants to nine existing
investors of PaperExchange to purchase an aggregate of 5,000,001
membership interests at an exercise price of $2.00 per share. These
issuances and sales were made in reliance upon Section 4(2) of the
Securities Act, as a transaction not involving any public offering.
5. On December 20, 1999, PaperExchange issued 441,754 membership interests
in exchange for a promissory note issued by the chief executive officer
to us in the amount of $1,052,632. This issuance and sale was made in
reliance upon Rule 506 of Regulation D under the Securities Act and
Section 4(2) of the Securities Act, as sales to accredited investors by
an issuer not involving a public offering.
6. On December 20, 1999, PaperExchange granted options to purchase
1,767,020 shares of common stock to its chief executive officer for an
aggregate exercise price of $4,210,526. This grant was made in reliance
upon Section 4(2) of the Securities Act, as a transaction not involving
any public offering.
7. On December 30, 1999, an executive officer of Paper Exchange exercised
options to purchase 142,748 shares of common stock of PaperExchange in
exchange for a promissory note issued by the executive officer to us in
the amount of $31,540. This issuance was made in reliance upon Section
4(2) of the Securities Act, as a transaction not involving any public
offering.
8. On December 30, 1999, PaperExchange issued and sold 1,572,515 membership
interests to five accredited investors for aggregate consideration of
$10,000,000. These issuances and sales were made in reliance upon
Rule 506 of Regulation D under the Securities Act and Section 4(2) of the
Securities Act, as sales to accredited investors by an issuer not
involving a public offering.
II-2
<PAGE>
9. On February 16, 2000, PaperExchange issued 1,479,894 shares of common
stock to one investor for an aggregate consideration of $10,000,000. This
issuance and sale was made in reliance upon Rule 506 of Regulation D
under the Securities Act and Section 4(2) of the Securities Act, as sales
to accredited investors by an issuer not involving a public offering.
10. On February 29, 2000, PaperExchange agreed to issue 503,164 shares of
common stock to one investor for aggregate consideration of $3,400,000.
This issuance and sale was made in reliance upon Rule 506 of
Regulation D under the Securities Act and Section 4(2) of the Securities
Act, as sales to accredited investors by an issuer not involving a public
offering.
11. On February 29, 2000, PaperExchange granted options to one accredited
investor to purchase 450,000 shares of common stock for an aggregate
exercise price of $4,383,000. This grant was made in reliance upon
Section 4(2) of the Securities Act, as a transaction not involving any
public offering.
12. On March 8, 2000, PaperExchange issued 519,149 shares of common stock at
a purchase price equal to $9.74 per share and a warrant to purchase up to
519,149 shares of common stock at an exercise price of $11.56 per share
to one accredited investor. This issuance and sale was made in reliance
upon Rule 506 of Regulation D under the Securities Act and Section 4(2)
of the Securities Act, as sales to accredited investors by an issuer not
involving a public offering.
13. On March 7, 2000, PaperExchange issued 527,639 shares of common stock to
one accredited investor at a purchase price equal to $9.74 per share.
This issuance and sale was made in reliance upon Rule 506 of
Regulation D under the Securities Act and Section 4(2) of the Securities
Act, as sales to accredited investors by an issuer not involving a public
offering.
14. On March 20, 2000, PaperExchange issued 86,525 shares of common stock to
one qualified institutional buyer as such term is defined by Rule 144A
under the Securities Act, at a purchase price of approximately $11.56 per
share. This sale was made in reliance upon Rule 506 of Regulation D under
the Securities Act and Section 4(2) of the Securities Act, as sales to
accredited investors by an issuer not involving a public offering.
15. On April 5, 2000, PaperExchange issued 268,648 shares of common stock to
one accredited investor at a purchase price equal to $11.56 per share and
also granted a warrant to purchase up to 268,648 shares of common stock
at an exercise price of $11.56 per share. This sale was made in reliance
upon Rule 506 of Regulation D under the Securities Act and Section 4(2)
of the Securities Act, as sales to accredited investors by an issuer not
involving a public offering.
16. Since inception, PaperExchange has granted options to purchase an
aggregate of 3,595,000 shares of common stock to a number of its
employees, officers, and consultants. These grants were made in reliance
upon Rule 701 promulgated under Section 3(b) of the Securities Act, as
transactions by an issuer not involving a public offering or transactions
pursuant to compensatory benefits plans and contracts relating to
compensation as provided under such Rule 701.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed as part of this registration statement:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 (a)** Registrant's Certificate of Incorporation (to be replaced by
Exhibit 3.1(b) upon the closing of this offering).
3.1 (b)* Form of Registrant's Amended and Restated Certificate of
Incorporation (to be effective upon the closing of this
offering).
3.2 (a)** Registrant's Bylaws (to be replaced by Exhibit 3.2(b) upon
the closing of this offering).
3.2 (b)* Form of Registrant's Amended and Restated Bylaws (to be
effective upon the closing of this offering).
4.1* Form of specimen stock certificate
4.2** Form of Warrant to Purchase Common Stock
5.1* Opinion of Bingham Dana LLP as to the legality of the
securities being registered.
10.1+** Listing and Strategic Alliance Agreement by and between the
Registrant and International Paper Company, each dated as of
February 16, 2000.
10.2+** Alliance Agreement, by and between the Registrant and
Impresse Corporation dated as of February 8, 2000.
10.3+** Alliance Agreement, by and between the Registrant and CH
Robinson Worldwide, Inc., dated as of January, 2000
10.4+** Co-branding Agreement, by and between the Company and
VerticalNet, Inc. dated as of September 30, 1999
10.5+** Supply Agreement, by and between the Registrant and Asia
Pulp & Paper Ltd. dated as of February 29, 2000
10.6+** Participation Warrant, dated as of March 7, 2000, to
purchase common stock between the Registrant, as issuer, and
Staples, Inc.
10.7** Purchase Agreement, by and between the Registrant, Rod
Parsley, Madison Dearborn Capital Partners III, L.P. and
Special Advisors Fund I, LLC, dated as of December 30, 1999
10.8** Purchase Agreement, by and between the Registrant and DSCKW
Irrevocable Trust dated as of December 30, 1999
10.9** Interest Purchase Agreement by and between the Registrant
and Kent Dolby dated as of December 20, 1999
10.10** Equity Option Agreement, by and between the Registrant and
Kent A. Dolby, dated as of December 20, 1999
10.11** Promissory Note issued by Kent Dolby to the Registrant dated
as of December 20, 1999
10.12** Employment Agreement dated as of December 20, 1999 by and
between the Company and Kent Dolby
10.13** Employment Agreement dated as of April 9, 1998, by and
between the Registrant and Hilton Plein
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- -----------
<C> <S>
10.14(a)** 1998 Equity Option Plan, as amended
10.14(b)** Form of Stock Option Agreement for 1998 Equity Option Plan,
as amended
10.15(a)** 2000 Equity Incentive Plan
10.15(b)** Form of Stock Option Agreement for 2000 Equity Incentive
Plan
10.15(c)* Amended and Restated 2000 Equity Incentive Plan (replacement
of 2000 Equity Incentive Plan)
10.16* 2000 Directors Option Plan
10.17* 2000 Employee Stock Purchase Plan
10.18(a)** Sublease by and between the Image Bank and the Registrant
dated as of July 13, 1999, for the premises at 545 Boylston
Street, Boston, Massachusetts (2nd Floor)
10.18(b)** Sublease by and between ICO, LLC and Keith Rodney Company
dated June 30, 1998 for the premises at 545 Boylston Street,
Boston, Massachusetts (8th Floor)
10.18(c)** Assignment of Sublease, dated March 19, 1999, by and between
Keith Rodney Company and the Registrant
10.19** Tenancy Agreement, by and between Mr. and Mrs. J. Minshaw
and the Registrant, dated as of February 1, 2000 for the
premises at 1, 54 Montague Square, London
10.20** Park Square Building Commercial Lease, dated as of March 3,
2000, by and between OMV Associates Limited Partnership
10.21** Stockholders' Agreement dated as of February 28, 2000, among
PaperExchange.com Inc. and its stockholders named therein
10.22** Form of Promissory Note dated as of October 15, 1999
10.23** Amendment to Employment Agreement by and between the
Registrant and Hilton Plein dated as of April 9, 1998
10.24+** Listing Agreement, by and between the Registrant and
Staples, Inc., dated as of March 7, 2000
10.25+ Listing and Strategic Alliance Agreement dated as of
April 5, 2000, by and between PaperExchange and Bowater
Incorporated
10.26+ Participation Warrant, dated as of April 5, 2000 to purchase
common stock between the Registrant, as issuer, and Bowater
Incorporated
10.27+ Integration and Marketing Agreement dated as of March 31,
2000 by and between PaperExchange and Noosh, Inc.
21** Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
23.2* Consent of Bingham Dana LLP
24.1** Power of Attorney (See page II-7)
27.1** Financial Data Schedule for the year ended December 31, 1999
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
+ Seeking confidential treatment.
II-5
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedule is included as part of this registration statement:
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS.
Other financial statement schedules have been omitted because they are
inapplicable or are not required under applicable provisions of regulation S-X,
or because the information that would otherwise be included in such schedules is
contained in the registrant's financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rules 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 2 TO ITS REGISTRATION STATEMENT TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF BOSTON, COMMONWEALTH OF MASSACHUSETTS, ON APRIL 21, 2000.
<TABLE>
<S> <C> <C>
PAPEREXCHANGE.COM, INC.
By: /s/ DUANE DESISTO
-----------------------------------------
Duane DeSisto
CHIEF FINANCIAL OFFICER
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
President, Chief Executive
/s/ KENT DOLBY* Officer and Director
------------------------------------------- (Principal Executive April 21, 2000
Kent Dolby Officer)
/s/ DUANE DESISTO Chief Financial Officer,
------------------------------------------- (Principal Financial and April 21, 2000
Duane DeSisto Accounting Officer)
/s/ ROBERT K. KRAFT* Chairman of the Board and
------------------------------------------- Director April 21, 2000
Robert K. Kraft
/s/ WALTER BUCKLEY* Director
------------------------------------------- April 21, 2000
Walter Buckley
/s/ WILLIAM HASKELL* Director
------------------------------------------- April 21, 2000
William Haskell
/s/ JONATHAN A. KRAFT* Director
------------------------------------------- April 21, 2000
Jonathan A. Kraft
/s/ NATHAN LEIGHT* Director
------------------------------------------- April 21, 2000
Nathan Leight
/s/ ROGER WARREN STONE* Director
------------------------------------------- April 21, 2000
Roger Warren Stone
/s/ DAVID WETHERELL* Director
------------------------------------------- April 21, 2000
David Wetherell
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ DUANE DESISTO
--------------------------------------
Duane DeSisto
Attorney-in-fact
</TABLE>
II-7
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
PAPEREXCHANGE.COM, INC.
DECEMBER 31, 1999
<TABLE>
<CAPTION>
ADDITIONS
-----------------------------------
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING OF CHARGED COSTS ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION PERIOD AND EXPENSES DESCRIBE DESCRIBE PERIOD
- ----------- ------------- --------------- ----------------- ------------------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1999:
Deducted from assets accounts......... $ 0 $ 31,218 -- $ 0 $ 31,218
Allowance for doubtful accounts....... 4,167 4,167
------------ ------------- ---------------- ------------------- ----------
Total............................... $ 0 $ 35,385 $ 0 $ 35,385
============ ============= ================ =================== ==========
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 (a)** Registrant's Certificate of Incorporation (to be replaced by
Exhibit 3.1(b) upon the closing of this offering).
3.1 (b)* Form of Registrant's Amended and Restated Certificate of
Incorporation (to be effective upon the closing of this
offering).
3.2 (a)** Registrant's Bylaws (to be replaced by Exhibit 3.2(b) upon
the closing of this offering).
3.2 (b)* Form of Registrant's Amended and Restated Bylaws (to be
effective upon the closing of this offering).
4.1* Form of specimen stock certificate
4.2** Form of Warrant to Purchase Common Stock
5.1* Opinion of Bingham Dana LLP as to the legality of the
securities being registered.
10.1+** Listing and Strategic Alliance Agreement by and between the
Registrant and International Paper Company, each dated as of
February 16, 2000.
10.2+** Alliance Agreement, by and between the Registrant and
Impresse Corporation dated as of February 8, 2000.
10.3+** Alliance Agreement, by and between the Registrant and CH
Robinson Worldwide, Inc., dated as of January, 2000
10.4+** Co-branding Agreement, by and between the Company and
VerticalNet, Inc. dated as of September 30, 1999
10.5+** Supply Agreement, by and between the Registrant and Asia
Pulp & Paper Ltd. dated as of February 29, 2000
10.6+** Participation Warrant, dated as of March 7, 2000, to
purchase common stock between the Registrant, as issuer, and
Staples, Inc.
10.7** Purchase Agreement, by and between the Registrant, Rod
Parsley, Madison Dearborn Capital Partners III, L.P. and
Special Advisors Fund I, LLC, dated as of December 30, 1999
10.8** Purchase Agreement, by and between the Registrant and DSCKW
Irrevocable Trust dated as of December 30, 1999
10.9** Interest Purchase Agreement by and between the Registrant
and Kent Dolby dated as of December 20, 1999
10.10** Equity Option Agreement, by and between the Registrant and
Kent A. Dolby, dated as of December 20, 1999
10.11** Promissory Note issued by Kent Dolby to the Registrant dated
as of December 20, 1999
10.12** Employment Agreement dated as of December 20, 1999 by and
between the Company and Kent Dolby
10.13** Employment Agreement dated as of April 9, 1998, by and
between the Registrant and Hilton Plein
10.14(a)** 1998 Equity Option Plan, as amended
10.14(b)** Form of Stock Option Agreement for 1998 Equity Option Plan,
as amended
10.15(a)** 2000 Equity Incentive Plan
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- -----------
<C> <S>
10.15(b)** Form of Stock Option Agreement for 2000 Equity Incentive
Plan
10.15(c)* Amended and Restated 2000 Equity Incentive Plan (replacement
of 2000 Equity Incentive Plan)
10.16* 2000 Directors Option Plan
10.17* 2000 Employee Stock Purchase Plan
10.18(a)** Sublease by and between the Image Bank and the Registrant
dated as of July 13, 1999, for the premises at 545 Boylston
Street, Boston, Massachusetts (2nd Floor)
10.18(b)** Sublease by and between ICO, LLC and Keith Rodney Company
dated June 30, 1998 for the premises at 545 Boylston Street,
Boston, Massachusetts (8th Floor)
10.18(c)** Assignment of Sublease, dated March 19, 1999, by and between
Keith Rodney Company and the Registrant
10.19** Tenancy Agreement, by and between Mr. and Mrs. J. Minshaw
and the Registrant, dated as of February 1, 2000 for the
premises at 1, 54 Montague Square, London
10.20** Park Square Building Commercial Lease, dated as of March 3,
2000, by and between OMV Associates Limited Partnership
10.21** Stockholders' Agreement dated as of February 28, 2000, among
PaperExchange.com Inc. and its stockholders named therein
10.22** Form of Promissory Note dated as of October 15, 1999
10.23** Amendment to Employment Agreement by and between the
Registrant and Hilton Plein dated as of April 9, 1998
10.24+** Listing Agreement, by and between the Registrant and
Staples, Inc., dated as of March 7, 2000
10.25+ Listing and Strategic Alliance Agreement dated as of
April 5, 2000, by and between PaperExchange and Bowater
Incorporated
10.26+ Participation Warrant, dated as of April 5, 2000 to purchase
common stock between the Registrant, as issuer, and Bowater
Incorporated
10.27+ Integration and Marketing Agreement dated as of March 31,
2000 by and between PaperExchange and Noosh, Inc.
21** Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
23.2* Consent of Bingham Dana LLP
24.1** Power of Attorney (See page II-7)
27.1** Financial Data Schedule for the year ended December 31, 1999
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
+ Seeking confidential treatment.
<PAGE>
Exhibit 10.25
LISTING AND STRATEGIC ALLIANCE AGREEMENT
THIS LISTING AND STRATEGIC ALLIANCE AGREEMENT is dated as of the 5th day
of April, 2000 (this "Agreement"), by and between (a) Bowater Incorporated, a
Delaware corporation ("Bowater"), and (b) PaperExchange.com, Inc., a Delaware
corporation ("PaperExchange.com").
WHEREAS, Bowater is engaged in the manufacture, sale and distribution of
certain paper-related products including newsprint;
WHEREAS, PaperExchange.com provides a real-time on-line trading exchange
(the "Exchange") for paper and other products to registered users of
PaperExchange.com services (the "Members");
WHEREAS, Bowater is a Member of PaperExchange.com pursuant to the terms of
the Membership Agreement between the parties except as otherwise provided herein
(the "Membership Agreement"); and
WHEREAS, Bowater and PaperExchange.com desire to enter into an agreement
with respect to the purchase and sale of certain products by Bowater and a
strategic alliance to facilitate the adoption of electronic commerce in the
pulp, paper and packaging industry.
NOW THEREFORE, the parties, in consideration of the undertakings and
commitments set forth herein, agree as follows:
1. Listings; Exclusivity. Bowater agrees to use its commercially
reasonable efforts to list for sale on the Exchange (either open market or
directed tons) first quality newsprint ("Newsprint") in the minimum amount
during each quarter as set forth on Schedule 1 attached hereto or as mutually
agreed to by Bowater and PaperExchange.com in writing; provided that, for a
period of seven (7) consecutive calendar days during each calendar month during
the Term (as hereinafter defined), Bowater may, in its sole discretion, withdraw
from its listing all or any portion of the listed Newsprint. The listing shall
be made at prices in Bowater's sole discretion (provided that the listed prices
shall not be greater than reasonable regional market prices) and the other terms
and conditions of such listing shall be commercially reasonable. Provided that
Bowater complies with the immediately preceding two sentences, it shall not be a
default by Bowater under this Agreement if Bowater does not sell in any period
the minimum amount set forth in Schedule 1 or any other amount. Bowater further
agrees to list on the Exchange requests for purchase for a portion of its
requirements for wastepaper and to use its reasonable commercial efforts to
purchase a portion of its wastepaper requirements on a non-exclusive basis
through the Exchange. Bowater further agrees that through June 30, 2002, the
Exchange will be Bowater's exclusive third-party provider of e-commerce services
for the sale of Newsprint. For the avoidance of doubt, Bowater and
PaperExchange.com agree that neither (a) Bowater's use of its electronic order
fulfillment system and related communications with customers through Bowater's
own electronic media (including, without limitation, Bowater's web site and
email), nor (b) Bowater's use of the Internet or other e-commerce services for
the sale of products other than Newsprint shall, in either case, be prohibited
by the terms of this Agreement. Additionally,
* Confidential Treatment Requested: material has been omitted and filed
separately with the Commission.
<PAGE>
it is contemplated that Bowater may from time to time list and sell pulp and
other paper-related products through PaperExchange.com's web site exchange.
2. Further Use of the Exchange. Bowater agrees to work with
PaperExchange.com, using commercially reasonable efforts, to explore its
expanded use of the Exchange, including without limitation, expanding its
purchase and sale of paper-related products on the Exchange. Nothing in this
Agreement, however, shall require Bowater to list, sell or purchase on the
Exchange or require the Exchange to accept for listing additional products
unless the parties agree to do so.
3. Integration Project. On a mutually agreeable timetable,
PaperExchange.com and Bowater will engage in the development of a plan to
implement an integration project. As part of such project, PaperExchange.com and
Bowater shall endeavor to link Bowater's internal information technology system
for a specific facility or production unit to PaperExchange.com's web site in
order to facilitate internet-based transactions through PaperExchange.com's web
site. Such project may include inventory, production scheduling, billing, and
receivable system integration. The implementation of this integration project
will be subject to Bowater and PaperExchange.com supplementing the terms of this
Section 3 with additional documentation to the extent reasonably required to
further define the scope and substance of such integration project and to
provide each party with reasonable protections as to confidentiality of
information, security and similar matters.
4. Term and Termination.
4.1 Term. The term of this Agreement shall be for a period
commencing on the date of this Agreement through (and including) June 30, 2002
(together with any successor one-year renewals, the "Term") and shall
automatically renew for one-year terms thereafter unless, at least thirty (30)
days prior to the expiration of the then current Term, either party terminates
this Agreement as of the end of that current Term upon written notice to the
other party. The parties agree to use good faith efforts to negotiate the terms
of a renewal of this Agreement if, in the good faith judgment of each party,
this Agreement is meeting their business needs.
4.2 Additional Termination Right of Bowater. Bowater shall have the
additional right to terminate this Agreement at any time during the Term upon
thirty (30) days prior written notice in the event that in its good faith
judgment the services provided by PaperExchange.com's web site are not meeting
Bowater's business needs.
5. General Provisions.
5.1 PaperExchange.com hereby agrees that it will use commercially
reasonable efforts to add sufficient sales force and allocate sufficient
budgetary resources based upon the parties' mutually agreed upon expectations,
prior to the commencement of the First Measuring Period, to promote the
newsprint component of its web site in a manner similar to that of the
containerboard and printing and writing components of its web site. The parties
agree to work together to form mutually agreed upon expectations of the sales
force and budgetary resources to be allocated pursuant to this Section.
2
<PAGE>
5.2 Bowater and PaperExchange.com are independent contractors.
Nothing in this Agreement is intended to or will constitute either party as an
agent, legal representative, joint venturer or partner of the other for any
purpose.
5.3 A waiver of a breach of any term of this Agreement will not be
construed as a waiver of any succeeding breach of that term or as a waiver of
the term itself. A party's performance after the other's breach will not be
construed as a waiver of that breach.
5.4 All notices required or permitted under this Agreement and all
requests for approvals, consents, and waivers must be in writing and must be
delivered to the parties at their respective addresses by a method providing for
proof of delivery. Any notice or request will be deemed to have been given on
the date of receipt.
If to PaperExchange.com: If to Bowater:
PaperExchange.com, Inc. Bowater Incorporated
545 Boylston Street, 8th Floor 55 East Camperdown Way
Boston, MA 02116 P.O. Box 1028
Attention: President and CEO Greenville, SC 29601
Telecopier No.: (617) 536-1573 Attention: James H. Dorton
Vice President, Corporate
Development and Strategy
Telecopier No.: (864) 282-9594
with copies to: with copies to:
Bingham Dana LLP Bowater Incorporated
150 Federal Street 55 East Camperdown Way
Boston, MA 02110 P.O. Box 1028
Attention: Jonathan K. Bernstein, Esq. Greenville, SC 29601
Telecopier No.: (617) 951-8736 Attention: Anthony H. Barash
Senior Vice President, Corporate
Affairs and General Counsel
Telecopier No.: (864) 282-9468
5.5 Neither party may assign its rights or obligations under this
Agreement without the prior written consent of the other. The Agreement shall be
binding upon and inure to the benefit of the parties and their successors and
permitted assigns.
5.6 Except as this Agreement otherwise provides, no amendment to
this Agreement will be binding unless agreed to in writing and executed by the
parties, and no approval, consent, or waiver will be enforceable unless the
granting party signs it.
5.7 Each term of this Agreement is severable. If a court, agency, or
arbitrator having jurisdiction determines that any term is invalid or
unenforceable under applicable law, that determination will not affect the other
terms of this Agreement, as the case may be, which other terms will continue to
be enforced as if the invalid or unenforceable terms were omitted.
3
<PAGE>
5.8 Any advertising, publicity, release, or other disclosure of
information concerning this Agreement or the relationship between the parties
must be approved in writing by both parties, except to the extent disclosure is
legally required, including, without limitation, in connection with securities
laws. In addition, each of PaperExchange.com and Bowater agrees not to disclose
to any person or entity any Confidential Information (as defined below) of the
other party except as required by law. Where disclosure is required by law
(except in connection with securities laws), each party hereby agrees to (a)
give the other notice of the legal requirement promptly following that party
becoming aware of the requirement and in any event prior to disclosure, (b)
provide all reasonable assistance in restricting the disclosure to the maximum
extent lawfully possible, whether by protective order or otherwise, and (c)
disclose only the Confidential Information that is required to be disclosed, and
solely to those persons or entities to whom the party is required to disclose
the Confidential Information. Each party agrees to notify the other in writing
of any disclosure, misuse or appropriation of Confidential Information of the
other that may come to its attention. For purposes of this Agreement,
"Confidential Information" means, without limitation, electronic data
processing, information, hardware, software and systems technology,
manufacturing and research concepts, techniques, processes, designs, cost data,
customer information, sales and marketing information and other technical,
sales, customer and proprietary information of either party except to the extent
that it is or becomes known publicly through no fault of the other party, is
learned by the other party on a non-confidential basis from a third party
entitled to disclose it, or was already known by the other party before receipt
of the information from the disclosing party. In order to maintain information
of the other party as confidential, each party agrees to take all security
precautions reasonably necessary to protect the information from disclosure and
to keep it confidential, including without limitation, providing protection from
theft, preventing unauthorized duplication or discovery, and restricting access
to the information.
5.9 This Agreement, in conjunction with the Membership Agreement as
modified hereby, states the complete agreement between the parties concerning
the subject matter hereof, and supersedes earlier oral and written
communications between the parties concerning the subject matter hereof. In the
event of any inconsistency between the Membership Agreement and this Agreement,
the terms of this Agreement shall govern. The parties also agree that section 23
of the Membership Agreement shall not apply to any dispute between the parties
arising out of this Agreement or the Membership Agreement. In addition,
notwithstanding section 9 or 10 of the Membership Agreement, no fee will be due
from Bowater as a result of any sale by it on the Exchange until thirty (30)
days after the date on which the sales transaction has been completed and
Bowater has received payment.
5.10 This Agreement shall constitute a contract under seal. The
validity and construction of this Agreement shall be governed by and construed
in accordance with the internal laws (and not the choice-of-law rules) of The
Commonwealth of Massachusetts.
5.11 This Agreement may be executed in multiple counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
[signature page to follow]
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the day and year first above written.
PaperExchange.com, Inc.
By: /s/ Duane DeSisto
-----------------------------------
Name: Duane DeSisto
---------------------------------
Title: CFO
--------------------------------
Bowater Incorporated
By: /s/ Arnold Nemirou
-----------------------------------
Name: Arnold Nemirou
---------------------------------
Title: Chairman and CEO
--------------------------------
5
<PAGE>
Schedule 1
MEASURING PERIODS AND TONNAGE
- --------------------------------------------------------------------------------
Measuring Period Minimum Metric
Tons of
Newsprint
- --------------------------------------------------------------------------------
July 1, 2000 through September 30, 2000 *****
- --------------------------------------------------------------------------------
October 1, 2000 through December 31, 2000 *****
- --------------------------------------------------------------------------------
January 1, 2001 through March 31, 2001 *****
- --------------------------------------------------------------------------------
April 1, 2001 through June 30, 2001 *****
- --------------------------------------------------------------------------------
July 1, 2001 through September 30, 2001 *****
- --------------------------------------------------------------------------------
October 1, 2001 through December 31, 2001 *****
- --------------------------------------------------------------------------------
January 1, 2002 through March 31, 2002 *****
- --------------------------------------------------------------------------------
April 1, 2002 through June 30, 2002 *****
- --------------------------------------------------------------------------------
TOTAL: *****
- --------------------------------------------------------------------------------
* Confidential Treatment Requested: material has been omitted and filed
separately with the Commission.
6
<PAGE>
EXHIBIT 10.26
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "1933 ACT"), AND NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF THIS WARRANT CAN BE SOLD NOR SUCH SHARES OF COMMON
STOCK TRANSFERRED UNLESS THE REGISTRATION PROVISIONS OF THE SAID ACT HAVE BEEN
COMPLIED WITH OR UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO THE COMPANY,
BOTH AS TO THE IDENTITY OF THE COUNSEL AND AS TO THE FORM AND SUBSTANCE OF THE
OPINION, COMPLIANCE WITH SUCH PROVISIONS IS NOT REQUIRED.
Date: April 5, 2000 Warrant to Purchase
Shares of Common Stock
PAPEREXCHANGE.COM, INC.
PARTICIPATION WARRANT
No. 2
THIS CERTIFIES that Bowater Incorporated, a Delaware corporation (the
"HOLDER"), is entitled, at any time during the Warrant Exercise Period (as
hereinafter defined), to subscribe for and purchase from PAPEREXCHANGE.COM,
INC., a Delaware corporation (including any entity which shall succeed to or
assume the obligations of PaperExchange.com, Inc. hereunder, the "COMPANY"),
with a principal office at 545 Boylston Street, 8th Floor, Boston, Massachusetts
02116, up to the Applicable Number, as adjusted from time to time, of the Shares
(as defined in Section 1 hereof) at an initial purchase price per Share of
$11.557373 (such price per Share as adjusted from time to time as provided
herein is referred to herein as the "EXERCISE PRICE"). The number of such Shares
and the Exercise Price are subject to adjustment as provided herein. This
Warrant is fully vested on the Issue Date.
This Warrant is subject to the following terms and conditions:
SECTION 1. DEFINITIONS. As used herein the following terms, unless the
context otherwise requires, have the following respective meanings:
APPLICABLE NUMBER shall mean 268,648 Shares (as adjusted pursuant to
the terms hereof).
COMPANY shall have the meaning set forth in the first paragraph of this
Warrant.
COMMON STOCK shall mean (i) the Company's Common Stock, $0.001 par
value per share, (ii) any other capital stock of any class or classes (however
designated) of the Company, the holders of which shall have the right, without
limitation as to amount, either to all or to a share of the balance of current
dividends and liquidating dividends after the payment of dividends and
distributions on any shares entitled to preference, and (iii) any other
securities into which or for which any of the securities described in clauses
(i) or (ii) above have been
* Confidential treatment requested: material has been omitted and filed
separately with the Commission.
<PAGE>
-2-
converted or exchanged pursuant to a plan of recapitalization, reorganization,
merger, sale of assets or otherwise.
EARLY EXPIRATION DATE shall have the meaning set forth in Section 2.2
hereof.
EXERCISE PRICE shall have the meaning set forth in the first paragraph
of this Warrant.
FAIR MARKET VALUE shall mean (i) prior to a Qualified Public Offering,
the Non-Public Company Fair Market Value, and (ii) after a Qualified Public
Offering, the average, for the period of ten (10) Business Days prior to the
date of exercise, of the closing prices (if listed on a stock exchange or quoted
on the NASDAQ National Market System or any successor thereto), or the average
of the closing bid and asked prices (if quoted on NASDAQ or otherwise publicly
traded) of the Shares.
HOLDER shall have the meaning set forth in the first paragraph of this
Warrant.
ISSUE DATE shall mean April 5, 2000.
MEASURING PERIOD shall have the meaning set forth in Section 2.2.
NEWSPRINT shall mean first quality newsprint.
NON-PUBLIC COMPANY FAIR MARKET VALUE shall mean, with respect to Shares
or Other Securities, the fair market value of such Shares or Other Securities as
determined in good faith by the Company's Board of Directors. The Non-Public
Company Fair Market Value shall in all cases be calculated by determining the
Non-Public Company Fair Market Value of the entire stock and other securities of
the Company or of the issuer of any Other Securities taken as a whole, without
premium for control or discounts for minority interests or restrictions on
transfer and taking into consideration any plans or proposals for any mergers,
sales of assets, acquisitions or substantial sales of stock or other securities
of the Company by the Company or its stockholders relating to the Company or by
any such other issuer.
OTHER SECURITIES refers to any stock (other than Common Stock) and
other securities of the Company or any other entity (corporate or otherwise) (i)
which the holder of this Warrant at any time shall be entitled to receive, or
shall have received, on the exercise of this Warrant, in lieu of or in addition
to Common Stock, or (ii) which at any time shall be issuable or shall have been
issued in exchange for or in replacement of Common Stock or Other Securities, in
each case pursuant to Section 6 or 7 hereof.
PERSON shall mean an individual, partnership, corporation, limited
liability company, business trust, joint stock company, trust, unincorporated
association, joint venture, governmental authority or other entity of whatever
nature.
QUALIFIED PUBLIC OFFERING shall mean an offering to the public of
securities of the Company in a firm commitment underwriting providing for gross
proceeds to the Company of at least One Hundred Million Dollars
($100,000,000.00).
SHARES shall mean shares of Common Stock.
<PAGE>
-3-
STOCKHOLDERS' AGREEMENT shall mean the Company's Stockholders'
Agreement, dated as of February 28, 2000, as in effect on the date hereof and
thereafter as amended or restated in compliance with its terms.
TOTAL EXERCISE PRICE shall mean the price obtained by multiplying (a)
$11.557373 and (b) the total number of Shares issuable, as of the Issue Date,
upon exercise of this Warrant.
WARRANT EXERCISE PERIOD shall mean the period beginning on April 5,
2015 and ending on the Warrant Expiration Date; provided that if the Holder
earns the right to exercise all or a portion of this Warrant early pursuant to
Section 2.2, with respect to that portion of the Warrant subject to such early
exercise right, the "Warrant Exercise Period" shall mean the period beginning on
the first day after the end of the Measuring Period for which such right was
earned and shall end on the Early Expiration Date.
WARRANT EXPIRATION DATE shall have the meaning set forth in Section 2.3
hereof.
WARRANT SHARES shall mean: (i) the Shares as they are provided for as
at the date of this Warrant and issuable upon the exercise or conversion of this
Warrant or any warrants delivered in substitution or exchange therefor; and (ii)
shall include any Other Securities which may become and be issuable upon such
exercise or conversion.
SECTION 2. EXERCISE OF WARRANT.
2.1. EXERCISE.
(a) This Warrant may be exercised by the Holder during the Warrant
Exercise Period at any time or from time to time, in whole or in part, by
surrender of this Warrant, with the form of subscription attached as EXHIBIT A
hereto duly executed by the Holder, to the Company at its principal office,
accompanied by payment in cash by certified or official bank check payable to
the order of the Company or by wire transfer to its account, in the amount
obtained by multiplying the number of Shares for which this Warrant is then
being exercised by the Exercise Price then in effect.
(b) In the event the Warrant is not exercised in full, the Company,
at its expense, will forthwith issue and deliver to or upon the order of the
Holder a new Warrant or Warrants of like tenor, in the name of the Holder or
as the Holder (upon payment by the Holder of any applicable transfer taxes)
may request, calling in the aggregate on the face or faces thereof for the
number of Shares equal (without giving effect to any adjustment therein) to
the number of such Shares called for on the face of this Warrant minus the
number of such Shares (without giving effect to any adjustment therein) for
which this Warrant shall have been exercised.
2.2. EARLY EXERCISE RIGHTS. For each measuring period set forth on
SCHEDULE 1 attached hereto (each a "MEASURING PERIOD"), the Holder will earn the
right to exercise this Warrant for a number of Shares equal to the product of
(i) 1.51778532 multiplied by (ii) the number of whole tons of Newsprint and
other paper products that the Holder purchases or sells through the Company's
web site exchange during such Measuring Period up to the maximum number of whole
tons of Newsprint and other paper products set forth on SCHEDULE 1 for such
Measuring Period, subject to adjustment as provided in the next sentence and in
Sections 6 and 7. Paper products other than Newsprint shall be counted toward
the maximum aggregate metric
<PAGE>
-4-
tons shown as SCHEDULE 1 as follows: as and to the extent that non-Newsprint
paper products are purchased or sold by Bowater through the Company's web site
exchange during a Measuring Period, Bowater shall get a credit in tons toward
the maximum aggregate tons shown on SCHEDULE 1 proportionately adjusted to
reflect the difference in the per-ton price for such other paper product and the
per-ton price for Newsprint. The right described in this Section 2.2 shall be
referred to as the "EARLY EXERCISE RIGHT." The Holder shall also have the
opportunity to earn the Early Exercise Right as follows: if the Holder has
listed the minimum tonnage of Newsprint and/or other paper products (adjusted as
described above) set forth on SCHEDULE 1 at any time during a Measuring Period,
for purposes of determining whether or not it has earned the Early Exercise
Right for that Measuring Period, the Holder can carry forward from, but only
from, the immediately preceding Measuring Period the amount by which actual
aggregate tons of Newsprint and other paper products (adjusted as described
above) sold or purchased, if any, during such immediately preceding Measuring
Period exceeded the maximum aggregate metric tons shown on SCHEDULE 1 for such
immediately preceding Measuring Period. For each consecutive eight (8) hours
that the Company's web site is not capable of listing and executing actual
transactions related to Newsprint in a manner not materially adversely different
from the capability of the Company's website as of the date hereof with respect
to the containerboard and printing and writing components of the Company's
website, the dates on SCHEDULE 1 occurring on or after such event shall be
extended by two (2) business days. The Warrant Shares as to which the Holder has
earned any Early Exercise Right may be purchased during the Warrant Exercise
Period for such rights; provided that any Early Exercise Right earned pursuant
to this Section 2.2 shall terminate on the fifth anniversary of the last day of
the Measuring Period for which such right was earned (the "EARLY EXPIRATION
DATE") unless exercised in full prior thereto. Once the Holder has earned the
Early Exercise Right described in this Section with respect to any Warrant
Shares, the anti-dilution provisions set forth in Sections 6 and 7 of this
Agreement shall operate as to those Warrant Shares, even if the event triggering
the operation of the anti-dilution provision has already occurred.
2.3. EXPIRATION. This Warrant shall terminate upon the earlier to occur
of (i) exercise in full, (ii) the Early Expiration Date with respect to, but
only with respect to, any Shares for which the right to early exercise was
earned pursuant to Section 2.2 and (iii) May 5, 2015 (the "WARRANT EXPIRATION
DATE").
SECTION 3. REGISTRATION RIGHTS. The Holder understands that (i) this
Warrant and the Shares issuable upon exercise of this Warrant have not been
registered under the 1933 Act by reason of their issuance in a transaction
exempt from the registration requirements of the 1933 Act, (ii) this Warrant and
the Shares issuable upon exercise of this Warrant must be held indefinitely
unless a subsequent disposition thereof is registered under the 1933 Act and
applicable state securities laws or is exempt from such registration (and, upon
request, evidence satisfactory to the Company is provided by the Holder of the
availability of such exemptions, including, upon request, the delivery to the
Company of opinions of counsel to the Holder, which opinions of counsel are
satisfactory to the Company), and (iii) this Warrant and the Shares issuable
upon exercise of this Warrant may bear a legend to such effect.
SECTION 4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise or conversion
of this Warrant or any portion thereof. With respect to any fraction of a share
called for upon the exercise or conversion of this Warrant or any portion
thereof, an amount equal to such fraction multiplied by the then current Fair
Market Value of a Warrant Share shall be paid to the Holder in cash by the
Company.
<PAGE>
-5-
SECTION 5. CHARGES, TAXES AND EXPENSES. Issuance of Warrant Shares upon
the exercise or conversion of this Warrant or any portion thereof shall be made
without charge to the Holder for any issue or transfer taxes or any other
incidental expenses in respect of the issuance of such Warrant Shares, all of
which taxes and expenses shall be paid by the Company, and such Warrant Shares
shall be issued in the name of the Holder; PROVIDED, HOWEVER, that any income
taxes or capital gains taxes or similar taxes assessed with respect to the
Warrant Shares following their issuance to the Holder shall be payable by the
Holder.
SECTION 6. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC.
6.1. CERTAIN ADJUSTMENTS. With respect to, but only with respect
to, any Shares for which the right to early exercise was earned pursuant to
Section 2.2, in case at any time or from time to time during the period
commencing on the Issue Date and ending on the Early Expiration Date for
such Shares (the "ADJUSTMENT PERIOD"), the Company shall (a) effect a
capital reorganization, reclassification or recapitalization, (b)
consolidate with or merge into any other entity, or (c) transfer all or
substantially all of its properties or assets to any other entity under any
plan or arrangement contemplating the dissolution of the Company, then in
each such case, the Holder, on the exercise hereof as provided in Section 2
hereof at any time after the consummation of such reorganization,
reclassification, recapitalization, consolidation or merger or the
effective date of such dissolution, as the case may be, shall receive, in
lieu of the Shares (or Other Securities) issuable on such exercise prior to
such consummation or effective date, the Shares and Other Securities and
property (including cash) to which the Holder would have been entitled upon
such consummation or in connection with such dissolution, as the case may
be, if the Holder had so exercised this Warrant immediately prior thereto,
all subject to further adjustment thereafter as provided in Section 7
hereof.
6.2. CONTINUATION OF TERMS. Upon any reorganization,
consolidation, merger or transfer (and any dissolution following any
transfer) during the Adjustment Period and referred to in this Section 6,
this Warrant shall continue in full force and effect and the terms hereof
shall be applicable to the Shares and Other Securities and property
receivable on the exercise of this Warrant after the consummation of such
reorganization, reclassification, recapitalization, consolidation or merger
or the effective date of dissolution following any such transfer, as the
case may be, and shall be binding upon the issuer of any such Shares or
Other Securities, including, in the case of any such transfer, the Person
acquiring all or substantially all of the properties or assets of the
Company, whether or not such Person shall have expressly assumed the terms
of this Warrant as provided in Section 8 hereof.
SECTION 7. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The
Exercise Price and number of Shares issuable upon exercise or conversion hereof
shall be subject to adjustment from time to time at any time after the Issue
Date as follows:
7.1. ADJUSTMENTS FOR DISTRIBUTIONS OF SHARES OR OTHER SECURITIES,
SPLITS AND COMBINATIONS. With respect to, but only with respect to, any
Shares for which the right to early exercise was earned pursuant to Section
2.2, in case at any time or from time to time during the Adjustment Period,
the Company shall (a) issue any Shares or Other Securities as a dividend or
distribution, or (b) issue any Shares or Other Securities in subdivision of
outstanding Shares or Other Securities by reclassification or otherwise,
then the then current number and type of Warrant Shares issuable
<PAGE>
-6-
upon exercise or conversion hereof shall be adjusted to a number and type
equal to the number and type of Warrant Shares issuable upon exercise
immediately prior to such event plus the number and type of Warrant Shares
the Holder would have received had the Holder exercised this Warrant
immediately prior to such event and received the number and type of Shares
and Other Securities issued in connection with such event and the Exercise
Price shall be adjusted to an amount equal to the Total Exercise Price (or,
if this Warrant has previously been exercised in part, the remaining unpaid
portion of the Total Exercise Price) divided by the total number of Warrant
Shares issuable upon exercise of this Warrant after giving effect to this
adjustment. In case at any time or from time to time the Company shall
combine outstanding Shares or Other Securities by reclassification or
otherwise, then the then current number and type of Warrant Shares issuable
upon exercise or conversion hereof shall be adjusted to a number and type
equal to the number and type of Warrant Shares the Holder would have
received had the Holder exercised this Warrant immediately prior to such
event and received the number and type of Shares issued in connection with
such event and the Exercise Price shall be adjusted to an amount equal to
the Total Exercise Price (or, if this Warrant has previously been exercised
in part, the remaining unpaid portion of the Total Exercise Price) divided
by the total number of Warrant Shares issuable upon exercise of this
Warrant after giving effect to this adjustment.
7.2. RECORD OF HOLDERS. In case the Company shall take a record of
the holders of its Shares for the purpose of entitling them (a) to receive
a dividend or other distribution payable in Shares or Other Securities, or
(b) to subscribe for or purchase Shares or Other Securities, then such
record date shall be deemed to be the date of the issue or sale of the
Shares or Other Securities deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or
the date of the issue of such right of subscription or purchase, as the
case may be.
SECTION 8. NO DILUTION. The Company will not, by amendment of its
Certificate of Incorporation, or through any reorganization, transfer of assets,
consolidation, merger or dissolution, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant. Without limiting the generality
of the foregoing, the Company (a) will take all such action as may be necessary
or appropriate in order that the Company may validly and legally issue fully
paid and non-assessable Shares on the exercise of the Warrant from time to time,
and (b) will not transfer all or substantially all of its properties and assets
to any other entity, or consolidate with or merge into any other entity or
permit any such entity to consolidate with or merge into the Company, unless
such other entity shall expressly assume in writing and will be bound by all the
terms of this Warrant.
SECTION 9. ACCOUNTANTS' CERTIFICATE AS TO ADJUSTMENTS. In the case of
each event that may require any adjustment or readjustment in the Warrant Shares
issuable on the exercise of this Warrant, the Company at its expense will
promptly prepare a certificate setting forth such adjustment or readjustment, or
stating the reasons why no adjustment or readjustment is being made, and
showing, in detail, the facts upon which any such adjustment or readjustment is
based, including a statement of (a) the number of shares of each class of the
Company's Common Stock then outstanding on a fully diluted basis, and (b) the
number of shares of each class of Warrant Shares to be received upon exercise of
this Warrant, in effect immediately prior to such adjustment or readjustment and
as adjusted and readjusted (if required by Section 6 or Section 7) on account
thereof. The Company will forthwith mail a copy of each such certificate to each
holder of a Warrant, and will, on the written request at any time of any holder
of a Warrant, furnish to such holder a like certificate setting forth the
calculations used to determine such adjustment or readjustment. At its option,
the holder of a Warrant may confirm the adjustment noted on the
<PAGE>
-7-
certificate by causing such adjustment to be computed by an independent
certified public accountant at the expense of the Company.
SECTION 10. NOTICES OF RECORD DATE. In the event of:
(a) any taking by the Company of a record of the holders of
any class of securities for the purpose of determining the holders
thereof who are entitled to receive any dividend or other distribution,
or any right to subscribe for, purchase or otherwise acquire any shares
of stock or other securities of any class or property, or to receive
any other right; or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the
Company or any transfer of all or substantially all the assets of the
Company to or any consolidation or merger of the Company with or into
any other Person; or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
then, in each such event occurring during the Adjustment Period, the Company
will mail or cause to be mailed to the Holder, no later than three days prior
to such event, a notice specifying (a) the date on which any such record is
to be taken for the purpose of such dividend, distribution or right, and
stating the amount and character of such dividend, distribution or right, and
(b) the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation
or winding-up is anticipated to take place, and the time, if any is to be
fixed, as of which the holders of record of Shares (or Other Securities)
shall be entitled to exchange their Shares (or Other Securities) for
securities or other property deliverable on such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up.
SECTION 11. RESERVATION OF SHARES ISSUABLE ON EXERCISE OF WARRANT.
Sufficient shares of authorized but unissued Common Stock of the Company have
been reserved by appropriate action in connection with the prospective exercise
of the Warrant. The Company represents and warrants that the issuance of the
Warrant or the Warrant Shares will not require any further action by the
stockholders of the Company, will not be subject to pre-emptive rights in any
present or future stockholders of the Company and will not conflict with any
provision of any agreement to which the Company is a party or by which it is
bound, and such Shares, when issued upon exercise of the Warrant in accordance
with their terms or upon such conversion, will be duly authorized, fully paid
and non-assessable and will be free and clear of any liens or encumbrances;
provided, however, that the Shares shall be subject to restrictions on transfer
under state and/or federal securities laws and pursuant to the terms of the
Stockholders' Agreement.
SECTION 12. NO RIGHTS OR RESPONSIBILITIES AS STOCKHOLDER. This Warrant
neither entitles the Holder to any rights, nor subjects the Holder to any
responsibilities, as a stockholder of the Company other than such rights as are
obtainable upon exercise of this Warrant.
SECTION 13. EXCHANGE. This Warrant is exchangeable, upon the surrender
hereof by the registered holder at the principal office of the Company, for new
warrants of like tenor and date representing in the aggregate the right to
purchase the number of Warrant Shares purchasable hereunder, each of such new
warrants to represent the right to purchase such
<PAGE>
-8-
number of Warrant Shares as shall be designated by said registered holder at the
time of such surrender.
SECTION 14. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT. Upon
receipt by the Company of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of this Warrant, and, in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it (which may
be the unsecured agreement of the Holder to indemnify the Company for any loss
on account thereof), and upon reimbursement to the Company of all reasonable
expenses incidental thereto, and upon surrender and cancellation of this
Warrant, if mutilated, the Company will make and deliver a new warrant of like
tenor and date, in lieu of this Warrant.
SECTION 15. REMEDIES. The Company stipulates that the remedies at law
of the Holder in the event of any default or threatened default by the Company
in the performance of or compliance with any of the terms of this Warrant are
not and will not be adequate, and that such terms may be specifically enforced
by a decree for the specific performance of any agreement contained herein or by
an injunction against a violation of any of the terms hereof or otherwise.
SECTION 16. TRANSFER OF WARRANT. Neither this Warrant nor the rights
hereunder are transferable by the Holder, provided that the Holder may transfer
this Warrant to a direct or indirect subsidiary owned 80% or more (with respect
to both voting and economic interests) by the Holder.
SECTION 17. AMENDMENTS AND WAIVERS. Any term of this Warrant may be
amended only with the written consent of the Company and the Holder. Any
amendment or waiver effected in accordance with this Section 17 shall be binding
upon the Company and the Holder.
SECTION 18. COMMUNICATIONS AND NOTICES. All communications and notices
hereunder must be in writing, either delivered in hand or sent by first-class
mail, postage prepaid, or sent by telecopier, and, if to the Company, shall be
addressed to it at the address set forth on the first page hereof, or at such
other address as the Company may hereafter designate in writing by notice to the
registered Holder, and, if to such registered Holder, addressed to such Holder
at the address of such Holder as shown on the books of the Company.
SECTION 19. SUNDAYS, HOLIDAYS, ETC. If the last or appointed day for
the taking of any action required or the expiration of any right granted herein
shall be a Sunday or a Saturday or shall be a legal holiday or a day on which
banking institutions in Boston, Massachusetts are authorized or required by law
to remain closed, then such action may be taken or right may be exercised on the
next succeeding day which is not a Sunday, a Saturday or a legal holiday and not
a day on which banking institutions in Boston, Massachusetts are authorized or
required by law to remain closed.
SECTION 20. MISCELLANEOUS.
(a) THIS WARRANT SHALL BE BINDING UPON THE COMPANY'S SUCCESSORS AND
ASSIGNS. THIS WARRANT SHALL CONSTITUTE A CONTRACT UNDER SEAL AND, FOR ALL
PURPOSES, SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS.
<PAGE>
-9-
(b) For all purposes of this Warrant, the Holder shall be bound by all
of the terms and conditions contained in, and entitled to all of the benefits
of, this Warrant.
(c) If the Company shall enter into any agreement with another
strategic paper industry investor providing that investor with rights commonly
referred to as "piggy-back registration rights", then the Company agrees to
grant the Holder those same rights.
(d) Any advertising, publicity, release or other disclosure of
information concerning this Agreement or the relationship between the parties
must be approved in writing by both parties, except to the extent disclosure is
legally required including without limitation in connection with securities
laws.
(e) The parties also agree that section 23 of the Membership Agreement
shall not apply to any dispute between the parties arising out of this
Agreement.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
<PAGE>
-10-
IN WITNESS WHEREOF, PAPEREXCHANGE.COM, INC. has caused this
PARTICIPATION WARRANT to be signed in its corporate name and its corporate seal
to be impressed hereon by its duly authorized officers.
THE COMPANY:
Dated as of: PAPEREXCHANGE.COM, INC.
April __, 2000
By: /s/ Duane DeSisto
----------------------------------
Name: Duane DeSisto
----------------------------
Title: Treasurer
---------------------------
Attest:
illegible
- -------------------------
<PAGE>
SCHEDULE 1
MEASURING PERIODS AND TONNAGE
<TABLE>
<CAPTION>
- ----------------------------------------------------- --------------------------------------------------
MEASURING PERIOD MAXIMUM AGGREGATE METRIC
TONS OF
NEWSPRINT AND/OR OTHER PAPER PRODUCTS
- ----------------------------------------------------- --------------------------------------------------
<S> <C>
July 1, 2000 through September 30, 2000 *****
- ----------------------------------------------------- --------------------------------------------------
October 1, 2000 through December 31, 2000 *****
- ----------------------------------------------------- --------------------------------------------------
January 1, 2001 through March 31, 2001 *****
- ----------------------------------------------------- --------------------------------------------------
April 1, 2001 through June 30, 2001 *****
- ----------------------------------------------------- --------------------------------------------------
July 1, 2001 through September 30, 2001 *****
- ----------------------------------------------------- --------------------------------------------------
October 1, 2001 through December 31, 2001 *****
- ----------------------------------------------------- --------------------------------------------------
January 1, 2002 through March 31, 2002 *****
- ----------------------------------------------------- --------------------------------------------------
April 1, 2002 through June 30, 2002 *****
- ----------------------------------------------------- --------------------------------------------------
TOTAL: *****
- ----------------------------------------------------- --------------------------------------------------
</TABLE>
* Confidential treatment requested: material has been omitted and filed
separately with the Commission.
<PAGE>
EXHIBIT A
FORM OF SUBSCRIPTION
(To be signed only on exercise of Participation Warrant)
TO: PAPEREXCHANGE.COM, INC.
The undersigned, the registered Holder of the within Participation
Warrant of PaperExchange.com, Inc., hereby irrevocably elects to exercise this
Participation Warrant for, and to purchase thereunder, _____* Shares of
PaperExchange.com, Inc. and the undersigned herewith makes payment of $_______
therefor.
Dated: ______________________________
(Signature must conform in all
respects to name of registered
holder as specified on the face
of the Warrant)
------------------------------
(Address)
Signed in the presence of:
- ----------------------
- ----------------------
*Insert here the number of shares (all or part of the number of shares
called for in the Participation Warrant) as to which the Participation Warrant
is being exercised without making any adjustment for any other stock or other
securities or property or cash which, pursuant to the adjustment provisions of
the Participation Warrant, may be deliverable on exercise.
<PAGE>
Exhibit 10.27
INTEGRATION AND MARKETING AGREEMENT
THIS INTEGRATION AND MARKETING AGREEMENT (the "Agreement") is entered into
by NOOSH, INC., a Delaware corporation with offices at 3401 Hillview Avenue,
Building B, Palo Alto, California 94304 ("Noosh") and PAPEREXCHANGE.COM, INC., a
Delaware corporation with offices at 545 Boylston Street, 8th floor, Boston,
Massachusetts 02116 ("PEX"), effective March 31, 2000 (the "Effective Date").
RECITALS
A. Noosh provides an Internet-based service for buyers and sellers of
print services to communicate and collaborate with each other and manage print
jobs.
B. PEX provides an online marketplace for buyers and sellers of paper
products to transact business with one another.
C. The parties want to cooperate to integrate the PEX paper procurement
process into the Noosh service to enable buyers and seller of print services
using the Noosh service to also coordinate the supply of paper for their print
jobs via the PEX marketplace.
The parties therefore agree as follows:
AGREEMENT
1. DEFINITIONS.
1.1 "Affiliate" of a party means a person or entity that controls, is
controlled by, or is under common control with such party. For these purposes
"control" means ownership of more than fifty percent (50%) of the voting stock
or other voting securities or interests.
1.2 "Change of Control" means any Ownership Change Event or a series of
related Ownership Change Events (collectively, the "Transaction") wherein the
shareholders or other ownership interest holders of a party immediately before
the Transaction do not retain immediately after the Transaction, in
substantially the same proportions as their ownership of shares of a party's
voting stock or other ownership voting interests immediately before the
Transaction, direct or indirect beneficial ownership of more than fifty percent
(50%) of the total combined voting power of the corporation or corporations so
which substantially all of the assets or stock of the party were transferred, as
the case may be.
1.3 "Confidential Information" means any data or information disclosed
hereunder (whether written, oral or graphical) that relates to the disclosing
party's products, technology, research, development, customers or business
activities, passwords, User Data (defined in Section 13, and which is
confidential or proprietary to or a trade secret of the disclosing party,
provided that, if disclosed in a tangible form it is labeled as confidential or
proprietary, or if provided orally, is identified as confidential or proprietary
at the time of disclosure, reduced to writing, and provided to the receiving
party within ten (10) days thereafter. Confidential Information shall not
include any information, data or material which: (a) the disclosing party
* Confidential Treatment Requested: material has been omitted and filed
separately with the Commission.
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<PAGE>
expressly agrees in writing is free of any non-disclosure obligations; (b) at
the time of disclosure to the receiving party was known to the receiving party
(as evidenced by documentation in the receiving party's possession) free of any
non-disclosure obligations; (c) is independently developed by the receiving
party (as evidenced by documentation in the receiving party's possession); (d)
is lawfully received by the receiving party, free of any non-disclosure
obligations, from a third party having the right to so furnish such Confidential
Information; or (e) is or becomes generally available to the public without any
breach of this Agreement or unauthorized disclosure of such Confidential
Information by the receiving party; provided that only the specific information
that meets the exclusion(s) specified in clauses (a)-(e) shall be excluded and,
not any other information that happens to appear in proximity to such excluded
portion (for example, a portion of a document may be excluded without affecting
the confidential nature of those portions that do not themselves qualify for
exclusion).
1.4 "Deliverables" means deliverables of either party as specified in the
Specifications and Development Schedule.
1.5 "Development Schedule" means the milestone schedule for the
specification, development and delivery of the tools, software, data and other
Deliverables required to integrate the PEX Service and the Noosh Service as
described in the Specifications. The Development Schedule shall be set forth in
Exhibit A (Development Schedule) in accordance with subsection (a) of Section
2.4.1 ("Specifications Phase") and may be amended from time to time as set forth
below.
1.6 "End User Information" means any information or data PEX obtains or
learns about a End User (however it does so, whether such information or data is
transferred by Noosh, provided by the End User, extracted through traffic
analysis or otherwise).
1.7 "Intellectual Property Rights" means all copyrights, trade secrets,
patents, mask works and other intellectual property rights worldwide, but
excluding trademarks, service marks, trade names and other product, service or
company identifiers.
1.8 "Marks" means the Noosh Marks or the PEX Marks, as applicable.
1.9 "Noosh APIs" means the Noosh application programmable interfaces or
other naming and data protocols, file formats created by or on behalf of Noosh
for interfacing to the Noosh Service in existence as of the Effective Date, or
developed or created by or for Noosh pursuant to this Agreement.
1.10 "Noosh Content" means all content or information, in any medium,
created by or on behalf of Noosh for use in the Noosh Service, including without
limitation any text, music, sound, photographs, video, graphics, data, data
types, stock keeping unit (SKU) designations and Noosh APIs and any marketing
materials provided by Noosh pursuant to this Agreement.
2
<PAGE>
1.11 "Noosh Marks" means all domain names, trademarks, servicemarks, links
and logos designated by Noosh for use in conjunction with the parties'
performance under this Agreement (initially including "Noosh", noosh.com and
"Live Jobs.")
1.12 "Noosh Service" means the Internet-based service Noosh offers to
enable buyers and sellers of print services to transact business with each
other, and any successor service, as revised, augmented, superseded, enhanced,
modified or supplemented from time to time.
1.13 "Noosh Site" means the website owned and operated by Noosh accessible
at www.noosh.com (or its successor URLs) for the purpose of making the Noosh
Service commercially available.
1.14 "Ownership Change Event" shall be deemed to have occurred if any of
the following occurs with respect to a party to this Agreement:
(a) the direct or indirect sale or exchange in a single series of
related transactions by the shareholders or other ownership interest
holders of a party to this Agreement of more than fifty percent (50%) of
the voting stock or other voting ownership interests of such party;
(b) a merger or consolidation in which a party to this Agreement is
a party excluding a merger conducted solely for the purpose changing the
state of domicile of a party;
(c) the sale, exchange or transfer of all or substantially all of
the assets of a party to this Agreement; or
(d) a liquidation or dissolution of a party to this Agreement;
provided, however, that any transaction or series of transactions that are
effected solely in connection with a (i) reincorporation, (ii) a reorganization,
recapitalization or financing not in connection with the sale of all or
substantially all of the assets or stock or other ownership interests of a party
to this Agreement or (iii) an underwritten public offering of common stock of a
party to this Agreement, is not an Ownership Change Event.
1.15 "PEX APIs" means the PEX application programmable interfaces or other
naming and data protocols, file formats created by or on behalf of PEX for
interfacing to the PEX Service in existence as of the Effective Date, or
developed or created by or for PEX pursuant to this Agreement.
1.16 "PEX Content" means all content or information, in any medium,
created by or on behalf of PEX for use in the PEX Service, including without
limitation any text, music, sound, photographs, video, graphics, data, data
types, stock keeping unit (SKU) designations and PEX APIs and any marketing
materials provided by PEX pursuant to this Agreement.
3
<PAGE>
1.17 "PEX Marks" means all domain names, trademarks, links and logos
designated by PEX for use in conjunction with the parties' performance under
this Agreement.
1.18 "PEX Service" means the PEX Trading Floor (which enables users to
view listings by product category and grade, to search for products using
specific criteria, and to place requests for product and to post the
availability of products for sale and bid on open requests for product) and
associated features, as more fully described in the Specifications.
1.19 "PEX Site" means the website owned and operated by PEX accessible at
www.paperexchange.com (or its successor URLs) for the purpose of making the PEX
Service commercially available.
1.20 "Specifications" means the detailed functional specifications for
integrating the Noosh Service and the PEX Service, which shall be set forth in
Exhibit B (Specifications) in accordance with subsection (b) of Section 2.4.1
("Specifications Phase") and may be amended from time to time as set forth
below.
2. INTEGRATION OF SERVICES.
2.1 Overview. The goal of the parties is to implement a link on the Noosh
Site for end users of the Noosh Service that have been given the ability to
procure paper or print providers on the Noosh Service (collectively referred to
as "End Users") to procure and manage paper requisitions using the PEX Service
(provided that End Users with a pre-existing purchasing relationship for paper
with PEX may purchase paper directly from PEX without using the Noosh Service).
2.1.1 Integration of Services. Noosh will use reasonable commercial
efforts to develop and integrate the Noosh Service with the PEX Service and PEX
will use reasonable commercial efforts to develop and integrate the PEX Service
with the Noosh Service to enable the following transactions on the Noosh
Service:
(a) When End Users specify the paper they want used for their
print jobs, the End Users will have the option to view available paper. When
this option is selected, the End Users will be linked to a list of matching
products (and/or close substitutes) available on the PEX site. This list will
include the price, availability, and other information that is normally provided
on the PEX site. In addition to viewing paper availability from PEX, the user
may have the ability to view paper availability from other sources but only
after having the option to view availability on the PEX site. Once matching
products on PEX are displayed, the End Users will then also have the option of
bidding on or purchasing this displayed product via PEX.
2.2 (b) When End Users specify the paper they want used for their print
jobs, the End Users will also have the option of submitting an RFE for their
desired products on the PEX service. If End Users are able to submit an RFE to
paper procurement providers other than PEX, then the PEX Service will be listed
first and in no case an inferior format to other paper providers on the Noosh
site. If PEX receives an RFE through the Noosh Service, PEX shall respond to
such
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<PAGE>
RFE within the required time as specified in such RFE provided that if PEX fails
to respond within such time, PEX will be unable to participate in the RFE. If
the RFE becomes an Accepted Order (as defined in Section 7) on the Noosh
Service, PEX shall perform its obligations as set forth in such Accepted Order.
Similarly, if Noosh print providers receive an RFE for a print job via the Noosh
Service that does not already address paper procurement, the print provider will
be offered the option to submit an RFE for appropriate paper on the PEX Service.
Similarly, PEX will use reasonable commercial efforts to develop the ability for
a user of the PEX Service to obtain information available from the Noosh Service
of a similar importance and in a similar priority to other transactions
conducted by such user on the PEX service so that the user of the PEX Service
interacts with the Noosh Service in a way that is similar to the way an End User
interfaces with the PEX Service and information contained therein.
2.3 Development Efforts. The parties shall use reasonable commercial
efforts to develop their respective Deliverables as defined in the
Specifications in accordance with the Development Schedule.
2.4 Phases of Development. Development of the Deliverables shall take
place in two phases, which may overlap at the discretion of the parties.
2.4.1 Specifications Phase. During Phase 1 (the "Specifications
Phase"):
(a) The parties will generate a mutually-agreeable Development
Schedule within forty-five (45) days after the Effective Date, which shall be
attached to this Agreement as Exhibit A (Development Schedule). The Development
Schedule is meant to serve as a guideline for the integration of Noosh Service
and PEX Services.
(b) Noosh will then generate, and PEX shall approve, the
Specifications in accordance with the milestones set forth in the Development
Schedule, and the Specifications shall be attached to this Agreement as Exhibit
B (Specifications). Noosh will define the Noosh APIs as part of the
Specification. (c) Any changes in the Development Schedule and Specifications
thereafter must be requested in writing by either party. If the requested change
is acceptable to both parties, Noosh will determine whether implementing the
suggested change would result in a delay or increase Noosh's costs to integrate
the PEX Service and will advise PEX on the effect of the suggested change. If
both parties accept the change and its effects on schedule and costs, the
applicable Exhibits will be modified to reflect the change and its effects.
(d) If the parties are unable to agree on the Development
Schedule and Specifications by August 1, 2000, Noosh or PEX may terminate the
Agreement with no liability for either party.
2.4.2 Development Phase. Phase 2 (the "Development Phase") will
consist of:
(a) The parties' development and delivery of their respective
Deliverables in accordance with the Development Schedule and Noosh's reasonable
commercial
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efforts to integrate the Deliverables into a paper procurement process on the
Noosh Site using the PEX Service.
(b) Noosh's acceptance testing of the Deliverables and the
overall paper procurement process using the PEX Service from the Noosh Site in
accordance with the acceptance test criteria in the Specifications. Unless the
parties otherwise agree with respect to a specific Deliverable, Noosh shall have
thirty (30) days following delivery of the final Deliverable to determine
whether the Deliverables as whole, and the overall paper procurement process
using the PEX Service, conform to the acceptance criteria (the "Initial
Acceptance Period"). Noosh agrees to inform PEX in writing during the Initial
Acceptance Period of any non-conformance. The notice will contain a detailed
description of the nature of the non-conformance. If no notice of
non-conformance is received by PEX before the end of the Initial Acceptance
Period, the Deliverables and overall paper procurement process shall be deemed
to be accepted. If Noosh rejects a Deliverable or the procurement process as a
whole as non-conforming, PEX shall have thirty (30) days following receipt of
Noosh's notice to correct the nom-conformance and deliver a modified Deliverable
for further testing. Noosh shall then have ten (10) days following delivery of
the modified Deliverable to determine whether it conforms to the applicable
acceptance criteria (the "Extended Acceptance Period"). If no notice of
non-conformance is received by PEX before the end of the Extended Acceptance
Period, the modified Deliverable shall be deemed to be accepted by Noosh. If
Noosh rejects the modified Deliverable, Noosh, in its option, shall have the
following sole and exclusive remedies: (i) to require the parties to continue
resubmitting modified Deliverables until they meet the acceptance criteria; or
(ii) to waive the unsatisfied acceptance criteria; provided that if Noosh does
not accept the resubmitted Deliverables within six (6) months from initial
submission, either party may terminate this Agreement with no liability to the
other party.
2.5 Delays. The parties agree that any delay by one party in performing
the tasks which are identified as its responsibility in the Development Schedule
and which are a prerequisite for the performance of the other party shall extend
the non-delaying party's milestone dates for its performance on a day-for-day
basis (or longer, if the nature of the delay precludes the timely performance of
long lead time items or other obligations whose deferral causes more than a
day-for-day schedule slip).
2.6 Collaboration on Initial Users. PEX and Noosh will cooperate to select
at least two customers -- one print buyer and one print supplier -- to use the
integration of the Noosh Service and the PEX Service and to provide feedback to
Noosh regarding such use ("Feedback"). Both parties will support the sales
effort for these customers with coordinated direct sales and training
interaction. Both PEX and Noosh agree that either party may use the ideas
generated from the Feedback in either party's future product development
(including but not limited to improvement of the PEX Service or Noosh Service.)
All such customers shall execute both PEX's and Noosh's standard user agreement
prior to use of the Noosh Service.
2.7 Noosh API. PEX will use reasonable commercial efforts to assist Noosh
in developing its respective product descriptions and data types and protocols
for paper products according to the Noosh API for the elements of the business
processes required to integrate the
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Noosh Service and the PEX Service. In addition, as reasonably requested by
Noosh, PEX will use reasonable commercial efforts to cooperate with Noosh to
integrate with Noosh's other paper suppliers according to the Noosh API.
2.8 Data Normalization. The parties shall use reasonable commercial
efforts to work together in good faith to achieve acceptable levels of
authentication and security in such data transfers and to fairly apportion costs
of doing so. To the extent that a party provides the other party with direct
server access, the accessing party shall not disclose the applicable password to
third parties. The parties will use reasonable commercial efforts to cooperate
to further integrate the Noosh Service with the PEX Service as mutually agreed
(such integration may contain for example pre-populated registration for End
Users or other data transfer mechanisms). Noosh acknowledges that an End User
will be required to register and become a member of PEX to obtain the PEX
Service and agrees that it will facilitate the process for its members to
become PEX members.
2.9 Disaster Recovery Plans. Each party will use reasonable commercial
efforts to implement disaster recovery and backup plans intended to minimize the
occurrence and impact of any disruption or downtime of each party's applications
on the other party's business.
2.10 Look and Feel. Noosh shall determine the appearance and look and feel
of the Noosh Service and may change the Noosh Service from time to time.
2.11 Accounts and Passwords.
2.11.1 PEX will receive an account id, username and password to gain
access to and use the Noosh Service. PEX is responsible for maintaining the
confidentiality of its username and password, and is fully responsible for all
activities that occur under its username or account. PEX agrees (a) not to allow
a third party to use its account, username or password at any time and (b) to
notify immediately Noosh customer support of any actual or suspected
unauthorized use of its account, username or password, or any other breach or
suspected breach of security at 1-888-AT-NOOSH (1-888-286-6674) or at
[email protected]. Noosh cannot and will not be liable for any loss or damage
arising from unauthorized use of PEX's account, username or password.
2.11.2 Noosh will receive an account id, username and password to
gain access to and use the PEX Service. Noosh is responsible for maintaining the
confidentiality of its username and password, and is fully responsible for all
activities that occur under its username or account. Noosh agrees (a) not to
allow a third party to use its account, username or password at any time and (b)
to notify immediately PEX customer support of any actual or suspected
unauthorized use of its account, username or password, or any other breach or
suspected breach of security. PEX cannot and will not be liable for any loss or
damage arising from unauthorized use of Noosh's account, username or password.
3. PROJECT COORDINATORS; CUSTOMER SUPPORT; TECHNICAL SUPPORT.
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3.1 Relationship Managers. PEX assigns Rod Parsley, and Noosh assigns Ned
Gibbons, and/or such other personnel as are later designated by the parties, as
their high-level relationship managers to oversee the parties' overall
relationship and the setting and implementation of parties' long-term
collaborative goals.
3.2 Engineering Managers. PEX assigns Bob Brenner, and Noosh assigns Joe
Black, and/or such other personnel as are later designated by the parties, as
their respective engineering coordinators to oversee the paper procurement
process development and implementation efforts. The responsibilities of the
engineering managers shall be to communicate on a regular basis by telephone,
facsimile, email and in person to complete the Development Schedule and
Specifications, review progress, track schedules, resolve problems and arrange
for the exchange of materials or information, or access to personnel, necessary
for the performance of this Agreement. The engineering managers shall have the
authority to make binding decisions concerning modifications of the Development
Schedule and Specifications.
3.3 CUSTOMER SUPPORT; TECHNICAL SUPPORT. Noosh shall use reasonable
commercial efforts to provide first-level and second level customer support to
End Users of the Noosh Service with the use and functionality of the integration
of the Noosh Service and PEX Service portions of the Noosh Service. Noosh shall
have the right to designate up to three (3) contact persons, which may include
substitutes, as necessary to address such customer support issues ("Contact
Persons"). Such Contact Persons may request assistance and communicate
descriptions of problems encountered with the integration of the Noosh Service
and the PEX Service and PEX will provide telephone support to such Contact
Persons during regular business hours, provided that if the problems cause a
material disruption in the operation of the PEX Services, PEX will provide
support Monday to Friday from 9 AM-8 PM E.S.T. PEX will use reasonable
commercial efforts to provide the Contact Persons with answers and solutions to
problems to End Users of the Noosh Service related to the PEX Service. If
necessary, PEX will provide the Contact Persons with a reasonable amount of
training and training materials to provide such Contact Persons with sufficient
information to train other Noosh personnel as necessary, at no additional cost
to Noosh.
4. MARKETING AND PROMOTION.
4.1 Initial Press Release. Noosh and PEX will issue a press release
announcing their integration and co-marketing plans on Tuesday April 4, 2000.
The form and substance of the press release shall be as mutually agreed. Noosh
and PEX will each be entitled to refer to their alliance in the "About" sections
of their press releases, on their respective web sites and otherwise as required
by law. However, any additional press releases focusing on the alliance would
require the mutual consent of the parties. The parties shall cooperate to draft
and issue a press release announcing the signing of this Agreement and each
party may include the information included in such press release in subsequent
advertisements, press releases or other publications without the other party's
prior written consent, provided that such party includes proper attribution of
the other party's name.
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4.2 Noosh Online Promotion. Noosh will promote PEX and the PEX Service on
the Noosh Site with a combination of mutually-agreeable links and promotional
information in mutually-agreeable locations on the Noosh Site, with the overall
objective of giving PEX's logo and other branding elements equal prominence with
those of Noosh's other partners. Specifically, during the term of this
Agreement, and pursuant to the Development Schedule, Noosh will include a PEX
Mark in the partner section of the Noosh Site, include information about the PEX
Service as mutually agreed by the parties, and identify PEX first in a list of
paper exchanges in a size and location at least as prominent as a similar third
party offering similar services. Pursuant to the Development Schedule, during
the term (as defined in Section 14), Noosh shall use reasonable commercial
efforts to include PEX at the top of the list of paper suppliers available on
the Noosh Service as originally presented to End Users that request such list on
the Noosh Service; provided that PEX acknowledges that End Users may modify or
delete such list as part of their normal use of the Noosh Service.
4.3 PEX Online Promotion. PEX will promote Noosh and the Noosh Service on
the PEX Site with a combination of mutually-agreeable links and promotional
information in mutually-agreeable locations on the PEX Site, with the overall
objective of giving Noosh's logo and other branding elements equal prominence
with those of PEX's other partners. Specifically, during the term of this
Agreement and pursuant to the Development Schedule, PEX will include a Noosh
Mark on the homepage of the PEX Site that serves as an entry point to the Noosh
Service, include information about the Noosh Service as mutually agreed by the
parties and identifies Noosh first in a list of print procurement partners with
a Noosh Mark at least as prominent as a similar third party offering similar
services. When PEX develops search capabilities on its site, PEX will use
reasonable commercial efforts to include Noosh on the top of any search results
where an end user of the PEX Service searches for the keywords "printing",
"print management service" or such other words as Noosh may reasonably request.
4.4 Collaboration and Joint Marketing Efforts. The parties will
collaborate to identify the most efficient venues for their promotion of the
integration of the Noosh Service and the PEX Service and enhance the impact of
their promotions in appropriate media. Noosh and PEX will jointly create an
education and training curriculum to teach Noosh clients how to procure paper
using the PEX Service and to promote its benefits, and the parties will
cooperate to develop, fund and execute other joint marketing programs on a
mutually-agreeable basis, which could include joint customer case studies,
direct mail, seminar series, exhibitions, web based marketing materials and
other advertising.
4.5 Joint Sales Meetings. In its reasonable discretion, each party will
periodically hold joint sales meetings with the sales personnel of the other
party to educate the sales force of both parties on the benefits, features and
use of paper procurement on the Noosh web site.
4.6 Success Metrics. The parties will cooperate to develop
mutually-agreeable metrics for analyzing the success of their marketing and
promotion efforts and the overall performance of the integrated Noosh Service
and PEX Service. The first set of metrics will be developed by the end of the
third calendar quarter of 2000, and the parties will thereafter develop
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success goals and implementation plans for each successive three (3) and six (6)
month period for the remainder of the term of the Agreement.
5. OWNERSHIP. Noosh and/or its suppliers shall own all right, title and interest
in Noosh Confidential Information, the Specifications and all Noosh Content,
including all Intellectual Property Rights therein. PEX and its suppliers shall
own all PEX Confidential Information and the PEX Content, including all
Intellectual Property Rights therein. There are no implied licenses under this
Agreement, and any rights not expressly granted to a licensee hereunder are
reserved by the licensor or its suppliers. Neither party shall exceed the scope
of the licenses granted hereunder.
6. LICENSE GRANTS.
6.1 Noosh Service. Noosh hereby grants to PEX the limited,
non-transferable, non-exclusive, nonsublicenseable right to use the Noosh
Service for the sole purpose of processing and monitoring print jobs involving
PEX's production and sale of paper and the PEX Service. PEX may print and down
load portions of the materials contained on the Noosh Service solely for PEX's
internal use provided PEX maintain the copyright notice and any other notices
that appear on any such copies. Any other copying, redistribution, publication,
or transmission of any portions of the materials on the Noosh Service, or any
materials provided by Noosh to PEX for training purposes related to the Noosh
Service including user manuals, is strictly prohibited without the express
written permission of Noosh.
6.2 PEX Information. As part of using the Noosh Service, PEX will submit
information as part of responding to an RFE, and other information to
communicate with End Users through the Noosh Service ("PEX Information"), PEX
hereby grants to Noosh a non-exclusive, world-wide, perpetual, irrevocable,
royalty-free, license to use, display, perform and reproduce the PEX Information
to operate and enhance the Noosh Service.
6.3 PEX Service. PEX hereby grants to Noosh the limited, non-transferable,
non-exclusive, nonsublicenseable right to use the PEX Service to perform its
obligations under this Agreement.
6.4 Content Licenses. Noosh hereby grants to PEX a non-exclusive license
to internal1y use, reproduce, publicly perform, publicly display and digitally
perform the Noosh Content solely for the purposes of integrating the PEX Service
with the Noosh Service as contemplated by this Agreement and promoting the
integration of the Noosh Service with the PEX Service as authorized by this
Agreement. PEX hereby grants to Noosh a non-exclusive license to use, reproduce,
create derivative works of (solely to the extent necessary to post on the Noosh
Site), publicly perform, publicly display and digitally perform the PEX Content
(subject to Section 6.5) on or in conjunction with Noosh's hosting, deployment
and promotion of the integrated Noosh Service and PEX Service as contemplated or
authorized by this Agreement.
6.5 PEX APIs. PEX hereby grants to Noosh a non-exclusive, irrevocable,
perpetual, royalty-free, world-wide, license to use, reproduce, create
derivative works of, publicly perform,
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publicly display, digitally perform, and distribute the PEX APIs through Noosh's
ordinary channels of distribution to third parties for the purpose of
integrating such third parties with the Noosh Service and to sublicense such
aforegoing rights as contemplated by this Agreement.
6.6 Trademark License. PEX hereby grants to Noosh a non-exclusive license
to use the PEX Marks (a) in links to and advertisements and promotions for the
PEX Site and PEX Service (b) in conjunction with hosting and operating the Noosh
Site and Noosh Service as integrated with the PEX Service and (c) on Noosh
prospectuses, financial reports and similar materials indicating that PEX is a
Noosh partner. Noosh hereby grants to PEX a non-exclusive license to use the
Noosh Marks (a) in links to and advertisements and promotions for the Noosh Site
and Noosh Service (b) in conjunction with hosting and operating the PEX Site and
PEX Service as integrated with the Noosh Service and (c) on PEX prospectuses,
financial reports and similar materials indicating that Noosh is a PEX partner.
6.7 Trademark Restrictions. The Mark owner may terminate the foregoing
license if, in its reasonable discretion, the licensee's use of the Marks
tarnishes, blurs or dilutes the quality associated with the Marks or the
associated goodwill and such problem is not cured within ten (10) days of notice
of breach; alternatively, instead of terminating the license in total, the owner
may specify that certain pages of the licensee's website may not contain the
Marks. Title to and ownership of the owner's Marks shall remain with the owner.
The licensee shall use the Marks exactly in the form provided and in conformance
with any trademark usage policies. The licensee shall not take any action
inconsistent with the owner's ownership of the Marks, and any benefits accruing
from use of such Marks shall automatically vest in the owner. The licensee shall
not form any combination marks with the other party's Marks.
6.8 Limits on Sublicensing. All license rights (under any applicable
intellectual property right) granted herein are not sublicenseable, transferable
or assignable (subject to Section 15.3 ("Assignment"), except that Noosh may use
a third party web hosting service for the Noosh Site and shall have the right to
sublicense the PEX Content (subject to Section 6.5) and PEX Marks solely for
such purpose and except that PEX may use a third party web hosting service for
the PEX Site and shall have the right to sublicense the Noosh Content and Noosh
Marks solely for such purpose..
6.9 Content Standards. PEX shall not provide any PEX Content, and Noosh
shall not provide any Noosh Content, that: (a) infringes any third party's
copyright, patent, trademark, trade secret or other proprietary rights or rights
of publicity or privacy; (b) is defamatory, trade libelous, unlawfully
threatening or unlawfully harassing; or (c) is materially false, misleading or
inaccurate.
6.10 Proprietary Notices. Neither party will obfuscate, remove or alter
any of the trademarks, trade names, logos, patent or copy-right notices,
confidential or proprietary legends or other notices or markings on or in the
Noosh Content or the PEX Content, as applicable, and all such markings shall be
included in all copies made by either party of such materials.
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6.11 End User Information. Subject to the terms and conditions of this
Agreement, Noosh hereby grants PEX a non-exclusive, non-sublicenseable,
royalty-free, fully-paid up license to (a) use the End User Information that PEX
obtains pursuant to this agreement as required to provide End Users the PEX
Service and (b) to disclose the End User Information as required by law or the
operation of the PEX Service. In no event shall PEX disclose the User
Information in any way that discloses, identifies or references in any way or
manner (i) a specific End User; or (ii) End User Information about a specific
End User, unless PEX has disclosed to such End User that PEX is collecting or
intends to collect such information and that End User has expressly provided
consent to the collection and disclosure of its End User Information by PEX. PEX
agrees that all End User Information shall be deemed Confidential Information of
Noosh; provided however that user information concerning the preexisting
end-users of PEX should not be pursuant to 6.11.
6.12 Restrictions on Communications. PEX acknowledges that Noosh
membership and End User information is proprietary and confidential. PEX will
not disclose Noosh membership and End User information to any third party. No
communications from PEX to any End User that accesses the PEX Service through
the Noosh Service shall contain: (a) any hypertext links except to the PEX
Service, or the Noosh Service, (b) any promotions for websites or services other
than the Noosh Service, or (c) any advertising or third party branding.
Notwithstanding the foregoing, PEX will not target an End User on behalf of a
Noosh Competitor (as defined below) on the basis of their status as an End User.
7. TRANSACTION FEES.
7.1 Published Commission Rates. From time to time, PEX will inform Noosh
of the published commission rate charged by PEX to sellers of paper ("Published
Commission Rate"). As of the Effective Date, the Published Commission Rate
equals ****%. PEX agrees that the Published Commission Rate will not exceed
****% and will not fall below ****% during the term of this Agreement.
7.2 Monthly Transaction Fees. During, the term of this Agreement, PEX will
pay to Noosh a monthly transaction fee equal to **** percent (****%) of the
Published Commission Rate ("Effective Rate") based on the applicable dollar
value ("Job Value") and job due date as defined by the End User ("Job Due Date")
for the paper portion of the print job of PEX for which an Accepted Order
(defined below) is reflected on the Noosh Service. For the purpose of this
Agreement, "Accepted Order" means acceptance by PEX of an order submitted by an
End User through the Noosh Service unless the order has been successfully
cancelled or modified by PEX or the End User. For the purposes of calculating
the Job Value, such Job Value will exclude charges in respect of (i) outbound
shipping, packaging, credit clearing, insurance and delivery, separately billed
to the End User or prepaid; and (ii) taxes and duties, and applicable
governmental charges (not including PEX's net income tax) and the Job Value and
Job Due Date relating to an Accepted Order shall for a particular print job
shall be as initially reflected in the Accepted Order, subject to any changes to
such Job Value or Job Due Date as are agreed by PEX and the End User and entered
on the Noosh Service and of which PEX notifies Noosh in writing on or before the
previously agreed upon Job Due Date. PEX agrees and acknowledges that an
* Confidential Treatment Requested: Material has been omitted and filed
separately with the Commission.
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Accepted Order will form a binding contract between PEX and the End User and/or
PEX and the print provider (the "Terms"), and that any Accepted Order will
create a monthly transaction fee obligation from PEX to Noosh.
7.3 Payment Terms. In the event that use of the Noosh Service is subject
to a fee pursuant to Section 7.2, Noosh will invoice PEX in the month following
the Job Due Date as recorded in the Noosh Service with respect to all Accepted
Orders during such month and will cooperate with PEX to submit such information
in one monthly invoice. For the purposes of any such billing, the Job Value and
Job Due Date relating to an Accepted Order for a particular print job shall be
as initially reflected in the Accepted Order, subject to any changes to such Job
Value and Job Due Date as agreed upon by PEX and the end user Buyer on the Noosh
Service and of which PEX notifies Noosh in writing on or before the previously
agreed upon Job Due Date. All invoices will be payable net thirty (30) days from
the date of the invoice submitted by Noosh in U.S. dollars.
7.4 Records and Audit Rights. Each party shall retain complete, clear and
accurate records regarding calculation of product order volumes and transaction
fees owed by PEX under this Agreement during the term of this Agreement and for
one (1) year thereafter. Each party shall have the right to have an inspection
and audit of all of the relevant accounting and sales books and records of the
other party conducted by an independent audit professional selected and paid by
the auditing party no more than once every twelve (12) months during regular
business hours at the offices of the party being audited and in such a manner
that does not interfere with the normal business activities of the party being
audited. If any audit discloses underpayments or overpayments of ten percent
(10%) or more of the amount of transaction fees actually due, the party which
owes the other party a refund or an additional payment, as the case may be,
shall bear all of the costs of the audit. The party's audit rights shall not
terminate or expire until one (1) year after termination or expiration of this
Agreement.
7.5 Taxes. PEX agrees to pay, and to indemnify and hold Noosh harmless
from, any sales, use, excise, import or export, value-added or similar tax or
duty not based on Noosh's net income, including any penalties and interest, as
well as any costs associated with the collection or withholding thereof, and all
government permit fees, license fees and customs and similar fees levied on any
payments by PEX to Noosh under this Agreement. All payments due from PEX under
this Agreement shall be made without any deduction or withholding, unless such
deduction or withholding is required by any applicable law of any relevant
governmental revenue authority then in effect.
7.6 Late Payments. Any invoiced amount or other payment due under this
Agreement which is not paid when due shall bear a late fee at the rate of
eighteen percent (18%) per annum or the maximum rate permitted by local law,
whichever is less.
8. EXCLUSIVE DEALING. PEX agrees that for at least 70 days after the Effective
Date it will not enter into or announce any agreement or relationship (i)
between PEX, XPEDX or an XPEDX Affiliate and a Noosh Competitor or an agreement
whereby such Noosh Competitor may offer paper procurement through both PEX and
XPEDX or such XPEDX Affiliate; or (ii)
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with a Noosh Competitor, except for oZeCorp, and Australian-based company. For
the purposes of this Agreement, a "Noosh Competitor" is defined as any online
print services procurement company. Noosh agrees that for at least 90 days after
the Effective Date Noosh will not enter into or announce a strategic partnership
(i) between Noosh, a "PEX Competitor" and XPEDX or such XPEDX Affiliate whereby
such PEX Competitor may offer its print procurement services to any such
competitor; or (ii) with a PEX Competitor. "PEX Competitor" refers to any
Internet marketplace with its primary business being an exchange with static
pricing including catalog pricing and/or dynamic pricing by auction or reverse
auction for the sale, purchase and/or exchange of pulp, paper, and paper
packaging.
9. REPRESENTATIONS AND WARRANTIES.
9.1 Noosh Representations. Noosh represents and warrants that Noosh has
the power and authority to enter into and perform all of its obligations under
this Agreement.
9.2 PEX Representations. PEX represents and warrants that PEX has the
power and authority to enter into and perform all of its obligations under this
Agreement.
10. DISCLAIMER OF OTHER WARRANTIES. EACH PARTY PROVIDES ALL MATERIALS,
DELIVERABLES AND SERVICES TO THE OTHER PARTY "AS IS." EXCEPT AS STATED IN
SECTION 9 ("REPRESENTATIONS AND WARRANTIES"), EACH PARTY DISCLAIMS ALL
WARRANTIES AND CONDITIONS, EXPRESS, IMPLIED OR STATUTORY, INCLUDING WITHOUT
LIMITATION THE IMPLIED WARRANTIES OF TITLE, NON-INFRINGEMENT, MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE. NOOSH DOES NOT REPRESENT OR WARRANT THAT
THE NOOSH SITE OR THE NOOSH SERVICE WILL OPERATE SECURELY OR WITHOUT
INTERRUPTION.
11. INDEMNITY. Each party (the "Indemnifying Party") shall indemnify the other
party (the "Indemnified Party") against any and all claims, losses, costs and
expenses, including reasonable attorneys' fees asserted by any third party in
any form (collectively, "Claims") so that as regards to Claims arising from
Noosh Content or the Noosh Marks (Noosh is the Indemnifying Party) and as
regards the PEX Content or PEX Marks or the Terms (PEX is the Indemnifying
Party). The foregoing obligations are conditioned on the Indemnified Party: (i)
giving the Indemnifying Party notice of the relevant claim, (ii) cooperating
with the Indemnifying Party, at the indemnifying Party's expense, in the defense
of such claim, and (iii) giving the Indemnifying Party the right to control the
investigation, defense and settlement of any such claim, except that the
indemnifying Party shall not enter into any settlement that affects the
Indemnified Party's rights or interest without the Indemnified Party's prior
written approval. The Indemnified Party shall have the right to participate in
the defense at its expense. In the event or in the reasonable belief of the
Indemnifying Party (Noosh in the case of the Noosh Content or Noosh Marks and
PEX in the case of the PEX Content, PEX Marks or Terms) that a Claim may arise,
the Indemnifying Party, may at its sole option and expense: (a) procure the
right for the Indemnified Party to continue to use the infringing materials; (b)
modify such materials so that they become non-infringing; or (c) if after
reasonable commercial efforts pursuant to subsections (a) and (b),
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terminate this Agreement upon written notice to the Indemnified Party. This is
the sole and exclusive remedy for the Indemnified Party arising from any claims
of infringement.
12. LIMITATION OF LIABILITY. EXCEPT FOR A BREACH OF SECTION 13.1 AND THIRD PARTY
CLAIMS ARISING UNDER SECTION 11, NEITHER PARTY SHALL BE LIABLE FOR ANY INDIRECT,
EXEMPLARY, SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES OF ANY KIND (INCLUDING
WITHOUT LIMITATION LOST PROFITS), EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY
OF SUCH DAMAGES. EXCEPT FOR CLAIMS ARISING UNDER SECTION 13.1, NEITHER PARTY'S
AGGREGATE LIABILITY IN CONNECTION WITH THIS AGREEMENT, (WHETHER IN CONTRACT,
TORT OR OTHERWISE), SHALL EXCEED THE AGGREGATE AMOUNTS PAID BY PEX TO NOOSH
UNDER THIS AGREEMENT DURING THE TWELVE (12) MONTHS PRECEDING THE CLAIM. THIS
LIMITATION IS CUMULATIVE, WITH ALL PAYMENTS FOR CLAIMS OR DAMAGES BEING
AGGREGATED TO DETERMINE SATISFACTION OF THE LIMIT. THE EXISTENCE OF ONE OR MORE
CLAIMS SHALL NOT EXPAND THE LIMIT. THE LIMITATIONS OF LIABILITY CONTAINED IN
THIS AGREEMENT ARE A FUNDAMENTAL PART OF THE BASIS OF EACH PARTY'S BARGAIN
HEREUNDER, AND NEITHER PARTY WOULD ENTER INTO THIS AGREEMENT ABSENT SUCH
LIMITATIONS.
13. CONFIDENTIALITY.
13.1 Non-disclosure and Non-use. Each party receiving Confidential
Information shall treat such information as strictly confidential, and shall use
the same care to prevent disclosure of such information as such party uses with
respect to its own confidential and proprietary information, which shall not be
less than the care a reasonable person would use under similar circumstances. In
any event, each party receiving Confidential Information shall (a) disclose such
Confidential Information to (i) only those authorized employees of such party
whose duties justify their need to know such information and who have been
clearly informed of their obligation to maintain the confidential and/or
proprietary status of such Confidential Information; or (ii) only those third
parties required for the performance of the receiving party's obligations under
this Agreement pursuant to a written confidentiality agreement as least as
extensive as the confidentiality provisions of this Agreement; and (b) use such
Confidential Information only for the purposes set forth in this Agreement.
13.2 Certain Exceptions. The parties may disclose any Confidential
Information which must be disclosed pursuant to applicable federal, state or
local law, regulation, court order, or other legal process; provided that upon
receipt of any judicial or administrative order or request, the recipient of
same shall promptly notify the other party and cooperate with the other party in
its attempts to have such order or request withdrawn or narrowed and shall not
make any disclosure until a final and non-appealable order is issued.
13.3 PEX User Data. Notwithstanding the foregoing, Noosh may use and
disclose any information (both individualized and aggregated) (x) about usage
activity of PEX as a user of the Noosh Service, (y) the contents of
specifications in an order as entered on the Noosh Service or
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as included in a response to an RFE, or (z) any other information entered by PEX
that identifies PEX ("PEX User Data"), for the purpose of operating and
enhancing the Noosh Service. Noosh shall not however disclose any PEX User Data
to any third party for any other reason that permits the PEX User Data to be
associated with PEX or permits the targeting of PEX on their basis of its status
as a user of the Noosh Service, without PEX's express written consent which may
occur through the Noosh Service. Noosh may however disclose PEX User Data if it
is aggregated (in a non-associated way without attribution of any kind to PEX)
with data from multiple suppliers or users.
13.4 Advertising and Press Releases. Except as expressly provided in
Section 4.1 ("Initial Press Release"), neither party shall advertise, issue any
press release or otherwise publish the fact that the parties have entered into
this Agreement without the prior written consent of the other party, except as
may be required by law.
13.5 Terms of This Agreement. Notwithstanding anything to the contrary in
this Agreement, neither party shall disclose the terms of this Agreement to any
third party without the express prior written consent of the other party;
provided however that either party may disclose the terms of this Agreement to
its attorneys, accountants and advisors or as otherwise may be required by law.
14. TERM AND TERMINATION.
14.1 Term. Unless terminated earlier pursuant to the termination
provisions in this Section 15 ("Term and Termination") or automatically extended
as set forth below, this Agreement shall remain in effect for eighteen (18)
months from the Effective Date, and shall automatically renew for periods of one
(1) year thereafter unless voluntarily terminated by a party at the end of the
initial term or any renewal term by the giving of ninety (90) days written
notice before the expiration of the initial or any renewal term.
14.2 Termination by Noosh During Development. Noosh may terminate the
Agreement pursuant to subsection (d) of Section 2.4.1 ("Specifications Phase")
or subsection (b) of Section 2.4.2 ("Development Phase").
14.3 Termination for Breach. Either party may terminate this Agreement for
a material breach by the other party that is not cured with thirty (30) days
after receipt of written notice specifying such breach.
14.4 Termination for Change of Control. PEX may terminate this Agreement
immediately, effective upon written notice to Noosh, upon the announcement of
any proposed Change of Control of Noosh to a PEX Competitor (as defined in
Section 8). Noosh may terminate this Agreement immediately, effective upon
written notice to PEX, upon the announcement of any proposed Change of Control
of PEX to a Noosh Competitor (as defined in Section 8).
14.5 Effect of Termination or Expiration. Upon expiration or termination
of this Agreement for any reason: (a) all license rights granted herein shall
terminate except to the extent
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stated in this Section, (b) each party shall immediately pay to the other all
amounts owed as of the date of such termination, and (c) the parties shall wind
down the integration of the Noosh Service and the PEX Service in a professional
manner (with any relevant licenses, as mutually agreed by the parties, remaining
in effect during such wind-down period). Noosh shall return or destroy all other
copies of the PEX Content (except the PEX APIs) and PEX Confidential Information
in its possession or control, except for any portions which may be contained on
backup and archival copies of Noosh data made in the ordinary course of Noosh's
business, PEX shall return or destroy all copies of Noosh Content and Noosh
Confidential Information in its possession or control, except for any portions
which may be contained on backup and archival copies of PEX data made in the
ordinary course of PEX's business.
14.6 Survival. Section 1 ("Definitions"), Section 5 ("Ownership"), Section
7 ("Transaction Fees"); Section 10 ("Disclaimer of Other Warranties"); Section
11 ("Indemnity"); Section 12 ("Limitation of Liability"), Section 13
("Confidentiality"), Section 14.5 ("Effect of Termination or Expiration") and
Section 15 ("General") shall survive the termination or expiration of this
Agreement.
15. GENERAL.
15.1 Relationship. The relationship between the parties under this
Agreement is that of independent contractors, and nothing contained in this
Agreement shall be construed to constitute either party as an agent, partner, or
joint venturer of the other.
15.2 Notices. All notices, demands or consents required or permitted
hereunder shall be delivered in writing to the respective parties at the
addresses set forth above, and, in the case of Noosh to the attention of the
General Counsel, or at such other address as shall have been given to the other
party in writing for the purposes of this clause. Such notices shall be deemed
effective upon the earliest to occur of: (i) actual delivery; or (ii) five (5)
calendar days after mailing, addressed and postage prepaid, return receipt
requested; or (iii) one (1) day after transmission by telex or facsimile
transfer.
15.3 Assignment Neither this Agreement nor any rights hereunder, in whole
or in part, shall be assignable or otherwise transferable by either party
without the express written consent of the other party; provided that either
party may assign this Agreement in the event of a merger for the purpose of
changing its domicile without the other party's prior written consent. Subject
to the above, this Agreement shall be binding upon and inure to the benefit of
the successors and assigns of the parties hereto.
15.4 Severability, Waiver or Amendment. If any Agreement provision is
determined by a court of competent jurisdiction to be contrary to law, the
remaining provisions of the Agreement will continue in effect. No waiver,
amendment or modification of any provision hereof shall be effective unless in
writing and signed by the party against whom such waiver, amendment or
modification is sought to be enforced. No failure or delay by either party in
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exercising any right, power or remedy hereunder shall operate as a waiver of any
such right, power or remedy.
15.5 Rights and Remedies Cumulative. Except as expressly provided herein,
the rights and remedies provided in this Agreement shall be cumulative and not
exclusive of any other rights or remedies provided at law, in equity or
otherwise.
15.6 Excusable Delays; Force Majeure. Neither party shall be responsible
for any delay in or failure to deliver or perform any obligations which is due
to circumstances beyond that party's reasonable control. In the event of any
such failure or delay, the time of performance shall be extended for a period
equal to the time lost by reason of the delay.
15.7 Governing Law. This Agreement is made under, governed by, and shall
be construed in accordance with the laws of the state of California, excluding
its choice of laws rule, as applied to contracts between California corporations
entered into and to be performed entirely in California. The prevailing party in
any judicial action brought to enforce or interpret this Agreement or for relief
for its breach shall be entitled to recover its costs and its reasonable
attorneys' fees incurred to prosecute or defend such action.
15.8 Entire Agreement. The provisions of this Agreement and the Exhibits
hereto constitute the entire agreement between the parties in connection with
the subject matter hereof and supersede all prior and contemporaneous
agreements, understanding, negotiations and discussions, whether oral or
written, between the parties hereto with respect to the subject matter hereof.
15.9 Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which will be considered an original, but all of
which together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties authorized representatives have executed
this Agreement as of the Effective Date.
NOOSH, INC. PAPEREXCHANGE.COM, INC.
By /s/ David Hannebrink By /s/ Rod A. Parsley
------------------------------ ------------------------------
Name: David Hannebrink Name: Rod A. Parsley
--------------------------- ---------------------------
(Print) (Print)
Title: SVP Marketing & Title: VP Business Development
-------------------------- --------------------------
Business Development
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EXHIBIT A
DEVELOPMENT SCHEDULE
To be provided by the parties in accordance with Section 2.4.1
<PAGE>
EXHIBIT B
SPECIFICATIONS
To be provided by the parties in accordance with Section 2.4.1
<PAGE>
Exhibit No. 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our report dated February 11,
2000 (except notes 5 and 8, as to which the date is March 9, 2000) in
Amendment No. 2 to the Registration Statement (Form S-1, No. 333-32176) and
related Prospectus of PaperExchange.com, Inc. dated April 20, 2000.
Our audits also included the financial statement schedule of
PaperExchange.com, Inc. listed in Item 16(b). This schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Ernst & Young LLP
Boston, Massachusetts
April 18, 2000
