-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EoFl3FU+xh9aKAvJSc4W7f8spd00evIRBpFk6w2AY6jnoo3Cf28XUaOkQxrqnd1p pStMxjVH8sEApePy+wG6Gg== 0001017062-99-001796.txt : 19991028 0001017062-99-001796.hdr.sgml : 19991028 ACCESSION NUMBER: 0001017062-99-001796 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 28 FILED AS OF DATE: 19991027 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BUY COM INC CENTRAL INDEX KEY: 0001097070 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 330816584 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-89737 FILM NUMBER: 99734310 BUSINESS ADDRESS: STREET 1: 21 BROOKLINE CITY: ALISO VIEJO STATE: CA ZIP: 92656 BUSINESS PHONE: 9494255230 MAIL ADDRESS: STREET 1: 21 BROOKLINE CITY: ALISO VIEJO STATE: CA ZIP: 92656 S-1 1 BUY.COM REGISTRATION STATEMENT As filed with the Securities and Exchange Commission on October 27, 1999 Registration No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- BUY.COM INC. (Exact Name of Registrant as Specified in Its Charter) ---------------- Delaware 5734 33-0816584 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Number) Identification No.)
21 Brookline Aliso Viejo, California 92656 (949) 425-5200 (Address, Including Zip Code and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) ---------------- Gregory J. Hawkins Chief Executive Officer BUY.COM INC. 21 Brookline Aliso Viejo, California 92656 (949) 425-5200 (Name, Address, Including Zip Code and Telephone Number, Including Area Code, of Agent for Service) Copies to: Bruce R. Hallett, Esq. Larry W. Sonsini, Esq. Ellen S. Bancroft, Esq. Steven L. Berson, Esq. Keven F. Baxter, Esq. Michael S. Russell, Esq. Sean M. Pence, Esq. Thomas M. Dono, Jr., Esq. Brobeck, Phleger & Harrison LLP Wilson Sonsini Goodrich & Rosati 38 Technology Drive Professional Corporation Irvine, California 92618 650 Page Mill Road (949) 790-6300 Palo Alto, California 94304 (650) 493-9300
---------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. ---------------- If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE
================================================================================================= Title of Each Class of Proposed Maximum Aggregate Securities to be Registered Offering Price(1) Amount of Registration Fee - ------------------------------------------------------------------------------------------------- Common Stock, $.0001 par value............ $150,000,000 $41,700 =================================================================================================
(1) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(o). ---------------- 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. ================================================================================ ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and it is not soliciting an offer to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion Preliminary Prospectus dated October , 1999 PROSPECTUS - ---------- Shares [LOGO OF BUY.COM APPEARS HERE] Common Stock ----------- This is BUY.COM INC.'s initial public offering of common stock. Currently, no public market exists for our stock. We expect the initial public offering price to be between $ and $ per share. After the pricing of the offering, we expect that the common stock will trade on the Nasdaq National Market under the symbol "BUYC." Investing in the common stock involves risks which are described in the "Risk Factors" section beginning on page 5 of this prospectus. -----------
Per Share Total ----- ----- Public offering price........................... $ $ Underwriting discount........................... $ $ Proceeds, before expenses, to BUY.COM........... $ $
The underwriters may also purchase up to an additional shares of common stock at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The shares of common stock will be ready for delivery in New York, New York, on or about , 1999. ----------- Merrill Lynch & Co. Bear, Stearns & Co. Inc. Hambrecht & Quist ----------- The date of this prospectus is , 1999. Inside Front Cover of Prospectus 1. Flap (outside) A. Graphics: Five screen shots of the BUY.COM shopping and buying process. B. Annotations for graphics: a. "BUY.COM's Online Shopping Experience" b. The Buy.com home page is designed to allow shoppers to move easily between stores. c. From the home page of each Buy.com store, the customer can view Buy.com's wide selection of products using our search engine, browsing the numerous category pages, or taking advantage of special features including Weekly Specials, Top 25 products and Coming Soon. d. Each Buy.com store has specific product categories to help the customer shop and purchase online. Each category page offers access to more specialized sub-categories and highlights the most popular products within the respective category. e. Throughout the shopping process, our customers can reference specific details and specifications to help make purchasing decisions. f. The customer can shop at each of our stores with the convenience of using one shopping basket for the entire shopping session. 2. Flap (inside gatefold) A. Graphics: Seven screen shots of each of BUY.COM's online stores. B. Annotations for graphics: a. "BUY.COM Why Buy Anywhere Else" b. "Computers" BuyComp.com showcases a comprehensive selection of high quality computer products. c. "Software" BuySoft.com offers a wide selection of software products. Customers can search by title or manufacturer and explore the weekly specials and the "Great Buys" section to find particular products. d. "Games" BuyGames.com features hardware and software for PC, Dreamcast, Playstation, Nintendo 64, and Gameboy systems, along with special features such as screenshots, video clips, and customer reviews. e. "Music" BuyMusic.com offers audio clips and customer reviews to help you choose from a wide selection of CDs and cassettes. f. "Books" BuyBooks.com offers thousands of books, including customer reviews, timely promotions and the ability to read the first chapters of certain selections. g. "Videos" BuyVideos.com offers thousands of movies and videos on VHS and DVD, special promotions, video clips and behind- the-scene information. h. "Clearance" BuyClearance.com is Buy.com's outlet for excess, closeout, and used inventory that is obtained through liquidations, overages, promotions and discontinuations. TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 1 Risk Factors............................................................. 5 Forward-Looking Statements............................................... 18 Use of Proceeds.......................................................... 19 Dividend Policy.......................................................... 19 Capitalization........................................................... 20 Dilution................................................................. 21 Selected Consolidated Financial Data..................................... 22 Selected Unaudited Pro Forma Condensed Combined Statement of Operations Information............................................................. 23 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 24 Business................................................................. 33 Management............................................................... 48 Certain Transactions..................................................... 61 Principal Stockholders................................................... 65 Description of Capital Stock............................................. 67 Shares Eligible for Future Sale.......................................... 71 Underwriting............................................................. 73 Legal Matters............................................................ 75 Experts.................................................................. 76 Where You Can Find More Information...................................... 76 Index to Consolidated Financial Statements............................... F-1
---------------- You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date. PROSPECTUS SUMMARY This summary may not contain all the information that may be important to you. You should read the entire prospectus, including the consolidated financial statements and related notes, before making an investment decision. BUY.COM INC. Overview BUY.COM is a leading multi-category Internet superstore, offering a comprehensive selection of brand name computer hardware and peripherals, software, books, videos, DVDs, computer games, music and clearance equipment at everyday low prices. Through our seven online specialty stores, we offer more than 850,000 stock keeping units or SKUs, using a convenient, intuitive shopping interface that features extensive product information and multi-media presentations. Our e-commerce portal, www.buy.com, links our seven specialty stores and is designed to enhance the customer's online shopping experience 24 hours a day, seven days a week. In addition, we have recently acquired BuyGolf.com, through which we offer golf equipment and other related golf accessories on our Web site located at www.buygolf.com. We employ a virtual operating model that includes outsourcing the majority of our operating infrastructure to leading national distribution and fulfillment partners. By leveraging the cost efficiencies and economies of scale of our distribution and fulfillment partners, we are able to offer a broader selection of products at lower prices and operate with significantly lower operating expenses than many of our competitors. This operating model also allows us to add new product categories easily and rapidly, minimizes our capital investments and eliminates the costs and risks of carrying inventory. Since inception, we have sold our products to more than 1.3 million unique customers, of which 396,000 were added during the third quarter of 1999. According to a BUY.COM sponsored survey, our customers are primarily between 18 and 35 years old, and 80% of our customers visit our stores at least once a week. Additionally, according to this survey, 76% of our customers are college educated and 33% have annual household incomes in excess of $75,000. Media Metrix estimates that approximately 2.5 million unique visitors came to our site in August 1999, representing a 25% increase over the estimated 2.0 million unique visitors to our site in July 1999. Accordingly, our net revenues have increased to $397.6 million for the nine months ended September 30, 1999 from $63.8 million for the nine months ended September 30, 1998 and $125.3 million for the year ended December 31, 1998. This rapid growth in net revenues has recently enabled us to become one of the top five e-commerce providers according to a number of industry studies. During September 1999, approximately 48% of our orders and over 55% of our total booked revenues have come from repeat customers. The Internet provides online retailers essentially unlimited shelf space without significant capital investments, allowing them to quickly build large global customer bases and to potentially achieve superior economic returns over the long-term. In addition, the Internet has emerged as a unique advertising medium that provides advertisers with a cost-effective means of targeting specific customer groups, interacting with and receiving feedback from customers and measuring the effectiveness of specific advertising campaigns. Online advertising also provides advertisers a unique opportunity to use a variety of advertisements and provide substantial product information. We believe that the high level of traffic on our site, coupled with the favorable demographics and purchasing behavior of our customers, will enable us to expand our advertising revenues to complement our product sales. Our objective is to become the leading e-commerce destination offering a broad selection of brand name products and services to consumers and small businesses at everyday low prices, backed by superior customer service. We intend to use our recognized brand and strong market position in computer hardware sales to expand our product offerings to include the most popular product categories on the Internet, encouraging one-stop shopping for multiple products and repeat purchases. We intend to expand our offerings through internal growth, as well as by establishing additional strategic relationships with leading partners, similar to our recently 1 announced joint venture with United Air Lines, Inc. Among our top priorities is to continue to offer superior customer service and improve our communications with customers. We also plan to continue to work with our distribution and fulfillment partners to obtain more timely and accurate product information, shipping and fulfillment. Our business strategy initially focused on using extremely low prices on a broad range of products to drive traffic to our site. As customer loyalty and recognition of our brand name have increased, we have begun to modify our pricing and merchandising strategy to offer a select group of aggressively low priced, high volume products, while promoting associated higher margin products. We have added higher margin products to our stores and have also started to raise prices on many of our SKUs. Since the second quarter of 1999, we have increased our product margins without experiencing any decline in overall sales volumes or customer levels. We intend to further refine this pricing structure over time. We have recently entered into a binding letter of intent with SOFTBANK America, Inc. and several of its affiliates and a New Corporation affiliate to form an international joint venture in the United Kingdom, Australia, New Zealand and India. In addition, we have binding letters of intent to form international joint ventures with several SOFTBANK affiliates in other international territories. In October 1999, we completed the private placement of our Series B convertible participating preferred stock to a group of investors led by SOFTBANK Capital Partners and its affiliates for approximately $90.0 million. These investors also purchased common stock for approximately $75.0 million from a trust controlled by our founder. BUY.COM was formed as a California limited liability company in June 1997 under the name BuyComp LLC and was incorporated in Delaware as Buy Corp. in August 1998. In November 1998, we changed our name to BUY.COM INC. Our executive offices are located at 21 Brookline, Aliso Viejo, California 92656, and our telephone number is (949) 425-5200. Our primary Web site is located at www.buy.com. Information contained on our Web site does not constitute part of this prospectus. The Offering Common stock offered by BUY.COM.................. shares Common stock to be outstanding after this offering........................................ shares Use of proceeds.................................. For repayment of indebtedness and for working capital and other general corporate purposes, including development of our infrastructure to support growth, sales and marketing activities, and for acquisitions of complementary businesses, technologies and strategic relationships. Proposed Nasdaq National Market symbol........... BUYC
The number of shares of common stock outstanding after this offering is based on 142,922,810 shares outstanding as of September 30, 1999, and does not include 30,598,875 shares of common stock issuable upon the exercise of options outstanding as of September 30, 1999 at a weighted average exercise price of $1.85 per share, or warrants to purchase approximately 2,043,550 shares of common stock, based upon an estimated initial public offering price of $ per share, at a weighted average exercise price of $ per share. 2 Summary Consolidated Financial Data (amounts in thousands, except share and per share data) The pro forma combined consolidated statement of operations data for the nine months ended September 30, 1999 show our pro forma results of operations as if the acquisition of BuyGolf.com had occurred on December 1, 1998, the date BuyGolf.com commenced its business operations. The pro forma basic and diluted weighted average shares outstanding gives effect to the issuance of common shares for the acquisition of BuyGolf.com as though it had occurred on January 1, 1999, and gives effect to the conversion of all of our Series A and B participating preferred stock into shares of common stock as if all shares were outstanding and converted on January 1, 1999.
Nine Months Ended September 30, Pro Forma ------------------------ Combined June 7, 1997 Nine Months (Inception) to Year Ended Ended December 31, December 31, September 30, 1997 1998 1998 1999 1999 -------------- ------------ ----------- ----------- ------------- (unaudited) (unaudited) Consolidated Statement of Operations Data: Net revenues............ $ 878 $ 125,290 $ 63,761 $397,601 $ 398,586 Gross profit............ 46 1,763 2,596 (3,613) (3,511) Operating loss.......... (381) (18,039) (4,685) (79,877) (89,177) Net loss................ (390) (17,844) (4,668) (80,527) (89,821) Net loss per share: Basic and diluted..... $ (0.00) $ (0.14) $ (0.04) $ (0.57) $ (0.50) Weighted average shares used in computing net loss per share: Basic and diluted..... 130,129,725 130,905,390 130,129,725 141,814,477 181,315,783
Three Months Ended -------------------------------------------------------- June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, 1998 1998 1998 1999 1999 1999 ------- ------- -------- -------- -------- -------- (unaudited) Quarterly Statements of Operations Data: Net revenues........... $19,233 $34,985 $ 61,529 $107,932 $129,820 $159,849 Gross profit........... 1,051 837 (832) (183) (4,266) 836 Operating loss......... (1,219) (3,031) (13,348) (19,383) (28,060) (32,434) Net loss............... (1,217) (3,008) (13,175) (19,252) (28,091) (33,184)
September 30, 1999 ----------------------------------- Pro Forma Actual Pro Forma As Adjusted ----------- ----------- ----------- (unaudited) (unaudited) (unaudited) Consolidated Balance Sheet Data: Cash and cash equivalents.................. $ 3,231 $ 93,231 $ Working capital (deficit).................. (69,954) 20,046 Total assets............................... 33,889 123,889 Long-term debt, net of current portion..... 1,818 1,818 Total stockholders' equity (deficit)....... (58,598) 31,402
Our pro forma calculations in the summary consolidated balance sheet data above reflect our receipt of approximately $90.0 million in connection with the sale of our Series B convertible participating preferred stock to SOFTBANK and its related entities in October 1999. 3 Our pro forma as adjusted balance sheet data gives effect to the application of the estimated net proceeds from the sale of the shares offered by this prospectus. - -------- Unless otherwise indicated the information in this prospectus does not give effect to the issuance of 4,142,927 shares of common stock in connection with our acquisition of BuyGolf.com, Inc., the issuance of 1,800,000 shares of common stock in connection with our sponsorship agreement with the PGA TOUR or warrants issued to another party to purchase 1,000,000 shares of our common stock. Unless otherwise indicated, all information in this prospectus gives effect to the 15-for-1 stock split effected in July 1999 and assumes that: . the initial public offering price will be $ per share; . all outstanding shares of Series A convertible participating preferred stock and Series B convertible participating preferred stock will be converted into an aggregate of 35,358,379 shares of our common stock upon consummation of this offering; and . the underwriters will not exercise their over-allotment option and no other person will exercise any other outstanding options or warrants. 4 RISK FACTORS You should consider carefully the following risks before you decide to buy our common stock. Additional risks and uncertainties not presently known to us or that we currently believe are not important may also impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected, the value of our common stock could decline, and you may lose all or part of your investment. We are dependent upon our suppliers and other third parties to supply and distribute all of our products, and we do not have long-term contractual relationships with many of them We depend on Ingram Micro, Inc. to provide all of our computer hardware and software products to fulfill our customers' orders. To date, a substantial majority of our product sales revenues were derived from computer hardware and software products acquired from Ingram Micro. We cannot guarantee that Ingram Micro will continue to supply a sufficient quantity of inventory on a timely basis to satisfy our order requirements. If Ingram Micro were to terminate or refuse to renew our distribution arrangement with them, we would have to purchase our computer hardware and software products from other distributors. In addition, in the event we do not purchase a specified annual minimum dollar volume of product from Ingram Micro, our current pricing schedules could be revised. Ingram Micro's termination or failure to renew our contract could cause significant delays in our ability to fulfill our customers' orders, and we may not be able to locate another distributor that can provide comparable fulfillment, processing and shipping services in a timely manner, on acceptable commercial terms, if at all. Our distribution agreement with Ingram Micro terminates in March 2000. However, Ingram Micro can terminate this agreement earlier without cause, provided that they give us notice 120 days prior to the termination. We are also subject to risks associated with Ingram Micro's ability to replenish its inventory in a timely manner. To the extent Ingram Micro maintains computer hardware and software products in-stock, we have an obligation to purchase these items exclusively from them. Due to this purchasing arrangement, our customers' orders could be significantly delayed if we need to seek other distributors to fulfill our customers' orders. Our distribution agreement with Ingram Micro does not require them to set aside any amount of inventory to fulfill our orders or to give our orders priority over other resellers to whom they sell. Furthermore, some vendors may decide, for reasons outside our control, not to offer particular products for sale on the Internet. These vendors may also cause Ingram Micro not to sell products to us. Ingram Micro's delay or inability to supply our orders would substantially harm our business. Our future success also depends on our ability to provide timely and accurate order fulfillment. We depend on Ingram Micro to process and ship substantially all of the computer hardware and software products that we sell to our customers. However, we have limited control over their shipping and processing procedures. Ingram Micro's systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, physical and electronic break-ins, earthquakes and similar events. We do not carry sufficient business interruption insurance to compensate us for any losses that could occur as a result of Ingram Micro's inability to perform for any reason. We are currently dependent on our distribution and fulfillment partners to manage inventory, process orders and distribute products to our customers in a timely manner. In addition to our contract with Ingram Micro for computer hardware and software products, we have supply and distribution contracts with Ingram Entertainment Inc. for videos, DVDs and games, Nashville Computer Liquidators L.P. for our clearance products and Valley Media, Inc. for music products. We do not have any long-term agreements with any of these third parties. We purchase all of our books from the Ingram Book Company, which are shipped and processed by Ingram Fulfillment Services, Inc. and we use Las Vegas Golf & Tennis, Inc. as the primary source for the golf equipment and accessories that we sell. If we do not maintain our existing relationships with these partners on acceptable commercial terms, we may not be able to continue to offer a broad selection of merchandise at low prices, and customers may refuse to shop at our online store. In addition, manufacturers 5 may decide, for reasons outside our control, not to offer particular products for sale on the Internet. For example, in February 1999, Compaq Computer Corp. temporarily suspended its authorization of Internet resellers to sell Compaq products. Other manufacturers, including Dell Computer Corp., have chosen not to authorize any Internet resellers. If we are unable to supply products to our customers, or if other product manufacturers refuse to allow their products to be sold via the Internet, our business would suffer severely. We rely on our distributors to fulfill a number of traditional retail functions, including maintaining inventory and preparing merchandise for shipment to individual customers. In the future, our vendors may not be willing to provide these services at competitive rates. In addition, vendors may refuse to develop the communications technology necessary to support our direct shipment infrastructure. We also have no effective means to ensure that our partners will continue to perform these services to our satisfaction. Our customers could become dissatisfied and cancel their orders or decline to make future purchases if we or our partners are unable to deliver products on a timely basis. If our customers become dissatisfied with our distributors and third party service providers, our reputation and the BUY.COM brand could suffer. Our operations are also heavily dependent upon a number of other third parties, including CyberSource Corporation for credit card processing, ClientLogic Corporation for customer service and support, and Exodus Communications, Inc. for hosting our system infrastructure and database servers. In addition, our distributors and fulfillment partners use the Federal Express Corporation, United Parcel Service and the United States Postal Service to deliver substantially all of our products. If the services of any of these third parties become unsatisfactory, our customers may experience lengthy delays in receiving their orders, and we may not be able to find a suitable replacement on a timely basis or on commercially reasonable terms. We have incurred substantial losses and expect to continue to incur losses for the foreseeable future We have not achieved profitability since our inception and incurred net losses of $17.8 million for the year ended December 31, 1998, and net losses of $80.5 million for the nine months ended September 30, 1999. We expect to continue to incur losses for the foreseeable future due to additional costs and expenses related to: . the implementation of our virtual operating model and our pricing strategies; . the introduction of new product lines or services; . brand development, marketing and other promotional activities; . the expansion of our product and service offerings; . the continued development of our Web site, transaction processing systems and network infrastructure; and . the development of strategic relationships. We sell a substantial portion of our products at very low prices. As a result, we have extremely low and sometimes negative gross margins on our product sales. Our ability to become profitable depends on, among other things: . our ability to generate and sustain substantially higher net sales with improved gross margins while maintaining reasonable expense levels; . our ability to generate significant advertising revenue; and . our ability to provide other higher margin products and services. We have only been operating our online business since November 1997 and face challenges related to early stage companies in rapidly evolving markets We were founded in June 1997 and began our online operations in November 1997. You should consider our prospects in light of the risks and difficulties frequently encountered by early stage companies in the 6 rapidly evolving online commerce market. These risks include, but are not limited to, an unpredictable business environment, the difficulty of managing growth and the use of our virtual operating model. To address these risks, we must, among other things: . expand our customer base; . enhance our brand recognition; . expand our product and service offerings; . access sufficient product inventory to fulfill our customers orders; . successfully implement our business and marketing strategy; . provide superior customer service and order processing; . respond effectively to competitive and technological developments; and . attract and retain qualified personnel. We have a very limited operating history upon which to evaluate our business and our prospects. In view of the rapidly evolving nature of our market and our limited operating history, we believe that period-to-period comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance. Our future operating results may fluctuate and cause the price of our common stock to decline Our limited operating history and the emerging nature of the markets in which we operate make it difficult to accurately predict our future revenues. We expect that our quarterly revenues and operating results will fluctuate significantly from quarter to quarter, due to a variety of factors, many of which are beyond our control. If our quarterly revenues or operating results fall below the expectations of investors or securities analysts, the price of our common stock could significantly decline. The factors that could cause our operating results to fluctuate include, but are not limited to: . our ability to build and maintain customer loyalty; . the introduction of new or enhanced Web pages, services, products and strategic alliances by us and our competitors; . price competition on the Internet or higher wholesale prices in general; . the success of our brand building and marketing campaigns; . our ability to increase advertising revenues; . our ability to maintain and expand our distribution relationships; . fluctuations in the amount of customer spending on the Internet; . increases in the cost of online or offline advertising; . unexpected increases in shipping costs or delivery times; . government regulations related to use of the Internet for commerce; . our ability to maintain, upgrade and develop our Web site, transaction processing systems and network infrastructure; . technical difficulties, system downtime or Internet brownouts; . the amount and timing of operating costs and capital expenditures relating to expansion of our business, operations and infrastructure; and . general economic conditions and economic conditions specific to the Internet and online commerce. 7 Our business model is new and unproven, and we may not be able to achieve profitability We are subject to risks due to the unproven and evolving nature of our virtual operating model and aggressive pricing strategy. The success of our business model depends on the volume of customers that visit our Web site and purchase our products, as well as our ability to generate significant online advertising revenues. To this end, we have worked hard to build our brand name and enhance our customer loyalty by selling our products at extremely low prices and maintaining very low, and sometimes negative, gross margins on our product sales. We intend to implement various strategies to improve our gross margins going forward, which may include raising prices on products and product categories from time to time. To the extent we raise the prices on our merchandise, our product sales may decline. We may also have to increase our prices if distributors receive pressure from manufacturers to discontinue sales to us as a result of our low price strategy. If the amount of traffic to our Web site decreases due to price increases or otherwise, we may become less attractive to our current and potential advertisers. As a result, our margins and advertising revenues may decline. Our recent growth has strained our resources, and if we are unable to manage and sustain our growth, our operating results will be impaired We have rapidly expanded our operations and anticipate that we must continue to expand our operations to address potential market opportunities. If we are unable to manage growth effectively or if we experience disruptions during our expansion, our operating results will suffer. Recent increases in our employee base and the volume of our merchandise sales have placed, and are expected to continue to place, significant demands on our management, operational and financial resources. For example, we expanded from seven employees at December 31, 1997 to 196 employees at September 30, 1999. Our new employees include a number of key managerial and technical employees who have not yet been fully integrated into our management team, and we expect to add additional key personnel in the near future. To manage growth in our operations, we will need to improve or replace our existing Web site, financial systems, procedures and controls. In addition, we will need to expand, train and manage our increasing employee base. We will also need to expand our finance, administrative and operations staff. System failures could prevent access to our online store and harm our business and results of operations Our sales would decline and we could lose existing or potential customers if they are not able to access our online store or if our online store, transaction processing systems or network infrastructure do not perform to our customers' satisfaction. Any network interruptions or problems with our Web site could: . prevent customers from accessing our online stores; . reduce our ability to fulfill orders; . reduce the number of products that we sell; . cause customer dissatisfaction; or . damage our reputation. We have experienced brief computer system interruptions in the past, and these interruptions may recur. If the number of customers visiting our Web site continues to increase, we will need to expand and upgrade our technology, transaction processing systems and network infrastructure significantly. We may not be able to make timely upgrades to our systems and infrastructure to accommodate increases in the number of customers. Our systems and operations are also vulnerable to damage or interruption from a number of sources, including fire, flood, power loss, telecommunications failure, physical and electronic break-ins, earthquakes and other similar events. For example, all of our servers are currently located in Southern California, a seismically active region. Our servers are also vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. Any substantial disruption of this sort could completely impair our ability to generate revenues from our Web site. We do not presently have a formal disaster recovery plan in effect and do not carry sufficient business interruption insurance to compensate us for losses that could occur. 8 We rely on a relatively new management team and need additional personnel to grow our business Several of our executive officers are relatively new, and we intend to continue to hire key management personnel. For example, our future success depends in part on the continued services of Gregory J. Hawkins, our Chief Executive Officer, who was hired in March 1999, and Mitch C. Hill, our Chief Financial Officer, whose employment will commence with us in November 1999. We may experience difficulty assimilating our recently hired managers, and we may not be able to successfully locate, hire, assimilate and retain other qualified key management personnel. Our business is also largely dependent on the personal efforts and abilities of other members of senior management, as well as other key personnel. Any of our officers or employees can terminate their employment relationship at any time. We do not maintain key person life insurance on any member of our management team. The loss of any key employee or our inability to attract or retain other qualified employees could harm our business and results of operations. Our future success depends on our ability to attract, retain and motivate highly skilled technical, managerial, editorial, merchandising, marketing and customer service personnel. We plan to hire additional personnel in all areas of our business. Competition for these types of personnel is intense, particularly in the Internet industry. As a result, we may be unable to successfully attract, assimilate or retain qualified personnel. Online security risks could seriously harm our business A significant barrier to e-commerce and online communications is the secure transmission of confidential information over public networks. Anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against potential security breaches or to alleviate problems caused by any breach. We rely on licensed encryption and authentication technology to provide the security and authentication necessary for secure transmission of confidential information, including credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments may result in a compromise or breach of the algorithms that we use to protect customer transaction data. In the event someone circumvents our security measures, it could seriously harm our business and reputation, and we could lose customers. Security breaches could also expose us to a risk of loss or litigation and possible liability for failing to secure confidential customer information. If we are not able to generate significant advertising revenue, we may not be able to achieve profitability Our future success will depend in part on the willingness of product manufacturers and other advertisers to advertise on our Web site. The market for Internet advertising is new and rapidly evolving. As a result, there is significant uncertainty about the demand for and market acceptance of Internet advertising. In addition, the number of Web sites that offer advertising opportunities has dramatically increased in the last year, thus increasing the competition for available advertising revenue. We cannot assure you that the market for Internet advertising will continue to expand, that it will become sustainable or that we will be able to continue to provide an attractive forum for advertisers. If the market for Internet advertising fails to develop, develops more slowly than we expect or if we do not provide an attractive forum for advertisers, our business may not achieve profitability. Because our advertising revenues generally carry higher gross margins than our product sales, any decline in our advertising revenues would have a disproportionate impact on our overall gross margin. If our current and potential advertisers find Internet advertising to be less effective for promoting their products and services than traditional advertising, they may choose to decrease or discontinue advertising on the Internet or on our Web site. If our advertising revenues decline, we may not be able to replace these revenues through other programs or through our product sales. 9 Our recent and planned expansion into new product categories and business areas is costly, risky and may not be profitable We have pursued an aggressive expansion strategy in the past year, opening six new online stores and acquiring BuyGolf.com. Continued expansion of our operations requires substantial expenses and development, operations and editorial resources, and strains our management, financial and operational resources. We may choose to continue to expand our operations by: . developing new Web sites; . pursuing new or complementary products, services or sales formats; . expanding the breadth and depth of the products and services that we offer; or . expanding our market presence through relationships with third parties. As we expand into other product or service offerings, we risk diluting our brand name, confusing customers and decreasing interest from our advertisers. In addition, we could be exposed to additional or unexpected risks as we enter into new business areas and may be forced to abandon our current business model or alter our strategic plans. If our expansion efforts are unsuccessful, our business may suffer, and we may lose potential market opportunities. In addition, we may pursue the acquisition of new or complementary businesses or technologies, although we have no present understandings, commitments or agreements with respect to any material acquisitions or investments. We may not be able to expand our efforts and operations in a cost- effective or timely manner and these efforts may not achieve market acceptance. Furthermore, any new business or Web site that we launch that is not favorably received by customers could damage our reputation or the BUY.COM brand. If sales from our computer products decline, our operating results will suffer Our operating results substantially depend on product revenue from the sale of computer hardware, software products and peripherals. To date, a substantial majority of our product sales revenues are derived from computer hardware and software products. We expect that revenue from these products will continue to represent more than a majority of our total product revenues during the next twelve months. We could experience declines in these product sales due to several factors, including, but not limited to: . decreased customer demand for computer hardware, software and peripheral products; . increased price competition from our competitors; . technological obsolescence of the computer hardware, software and peripheral products that we offer; or . decisions by manufacturers of computer products to curtail or eliminate the sale of products or categories of products over the Internet by us. If we are unable to maintain our current sales levels of computer hardware, software and peripheral products, our financial condition and results of operations would suffer. We must continue to develop and maintain the BUY.COM brand, which is costly and may not generate corresponding revenues Maintaining and strengthening the BUY.COM brand is an important factor in attracting new customers, building customer loyalty and attracting advertisers. Accordingly, we intend to continue to pursue an aggressive 10 promotional strategy to enhance our brand. These initiatives have involved, and are expected to continue to require, significant expenditures. If we are unsuccessful in our promotional efforts, we may never be able to recover these expenses or increase our revenues or margins. We also believe potential customers and advertisers are driven to our online store because of our strong brand recognition. If advertisers do not believe our Web site is an effective marketing and sales channel for their merchandise, or if customers do not perceive us as offering a desirable way to purchase merchandise, our branding efforts will suffer and we may lose customers. Our ability to build and strengthen the BUY.COM brand depends largely on: . the success of our advertising and promotional efforts; . our ability to provide our customers with a broad range of products at competitive prices; and . our ability to provide high quality customer service. To promote the BUY.COM brand in response to competitive pressures, we may increase our marketing budget or otherwise increase our financial commitment to creating and maintaining brand loyalty among our customers. For example, we spent approximately $13.4 million on sales and marketing in the fiscal year ended December 31, 1998 and approximately $44.1 million for the nine months ended September 30, 1999, and we expect these expenses to continue to increase for the remainder of 1999. We cannot be certain that our advertising efforts will be a successful means of customer acquisition or that this allocation of resources will provide additional revenues equal to this dedication of our resources. If we fail to promote and maintain our brand, or if we incur excessive expenses attempting to promote and maintain our brand, our business may suffer. If we do not respond to technological change, our stores could become obsolete, and we could lose customers The development of our Web site entails significant technical and business risks. To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our online stores. The Internet and the e-commerce industry are characterized by: . rapid technological change; . changes in customer requirements and preferences; . frequent new product and service introductions embodying new technologies; and . the emergence of new industry standards and practices. The evolving nature of the Internet could render our existing online stores and systems obsolete. Our success will depend, in part, on our ability to: . license or acquire leading technologies useful in our business; . enhance our existing online stores; . develop new services and technology that address the increasingly sophisticated and varied needs of our current and prospective customers; and . adapt to technological advances and emerging industry and regulatory standards and practices in a cost-effective and timely manner. Future advances in technology may not be beneficial to, or compatible with, our business. Furthermore, we may not use new technologies effectively or adapt our Web site and transaction processing systems to customer requirements or emerging industry standards on a timely basis. Our ability to remain technologically competitive may require substantial expenditures and lead time. If we are unable to adapt to changing market conditions or user requirements in a timely manner, our stores may become obsolete and we will lose customers. 11 If the software, hardware, computer technology and other systems and services we use are not Year 2000 compliant, our operations could suffer and we could lose customers Many existing computer systems and software products are coded to accept only two digit entries in the date code field and cannot distinguish 21st century dates from 20th century dates. If not corrected, there could be system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in normal business activities. As a result, many companies' software and computer systems may need to be upgraded or replaced to become "Year 2000" compliant. We use and depend on third party equipment and software that may not be Year 2000 compliant. If Year 2000 issues prevent our customers from accessing the Internet or our Web site, processing orders or using their credit cards, our business and operations will suffer. We are also entirely dependent upon distribution and fulfillment partners to provide and distribute the merchandise we sell in our online stores directly to our customers. We also rely on Federal Express, United Parcel Service, United States Postal Service and other third party carriers to deliver orders to our customers. Any failure of our third party equipment, software or services to operate properly could require us to incur unanticipated expenses, which could seriously harm our business and operating results. Our failure to make our Web site, network infrastructure and transaction processing systems Year 2000 compliant could result in: . a decrease in our sales; . a disruption in our ability to fulfill orders; . an increase in our allocation of resources to address Year 2000 problems without additional revenue equal to this dedication of resources; and . an increase in litigation costs relating to losses suffered by our customers due to Year 2000 problems. Furthermore, the purchasing patterns of customers or potential customers may be affected by Year 2000 issues as companies expend significant resources to correct their current systems. These expenditures may result in reduced funds available to purchase products on our Web site, thus causing a decrease in our product sales revenues. We may be subject to liability for sales and other taxes We currently collect sales or other similar taxes on the shipment of goods in the States of California, Massachusetts and Tennessee. However, one or more states could seek to impose additional income tax obligations or sales tax collection obligations on out-of-state companies, such as ours, which engage in or facilitate online commerce. A number of proposals have been made at state and local levels that could impose taxes on the sale of products and services through the Internet or the income derived from these sales. These proposals, if adopted, could substantially impair the growth of e-commerce and adversely affect our ability to become profitable. Furthermore, since our service is available over the Internet in multiple states and in foreign countries, these jurisdictions may require us to qualify to do business in these states and foreign countries. If we fail to qualify in a jurisdiction that requires us to do so, we could face liabilities for taxes and penalties. Internet domain names are essential to our business, and we may be unable to protect our domain names Internet domain names are critical to our brand recognition and our overall success. We currently hold over 1,200 domain names relating to our brand, including BUY.COM and each domain name for our specific online stores and subcategories. If we are unable to protect these domain names, our competitors could capitalize on our brand recognition. The acquisition and maintenance of domain names generally are regulated by governmental agencies and their designees. The regulation of domain names in the United States and in foreign countries has changed and is subject to further change in the near future. As a result, we may be unable to acquire or maintain relevant domain names in the United States and in other countries where we conduct 12 business. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. Therefore, we may be unable to protect our own domain names or prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our domain names, trademarks and other intellectual property rights. Our operating results could be impaired if we become subject to burdensome government regulations and legal uncertainties concerning the Internet Due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may be adopted with respect to the Internet, relating to: . user privacy; . pricing, usage fees and taxes; . content; . copyrights; . online advertising and marketing . distribution; . characteristics and quality of products and services; and . online advertising and marketing. The adoption of any additional laws or regulations may decrease the popularity or impede the expansion of the Internet and could seriously harm our business. A decline in the popularity or growth of the Internet could decrease demand for our products and services, reduce our advertising revenues and margins and increase our cost of doing business. Moreover, the applicability of existing laws to the Internet is uncertain with regard to many important issues, including property ownership, intellectual property, export of encryption technology, libel and personal privacy. The application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and other online services, could also harm our business. Our growth and operating results could be impaired by the risks associated with our planned international expansion A key component of our business strategy is to expand our international sales, and we intend to establish a physical presence in international markets in the future. For example, we have already initiated expansion into Europe and Canada. Conducting business in foreign countries involves inherent risks, including, but not limited to: . unexpected changes in regulatory requirements; . export restrictions; . tariffs and other trade barriers; . difficulties in protecting intellectual property rights; . difficulties in staffing and managing foreign operations; . problems collecting accounts receivable; . longer payment cycles; . political instability; . fluctuations in currency exchange rates; and . potentially adverse tax consequences. 13 If we are unable to successfully defend against pending legal actions against us, we could face substantial liabilities We are currently a party to pending legal actions against us, the outcomes of which are uncertain and could result in significant judgments against us. In March 1999, a class action suit was filed against us in the Orange County California Superior Court alleging we intentionally mispriced products and charged for orders knowing the orders could not be fulfilled. Another class action suit was filed against us in Camden County, New Jersey in March 1999 based on facts similar to the class action pending in Orange County. Defending against these lawsuits may involve significant expense and diversion of management's resources. Furthermore, due to the inherent uncertainties of litigation, we may not prevail in these actions. In addition, the methods that we use to update our product prices may result in future pricing errors that may subject us to significant litigation and costs in the future. For a more detailed description of these litigation matters, see "Business--Legal Proceedings." The success of our business depends on the continued growth of the Internet as a viable commercial marketplace Our success depends upon the widespread acceptance of the Internet as a vehicle to purchase products. The e-commerce market is at an early stage of development, and demand and continued market acceptance is uncertain. We cannot predict the extent to which customers will shift their purchasing habits from traditional to online retailers. If customers or manufacturers are unwilling to use the Internet to conduct business and exchange information, our business will fail. It is possible that the Internet may not become a viable long-term commercial marketplace due to the potentially inadequate development of the necessary network infrastructure, the delayed development of enabling technologies and performance improvements and the high cost of shipping products. The commercial acceptance and use of the Internet may not continue to develop at historical rates, or may not develop as quickly as we expect. In addition, concerns over security and privacy may inhibit the growth of the Internet. Because we face intense competition in various retail segments and operate in an industry with limited barriers to entry, some of our competitors may be better positioned to capitalize on the rapidly growing e-commerce market The e-commerce market is new, rapidly evolving and intensely competitive. Many of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing, technical, management and other resources than we do. Some of our competitors have and may continue to use aggressive pricing or inventory availability practices and devote substantially more resources to Web site and system development than us. We expect that competition will further intensify in the future. Because barriers to entry are limited, current and new competitors can launch Web sites at a relatively low cost and can expand their operations rapidly. New technologies and the expansion of existing technologies may also increase the competitive pressure we face. Increased competition may result in reduced operating margins, loss of market share and diminished brand recognition. We believe that the primary competitive factors in the online market include brand recognition, price, product selection, ease of use, customer service, available content and value added services. We currently compete with a variety of online vendors that specialize in computer hardware and software products, as well as those who sell books, music, videos, DVDs and other entertainment products. Moreover, all of the products we sell in our online stores are typically available from traditional retailers. Consequently, we must compete with companies in the online commerce market as well as the traditional retail industry. With respect to computer hardware, software, peripheral and clearance product markets, our competitors include, but are not limited to: . traditional computer retailers, including CompUSA and MicroCenter; . catalogue retailers, including Insight and PC Connection; 14 . online computer retailers, including Cyberian Outpost, Egghead.com and Onsale; and . software and hardware manufacturers that market their products through their own Web sites, including Apple Computer, Dell Computer and Gateway. Our current or potential competitors with respect to books, DVDs and videos, and other entertainment related products include, but are not limited to: . traditional entertainment product retailers, including Barnes & Noble, Blockbuster Video and Borders; . internet-focused entertainment product retailers, including Amazon.com and Reel.com; and . non-entertainment retailers that sell a limited selection of entertainment products, such as Wal-Mart. We would also realize significant competitive pressure if any of our distribution partners were to initiate their own retail operations. Since our distributors have access to merchandise at very low costs, they could sell products at lower prices and maintain a higher gross margin on their product sales than we can. In this event, our current and potential customers may decide to purchase directly from these distributors. Increased competition from any distributor capable of maintaining high sales volumes and acquiring product at lower prices than us could significantly reduce our market share. Our growth and operating results could be impaired if we are unable to meet our future capital needs Based on our current operating plan, we anticipate that the net proceeds of this offering, together with our available funds, will be sufficient to satisfy our anticipated needs for working capital, capital expenditures and business expansion for at least the next twelve months. After that time, we may need additional capital. Alternatively, we may need to raise additional funds sooner to: . fund more rapid expansion; . develop new product lines or enhanced services; . fund acquisitions; or . respond to competitive pressures. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our stockholders will be diluted. Furthermore, any new securities could have rights, preferences and privileges senior to those of our common stock. We currently do not have any commitments for additional financing. We cannot be certain that additional financing will be available when and to the extent required or that, if available, it will be on acceptable terms. If adequate funds are not available on acceptable terms, we may not be able to fund our expansion, develop or enhance our products or services or respond to competitive pressures. If we are unable to successfully manage the transition of our leadership, our business could suffer Scott A. Blum, our founder, majority stockholder and former Chief Executive Officer and Chairman, recently resigned from our Board of Directors, terminated his employment relationship with us, deposited all of his shares of our common stock into a voting trust, which shares as of October 15, 1999 represented approximately 56% of our outstanding capital stock, and withdrew from participation in our management, business and operations. To date, Mr. Blum has been primarily responsible for conceiving, developing and implementing our virtual operating business model and recruiting our Board of Directors and our current management team. In addition, Mr. Blum has been directly involved in the creation, development and implementation of our corporate image and advertising strategy. Mr. Blum's withdrawal from our business and our inability to replace Mr. Blum could harm our business. 15 If we are unable to protect our trademarks and intellectual property rights, our reputation and brand could be impaired, and we could lose customers We regard our trademarks, trade secrets and similar intellectual property as critical to our success. We rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with employees, customers, partners and others to protect our proprietary rights. We cannot be certain that we have taken adequate steps to protect our proprietary rights, especially in countries where the laws may not protect our rights as fully as in the United States. In addition, third parties may infringe or misappropriate our proprietary rights, and we could be required to incur significant expenses to preserve them. We have pursued the registration of our trademarks in the United States and internationally, and have applied for the registration of some of our trademarks and service marks. We have pending trademark registrations for many names; however, even if we obtain registrations for these names, the registrations may not adequately protect us against infringement by others. Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our products and service are made available online. If we are not able to protect our trademarks or other intellectual property, we may experience difficulties in achieving and maintaining brand recognition and customer loyalty. Intellectual property claims against us could be costly and result in the loss of significant rights Other parties may assert infringement or unfair competition claims against us. In the past, other parties have sent us notices of claims of infringement of intellectual property rights, and we expect to receive other notices in the future. We cannot predict whether third parties will assert claims of infringement against us, or whether any past or future assertions or prosecutions will adversely affect our business. If we are forced to defend against any of these claims, whether meritless or not, are determined in our favor, we may face costly litigation and diversion of technical and management personnel. As a result of these disputes, we may have to expend significant resources to develop or acquire non-infringing property. Alternatively, we may need to pursue royalty or licensing agreements, which may not be available on acceptable terms, if at all. SOFTBANK controls a majority of our outstanding common stock, which will enable it to control many significant corporate actions and may prevent a change in control that would otherwise be beneficial to our stockholders Upon completion of this offering, shares of common stock constituting approximately % of our outstanding stock will be voted in accordance with the terms of a voting trust agreement. On significant stockholder actions, as defined as the voting trust agreement, the trustees are required to vote the trust shares to mirror the voting of all shares which are not subject to the terms of the voting trust agreement. On routine stockholder actions, the trustees have the discretion to vote the trust shares in any manner determined by a majority of the trustees. As a result, SOFTBANK and its affiliates will effectively control the votes of approximately % of our common stock on significant corporate actions and % on routine corporate governance matters immediately after this offering. This control by SOFTBANK could have a substantial impact on matters requiring the vote of the stockholders, including the election of our directors and most of our corporate actions. This control could delay, defer or prevent others from initiating a potential merger, takeover or other change in our control, even if these actions would benefit our stockholders and us. This control could adversely affect the voting and other rights of our other stockholders and could depress the market price of our common stock. We have broad discretion as to the use of proceeds from this offering and may not use the proceeds effectively We estimate the net proceeds of this offering to be approximately $138.0 million. Our management team will retain broad discretion as to the allocation of the proceeds and may spend these proceeds in ways that our stockholders may not agree. 16 Our stock price may be volatile, which may result in losses to our stockholders The trading price of our common stock is likely to be volatile and could fluctuate widely in response to many of the following factors, some of which are beyond our control: . variations in our operating results; . announcements of technological innovations, new services or product lines by us or our competitors; . changes in expectations of our future financial performance, including financial estimates by securities analysts and investors; . changes in operating and stock price performance of other Internet and online commerce companies; . conditions or trends in the Internet industry; . additions or departures of key personnel; and . future sales of our common stock. Domestic and international stock markets often experience significant price and volume fluctuations. These fluctuations, as well as general economic and political conditions unrelated to our performance, may adversely affect the price of our common stock. In particular, following initial public offerings, the market prices for stocks of Internet and technology-related companies often reach levels that bear no established relationship to the operating performance of these companies. These market prices are generally not sustainable and could vary widely. The market prices of the securities of Internet-related and online companies have been especially volatile. If our common stock trades to high levels following this offering, it could eventually experience a significant decline. A large number of additional shares may be sold into the public market in the near future, which may cause the market price of our common stock to decline significantly, even if our business is doing well After this offering, we will have outstanding shares of common stock. This includes the we are selling in this offering, which may be resold in the public market immediately. The remaining %, or 178,281,189 shares, of our total shares outstanding after the offering will become available for resale in the public market as shown in the chart below. As restrictions on resale end, the market price could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them.
Number of shares Date of availability for resale into public market ---------------- -------------------------------------------------- 180 days after the date of this prospectus due to an agreement these stockholders have with the underwriters. However, the underwriters can waive this restriction and allow these stockholders to sell their shares at any time. Between 180 and 365 days after the date of this prospectus due to the requirements of the federal securities laws.
For a more detailed description, see "Shares Eligible for Future Sale." Our charter documents could defer a takeover effort, which could inhibit your ability to receive an acquisition premium for your shares Provisions of our certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. For a more detailed discussion of these provisions, see "Description of Capital Stock--Anti-Takeover Provisions." 17 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about us and our industry. When used in this prospectus, the words "expects," "anticipates," "estimates," "intends" and similar expressions are intended to identify forward looking statements. These statements include, but are not limited to, statements under the captions "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus concerning, among other things: . our ability to maintain and expand current distribution, fulfillment and other partnering relationships and to enter into new relationships; . our ability to attract advertisers and increase advertising revenue; . our ability to increase our gross margins; . our ability to broaden our existing product lines or expand into new product categories; and . our Year 2000 readiness. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. The cautionary statements made in this prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this prospectus. We assume no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. 18 USE OF PROCEEDS The net proceeds from the sale of the shares of common stock sold by us in this offering are estimated to be approximately $138.0 million based on an assumed initial public offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. At this time, the principal purposes of this offering are to obtain additional capital to increase our financial flexibility and to create a public market for our common stock. We presently intend to use the net proceeds of this offering in the following ways: . approximately $20.0 million for capital expenditures associated with technology and systems upgrades and the expansion of our corporate headquarters; . approximately $8.7 million to repay loans from SOFTBANK America, Inc. to us in connection with the formation of three international joint ventures; and . approximately $8.5 million to pay part of our sponsorship fee in connection with our agreement with the PGA TOUR, Inc. We also intend to spend a portion of the net proceeds of this offering to expand our sales and marketing capabilities, particularly for advertising campaigns and promotions to increase brand recognition, to pursue new product categories and expand our current product categories, and to expand internationally. We may also use an unspecified portion of the net proceeds of this offering to acquire or invest in complementary businesses, services or technologies, or to enter into strategic marketing relationships with third parties. From time to time, in the ordinary course of business, we expect to evaluate potential acquisitions of these businesses, services or technologies and strategic relationships. At this time, however, we do not have any present understandings, commitments or agreements with respect to any material acquisition. We have no specific plans at this time for use of the remaining proceeds and expect to use these proceeds for working capital and general corporate purposes. Our management will have broad discretion concerning the allocation and use of a significant portion of the net proceeds of this offering. Pending the use of the net proceeds of this offering, we intend to invest these proceeds in short-term, investment grade, interest bearing securities. The foregoing represents our best estimate of the allocation of the net proceeds from the sale of the common stock offered by this prospectus, based upon the current state of our business operations, our current plans for expansion and the current economic and industry conditions. The net proceeds are subject to reallocation among the categories stated above. The amount or timing of our actual expenditures will depend on numerous factors, including our profitability, the availability of alternative financing, our business development activities and competition. DIVIDEND POLICY We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings to finance the growth and development of our business. Therefore, we do not anticipate that we will declare or pay any cash dividends on our common stock in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, restrictions under any existing indebtedness and other factors the Board of Directors deems relevant. 19 CAPITALIZATION The following table indicates our capitalization at September 30, 1999: . on an actual basis; . on a pro forma basis to give effect to the conversion of all of our Series A preferred stock and the issuance of our Series B preferred stock into an aggregate of 35,358,379 shares of common stock upon the completion of this offering; and . on a pro forma as adjusted basis to reflect this conversion and the issuance of shares of common stock at an assumed initial public offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. This table should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus.
September 30, 1999 ----------------------------------- Pro Forma Actual Pro Forma As Adjusted ----------- ----------- ----------- (unaudited) (unaudited) (unaudited) (amounts in thousands , except share and per share data) Total long-term debt, net of current portion................... $ 1,818 $ 1,818 $ Stockholders' equity (deficit): Convertible preferred stock, $.0001 par value (Series A and B); 150,000,000 authorized; 19,481,130 shares issued and outstanding; no shares issued and outstanding, pro forma and pro forma as adjusted; including additional paid-in capital....... 14,943 -- Common stock, $.0001 par value; 850,000,000 shares authorized; 142,922,810 shares issued and outstanding, actual; 178,281,189 shares issued and outstanding, pro forma; shares issued and outstanding, pro forma as adjusted ........................ 14 18 Additional paid-in capital, common........................... 33,593 138,532 Deferred compensation............. (8,387) (8,387) Accumulated deficit............... (98,761) (98,761) -------- ------- ------- Total stockholders' equity (deficit)...................... (58,598) 31,402 -------- ------- ------- Total capitalization........... $(56,780) $ 33,220 $ ======== ======= =======
- -------- These share amounts exclude 30,598,875 shares of common stock issuable upon the exercise of options outstanding as of September 30, 1999 at a weighted average exercise price of $1.85 per share and warrants to purchase approximately 2,043,550 shares of common stock, based upon an estimated initial public offering price of $ per share, at a weighted average exercise price of $ per share. For additional information regarding our capital structure, see "Management--Employee Benefit Plans," "Description of Capital Stock" and notes 8 and 9 of notes to consolidated financial statements. 20 DILUTION Our pro forma net tangible book value as of September 30, 1999, which includes actual proceeds of approximately $90.0 million from the issuance of 15,877,249 shares of Series B convertible participating preferred stock, was approximately $24.2 million, or $0.14 per share of common stock. Our pro forma net tangible book value does not give effect to the issuance of 4,142,927 shares of common stock in connection with our acquisition of BuyGolf.com or the issuance of 1,800,000 shares of common stock in connection with our sponsorship agreement with PGA TOUR. Pro forma net tangible book value per share represents our total tangible assets less total liabilities divided by the pro forma number of shares of common stock outstanding as of September 30, 1999, after giving effect to the conversion of all outstanding shares of our convertible participating preferred stock, which immediately converts upon the closing of this offering into 35,358,379 shares of common stock. Without taking into account any other changes in pro forma net tangible book value other than to give effect to our sale of the shares of common stock offered by this prospectus and the receipt and application of those net proceeds, our pro forma net tangible book value as of September 30, 1999 would have been $ million, or $ per share of common stock. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $ per share to investors purchasing common stock in this offering. The following table illustrates this per share dilution (unaudited): Assumed initial public offering price per share........... $ Pro forma net tangible book value per share as of September 30, 1999...................................... $ 0.14 Increase per share attributable to new investors......... --------- Pro forma net tangible book value per share after this offering................................................. ----- Dilution per share to new investors....................... $ =====
The following table summarizes as of September 30, 1999, on a pro forma basis which included the sale of our Series B convertible participating preferred stock, the difference between the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing stockholders and by new investors, assuming an initial public offering price of $ per share and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:
Shares Purchased Total Consideration Average ------------------- -------------------- Price Number Percent Amount Percent per Share ----------- ------- ------------ ------- --------- Existing stockholders.... 178,281,189 % $116,930,000 % $0.66 New investors............ ----------- --- ------------ --- Total................ 100% $ 100% =========== === ============ ===
The foregoing tables assume no exercise of the underwriters' over-allotment option or any stock options or warrants outstanding as of September 30, 1999, and does not give effect to the issuance of 1,800,000 shares of common stock in connection with our sponsorship agreement with the PGA TOUR. As of September 30, 1999, options to purchase 30,598,875 shares of common stock were outstanding at a weighted average exercise price of $1.85 per share. To the extent that these options are exercised, new investors will experience further dilution. As of September 30, 1999, warrants to purchase approximately 2,043,550 shares of common stock were outstanding, based upon an estimated initial public offering price of $ per share, at a weighted average exercise price of $ per share. For additional information regarding our stock options, see note 9 of notes to consolidated financial statements. 21 SELECTED CONSOLIDATED FINANCIAL DATA (amounts in thousands, except share and per share data) The following selected consolidated financial data as of December 31, 1997 and 1998 and for the period from June 7, 1997 (Inception) to December 31, 1997 and the year ended December 31, 1998 have been derived from our consolidated financial statements and related notes audited by Arthur Andersen LLP, independent public accountants, included elsewhere in this prospectus. The selected consolidated statement of operations data for the nine months ended September 30, 1998 and 1999 and the selected consolidated balance sheet data as of September 30, 1999, are derived from our unaudited financial statements included elsewhere in this prospectus. Our unaudited financial statements have been prepared on substantially the same basis as the audited consolidated financial statements and, in the opinion of our management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial condition as of and results of operations for these periods. The historical results are not necessarily indicative of future results. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included elsewhere in this prospectus.
June 7, 1997 Nine Months Ended (Inception) to Year Ended September 30, December 31, December 31, -------------------------- 1997 1998 1998 1999 -------------- ------------ ----------- ------------- (unaudited) Consolidated Statement of Operations Data: Net revenues............ $ 878 $ 125,290 $ 63,761 $ 397,601 Cost of goods sold...... 832 123,527 61,165 401,214 ----------- ----------- ----------- ----------- Gross profit............ 46 1,763 2,596 (3,613) ----------- ----------- ----------- ----------- Operating expenses: Sales and marketing.... 130 13,430 2,770 44,094 Product development.... 30 950 404 3,851 General and administrative........ 260 4,250 3,624 12,872 Depreciation and amortization.......... 7 377 61 3,009 Amortization of deferred compensation.......... -- 795 422 5,417 Charge for warrants.... -- -- -- 7,021 ----------- ----------- ----------- ----------- Total operating expenses............ 427 19,802 7,281 76,264 ----------- ----------- ----------- ----------- Operating loss.......... (381) (18,039) (4,685) (79,877) ----------- ----------- ----------- ----------- Other income (expense): Interest income (expense), net........ (7) 202 78 (721) Other.................. -- (4) (58) 74 ----------- ----------- ----------- ----------- Total other income (expense).............. (7) 198 20 (647) ----------- ----------- ----------- ----------- Loss before provision for income taxes....... (388) (17,841) (4,665) (80,524) Provision for income taxes.................. 2 3 3 3 ----------- ----------- ----------- ----------- Net loss................ $ (390) $ (17,844) $ (4,668) $ (80,527) =========== =========== =========== =========== Net loss per share: Basic and diluted...... $ (0.00) $ (0.14) $ (0.04) $ (0.57) Weighted average shares outstanding: Basic and diluted...... 130,129,725 130,905,390 130,129,725 141,814,477 December 31, --------------------------- September 30, 1997 1998 1999 -------------- ------------ ------------- (unaudited) Consolidated Balance Sheet Data: Cash and cash equivalents............ $ 34 $ 9,221 $ 3,231 Working capital (deficit).............. (391) (3,562) (69,954) Total assets............ 267 26,837 33,889 Long-term debt, net of current portion........ -- 1,175 1,818 Total stockholders' equity (deficit)....... (340) 6,635 (58,598)
Please refer to note 10 of the notes to consolidated financial statements for information regarding the method used to compute our basic and diluted net loss per share. The selected consolidated financial data above does not reflect our receipt of approximately $90.0 million in connection with the sale of our Series B convertible participating preferred stock to SOFTBANK and its related entities in October 1999. 22 SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS INFORMATION (amounts in thousands, except share and per share data) The following selected unaudited pro forma condensed combined financial information and related notes contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed here. We have no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. The selected unaudited pro forma condensed combined financial information is based upon, and should be read together with, the historical financial statements of BUY.COM and BuyGolf.com and the related notes to these financial statements. The selected unaudited pro forma condensed combined financial information is based upon tentative allocations of purchase price for the acquisitions and may not show the results that would have been reported had such events actually occurred on the dates specified, nor does it indicate our future results. Purchase accounting is based upon preliminary asset valuations, which are subject to change. The selected unaudited pro forma condensed combined statement of operations information for the nine months ended September 30, 1999 is presented as if BUY.COM had completed the acquisition of BuyGolf.com as of January 1, 1999. Since BuyGolf.com did not commence operations until December 1, 1998, the impact of the acquisition of BuyGolf.com to the selected unaudited pro forma condensed combined statement of operations information for the year ended December 31, 1998 is immaterial and has not been shown.
Nine Months Ended September 30, 1999 ------------------------------------------------------ BUY.COM BuyGolf.com, Pro Forma Pro Forma Inc. Inc.(a) Adjustments Combined ----------- ------------ ----------- ----------- Net revenues............ $ 397,601 $ 1,025 $ (40)(b) $ 398,586 Cost of goods sold...... 401,214 883 -- 402,097 ----------- ----------- ----------- ----------- Gross profit............ (3,613) 142 (40) (3,511) Total operating expense................ 76,264 3,584 5,818 (c) 85,666 ----------- ----------- ----------- ----------- Operating loss.......... (79,877) (3,442) (5,858) (89,177) Total other income (expense).............. (647) 7 -- (640) ----------- ----------- ----------- ----------- Loss before provision for income taxes....... (80,524) (3,435) (5,858) (89,817) Provision for income taxes.................. 3 1 -- 4 ----------- ----------- ----------- ----------- Net loss................ $ (80,527) $ (3,436) $ (5,858) $ (89,821) =========== =========== =========== =========== Net loss per share: Basic and diluted...... $ (0.62) Weighted average number of commons shares outstanding: Basic and diluted...... 145,642,459
- -------- (a) The results of operations of BuyGolf.com will be included in our consolidated results commencing October 1, 1999. This presentation shows the pro forma effects of the operations of BuyGolf.com as if the acquisition occurred on January 1, 1999. (b) Represents advertising revenues/expenses, recorded for the nine months ended September 30, 1999, that should be eliminated upon the acquisition of BuyGolf.com by BUY.COM. (c) Represents the amortization of goodwill that would have been recorded for the nine months ended September 30, 1999, if the acquisition of BuyGolf.com occurred on January 1, 1999. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read together with our selected consolidated financial data and the consolidated financial statements and related notes included elsewhere in this prospectus. Overview BUY.COM is a leading multi-category Internet superstore, offering a comprehensive selection of brand name computer hardware and peripherals, software, books, videos, DVDs, computer games and music at everyday low prices. Through our seven online specialty stores, we offer more than 850,000 stock keeping units, or SKUs, in a convenient, intuitive shopping interface that features extensive product information and multi-media presentations. Our e- commerce portal, www.buy.com, links our seven specialty stores and is designed to enhance the customer's online shopping experience 24 hours a day, seven days a week. From our inception in June 1997 through mid November 1997, we had no sales and our operating activities related primarily to the planning and development of our original Web site, BUYCOMP.COM, which offered computer hardware and software products. Beginning with the opening of our BUYCOMP.COM online computer store in November 1997 through November 1998, we continued to expand our infrastructure and focused on expanding distributor and vendor relationships, attracting customers to our Web site, building our brand and establishing customer service operations. In December 1998, we acquired Speedserve, Inc., an online retailer of books, videos, DVDs and video games, and reincorporated BUY.COM in Delaware. Concurrent with this acquisition, we opened our BUY.COM Web site that consolidated Speedserve's retail Web site with our existing computer hardware and software online retail store to create five specialty online retail stores. In late April 1999, we launched the BUYMUSIC.COM store and an improved version of our Web site that incorporated increased functionality and speed, broader content and enhanced customer service. In May 1999, we added our newest online retail store, BUYCLEARANCE.COM, which offers high quality, brand name, closeout products at significant discounts. We derive revenues principally from the sale of products and, to a lesser extent, from paid advertisements on our Web site. We recognize product revenue upon shipment of products. We generally recognize advertising revenue straight line over the period of time an advertisement runs on our site. In some circumstances, our agreements with advertisers require consumer action, in which cases, we recognize advertising revenue when the consumer action is completed. We have employed a virtual operating model that includes outsourcing the majority of our infrastructure to leading national distribution and fulfillment partners with established expertise. Through this model, we capitalize on the cost efficiencies achieved by our distribution partners and minimize our infrastructure and operating expenses, enabling us to pass significant savings on to our customers. Additionally, by aligning with leading distributors in each of our product categories, we can use their significant inventories and distribution capabilities to offer a broader selection of products at lower costs than traditional retailers can. Initially, our strategy has focused on using extremely low prices together with aggressive marketing and advertising campaigns to drive traffic to our web site, promote our brand and build sales momentum. As a result of these advertising and merchandising strategies, our revenues have grown rapidly. Net revenues were $125.3 million for the year ended December 31, 1998 and $397.6 million for the nine months ended September 30, 1999. We have constructed our e-commerce portal to function as a multi-category Internet superstore, enabling customers to purchase products from each of our online specialty stores in the same shopping visit and encouraging repeat purchases. Since inception, we have sold our products to more than 1.4 million unique customers. In September 1999, repeat customers accounted for approximately 48% of our orders and over 55% of our booked revenues. We believe that these percentages will increase as we continue to modify our merchandising strategy and further cultivate customer loyalty through everyday low prices and an improved 24 shopping experience. In view of the rapidly evolving nature of our business and our limited operating history, we believe that period-to-period comparisons of our operating results, including our gross profit margin and operating expenses as a percentage of our net revenues, should not be relied upon as an indication of our future performance. Consistent with our merchandising strategy, we have started to raise prices on many of our SKUs. Since the second quarter of 1999, we have increased our product margins without experiencing a decline in overall sales volumes or customer levels. Although we intend to continue these selective price increases, under our long-term business model we expect to maintain lower relative product margins than many other online and offline retailers, while generating high sales volumes. For this reason, our ability to become and remain profitable depends upon our ability to substantially increase our net sales. We cannot be certain that our sales growth will continue or that we will ever become profitable. To date, our sales of computer hardware and software products have accounted for the vast majority of our revenues. As we continue to expand into new product categories, we expect sales of products other than computer hardware and software to be an increasingly larger component of our business in the future. We currently generate additional revenues from vendor co-op advertising as well as media advertising. Vendor co-op advertising is a standard practice in the retailing sector, where product vendors set aside certain amounts of advertising funds to be paid to retailers in exchange for specific marketing and in-store placement of their products. We work closely with vendors to develop marketing programs and merchandising initiatives in our online stores. To date, most of our co-op advertising has come from our technology and entertainment vendors, although we plan to explore new co-op advertising opportunities as we expand into new product categories. We also generate advertising media revenue from click-through advertisements that direct the customer to the advertiser's Web site. These media advertising revenues are generally derived from short-term advertising contracts in which we typically guarantee a minimum number of impressions to be delivered to users over a specified period of time for a fixed fee. In the cases where we guarantee a minimum number of impressions, we defer a portion of the advertising revenues until the minimum number of impressions has been achieved. We have incurred significant losses since our inception and our cost of sales and operating expenses have increased dramatically. This trend reflects the costs associated with the formation of BUY.COM, as well as our increased efforts to promote the BUY.COM brand, build market awareness, attract new customers, recruit personnel, build operating infrastructure, and develop and expand our Web site and related transaction-processing systems. We intend to continue to invest heavily in marketing and promotion, Web site development, and technology and operating infrastructure development. We believe that we will continue to incur substantial operating losses for the foreseeable future. Although we have experienced significant revenue growth in recent periods, this growth may not be sustainable, and we may never achieve profitability. 25 Results of Operations The following table sets forth statement of operations data expressed as a percentage of net revenues for the periods indicated:
June 7, 1997 Nine Months Ended (Inception) to Year Ended September 30, December 31, December 31, ------------------- 1997 1998 1998 1999 -------------- ------------ -------- -------- (unaudited) Net revenues................ 100.0 % 100.0 % 100.0 % 100.0 % Cost of goods sold.......... 94.8 98.6 95.9 100.9 ----- ----- -------- -------- Gross profit................ 5.2 1.4 4.1 (0.9) ----- ----- -------- -------- Operating expenses: Sales and marketing........ 14.8 10.7 4.3 11.1 Product development........ 3.4 0.8 0.6 1.0 General and administrative............ 29.6 3.4 5.7 3.2 Depreciation and amortization.............. 0.8 0.3 0.1 0.7 Amortization of deferred compensation.............. -- 0.6 0.7 1.4 Charge for warrants........ -- -- -- 1.8 ----- ----- -------- -------- Total operating expenses............... 48.6 15.8 11.4 19.2 ----- ----- -------- -------- Operating loss.............. (43.4) (14.4) (7.3) (20.1) ----- ----- -------- -------- Other income (expense): Interest income (expense), net....................... (0.8) 0.2 0.1 (0.2) Other...................... -- 0.0 (0.1) 0.0 ----- ----- -------- -------- Total other income (expense).............. (0.8) 0.2 0.0 (0.2) ----- ----- -------- -------- Loss before provision for income taxes............... (44.2) (14.2) (7.3) (20.3) Provision for income taxes.. (0.2) 0.0 0.0 0.0 ----- ----- -------- -------- Net loss.................... (44.4)% (14.2)% (7.3)% (20.3)% ===== ===== ======== ========
Net Revenues Net revenues consist of product sales, advertising revenue and customer shipping and handling charges. During 1998 and for the nine months ended September 30, 1999, the vast majority of our net revenues were derived from the sale of computer hardware and software products. Net revenues increased to $397.6 million for the nine months ended September 30, 1999 from $63.8 million for the nine months ended September 30, 1998. This increase was predominantly driven by computer hardware and software sales as well as the significant growth in our customer base and repeat purchases from our existing customers. This increase also reflects, to a lesser extent, the expansion of our Web site and the launch of our BUYBOOKS.COM, BUYGAMES.COM and BUYVIDEOS.COM specialty online stores in December 1998 and the launch of our BUYCLEARANCE.COM and BUYMUSIC.COM online stores during the second quarter of 1999. Cost of Goods Sold Cost of goods sold consists primarily of the cost of products sold, and the related distribution and fulfillment costs. Cost of goods sold increased to $401.2 million for the nine months ended September 30, 1999 from $61.2 million for the nine months ended September 30, 1998 as a result of the significant increase in our net revenues. Gross margin declined to (0.9)% for the nine months ended September 30, 1999 from 4.1% for the nine months ended September 30, 1998. This decline in gross margin reflects our aggressive product pricing strategy to build brand recognition, as well as our decision to offer select products as loss leaders to attract customers to our Web site. Our negative product gross margin in the first three quarters of 1999 was offset in part by gross profit derived from higher margin advertising revenue and shipping and handling revenue. While 26 we plan to increase gross margin in the future by employing more selective pricing and merchandising strategies, focusing on advertising revenues and emphasizing higher margin products and services, we may not be able to improve our profit margins. Sales and Marketing Expenses Sales and marketing expenses consist primarily of advertising and promotional expenses, as well as credit card fees, outsourced customer service fees, and payroll associated with our advertising and marketing personnel. Sales and marketing expenses increased to $44.1 million for the nine months ended September 30, 1999 from $2.8 million for the nine months ended September 30, 1998. Sales and marketing expenses as a percentage of net revenues increased to 11.1% for the nine months ended September 30, 1999 from 4.3% for the nine months ended September 30, 1998. This increase was primarily attributable to increased credit card processing fees associated with increased product sales, the expansion of our online and offline advertising campaigns, including a comprehensive print and television advertising campaign, as well as online advertisements with large online portals. In addition, as a result of the launch of our three new online specialty stores in November 1998 and the launch of our improved Web site in April 1999, we experienced higher than expected customer service fees during these periods. The increase in our sales and marketing expense was also due, to a lesser extent, to increased personnel and related expenses required to implement our marketing strategy. We intend to continue to pursue an aggressive branding and marketing campaign and, therefore, expect marketing and sales expenses to continue to increase significantly in absolute dollars in future periods. Product Development Expenses Product development expenses consist primarily of personnel and other expenses associated with developing and enhancing our Web site, as well as associated facilities and related expenses. Product development expenses increased to $3.9 million for the nine months ended September 30, 1999 from $404,000 for the nine months ended September 30, 1998. Product development expenses as a percentage of net revenues increased to 1.0% for the nine months ended September 30, 1999 from 0.6% for the nine months ended September 30, 1998. This increase was primarily attributable to increased staffing in our information systems, product management and web development groups and associated costs related to enhancing the features, content and functionality of our online stores and transaction-processing systems, as well as increased investment in systems and telecommunications infrastructure. General and Administrative Expense General and administrative expenses consist primarily of payroll and related expenses for executive and administrative personnel, facilities expenses, professional fees, telephone charges, and other general corporate expenses. General and administrative expenses increased to $12.9 million for the nine months ended September 30, 1999 from $3.6 million for the nine months ended September 30, 1998. General and administrative expenses as a percentage of net revenues decreased to 3.2% for the nine months ended September 30, 1999 from 5.7% for the nine months ended September 30, 1998. The increase in absolute dollars was primarily attributable to additional administrative personnel and their related expenses, and increased professional fees. We expect general and administrative expenses to continue to increase in absolute dollars as we expand our sales, increase our staff and incur additional costs related to the growth of our business and our operations as a public company. Depreciation and Amortization Depreciation and amortization consists primarily of the amortization of goodwill associated with business acquisitions, as well as fixed asset depreciation. Depreciation and amortization increased to $3.0 million for the nine months ended September 30, 1999 from $61,000 for the nine months ended September 30, 1998. Depreciation and amortization as a percentage of net revenues increased to 0.7% for the nine months ended September 30, 1999 from 0.1% for the nine months ended September 30, 1998. This increase was primarily 27 attributable to the amortization of goodwill associated with our acquisition of Speedserve in December 1998, which is being amortized over a three-year period. This increase was also attributable, to a lesser extent, to additional depreciation of fixed assets acquired during the period. Amortization of Deferred Compensation Amortization of deferred compensation represents the difference between the exercise price of stock option grants and the deemed fair value of our stock at the time of such grants. Such amounts are amortized over the vesting for such grants, which is typically four years. Amortization of deferred compensation increased to $5.4 million for the nine months ended September 30, 1999 from $422,000 for the nine months ended September 30, 1998. Amortization of deferred compensation increased to 1.4% for the nine months ended September 30, 1999 from 0.7% for the nine months ended September 30, 1998. The increase was attributable to the grant of stock options to new employees as well as the increase in the difference between the grant price and the deemed fair market value of our common stock. At September 30, 1999, we had approximately $8.4 million in deferred compensation that will be amortized through May 2003. Charge for Warrants Charge for warrants primarily represents the cost of warrants granted to United Air Lines and to a lesser extent warrants issued to a commercial lender. The charge for warrants was $7.0 million for the nine months ended September 30, 1999 and there was no charge during the previous year. Other Income (Expense) Total other income (expense) decreased to ($647,000) for the nine months ended September 30, 1999 from $20,000 for the nine months ended September 30, 1998. This decrease was largely due to interest expense related to a loan from our founder and interest expense relating to our revolving credit facility. Net Loss Our net loss increased to $80.5 million for the nine months ended September 30, 1999 from $4.7 million for the nine months ended September 30, 1998. The increase in net loss was due to increased operating expenses and an increase in amortization of goodwill, amortization of deferred compensation and charge for warrants. 28 Quarterly Results of Operations The following tables present unaudited quarterly results of operations, in dollar amounts and as a percentage of net revenues, for the last six quarters. This information has been derived from our unaudited consolidated financial statements and has been prepared by us on a basis consistent with our audited consolidated financial statements and includes all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation of the information for the periods presented.
Three Months Ended ---------------------------------------------------------------- June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, 1998 1998 1998 1999 1999 1999 -------- --------- -------- -------- -------- --------- (unaudited) (amounts in thousands) Statement of Operations Data: Net revenues........... $19,233 $34,985 $ 61,529 $107,932 $129,820 $159,849 Cost of goods sold..... 18,182 34,148 62,361 108,115 134,086 159,013 ------- ------- -------- -------- -------- -------- Gross profit........... 1,051 837 (832) (183) (4,266) 836 ------- ------- -------- -------- -------- -------- Operating expenses: Sales and marketing... 1,370 2,151 9,264 12,322 15,130 16,642 Product development... 120 220 546 830 1,404 1,617 General and administrative....... 658 1,140 2,019 3,079 4,437 5,356 Depreciation and amortization......... 16 39 316 854 967 1,188 Amortization of deferred compensation......... 106 318 371 2,115 1,856 1,446 Charge for warrants... -- -- -- -- -- 7,021 ------- ------- -------- -------- -------- -------- Total operating expenses........... 2,270 3,868 12,516 19,200 23,794 33,270 ------- ------- -------- -------- -------- -------- Operating loss......... (1,219) (3,031) (13,348) (19,383) (28,060) (32,434) ------- ------- -------- -------- -------- -------- Other income (expense): Interest income (expense), net....... -- 82 124 114 (39) (796) Other................. 2 (59) 52 17 8 49 ------- ------- -------- -------- -------- -------- Total other income (expense).......... 2 23 176 131 (31) (747) ------- ------- -------- -------- -------- -------- Loss before provision for income taxes...... (1,217) (3,008) (13,172) (19,252) (28,091) (33,181) Provision for income taxes................. -- -- 3 -- -- 3 ------- ------- -------- -------- -------- -------- Net loss............... $(1,217) $(3,008) $(13,175) $(19,252) $(28,091) $(33,184) ======= ======= ======== ======== ======== ======== As a Percentage of Net Revenues: Net revenues........... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold..... 94.5 97.6 101.4 100.2 103.3 99.5 ------- ------- -------- -------- -------- -------- Gross profit........... 5.5 2.4 (1.4) (0.2) (3.3) 0.5 ------- ------- -------- -------- -------- -------- Operating expenses: Sales and marketing... 7.1 6.1 15.1 11.4 11.7 10.4 Product development... 0.6 0.6 0.9 0.8 1.1 1.0 General and administrative....... 3.4 3.4 3.2 2.8 3.4 3.4 Depreciation and amortization......... 0.1 0.1 0.5 0.8 0.7 0.7 Amortization of deferred compensation......... 0.6 0.9 0.6 2.0 1.4 0.9 Charge for warrants... -- -- -- -- -- 4.4 ------- ------- -------- -------- -------- -------- Total operating expenses........... 11.8 11.1 20.3 17.8 18.3 20.8 ------- ------- -------- -------- -------- -------- Operating loss......... (6.3) (8.7) (21.7) (18.0) (21.6) (20.3) ------- ------- -------- -------- -------- -------- Other income (expense): Interest income (expense), net....... -- 0.2 0.2 0.1 0.0 (0.5) Other................. 0.0 (0.1) 0.1 0.1 0.0 0.0 ------- ------- -------- -------- -------- -------- Total other income (expense).......... 0.0 0.1 0.3 0.2 0.0 (0.5) ------- ------- -------- -------- -------- -------- Loss before provision for income taxes...... (6.3) (8.6) (21.4) (17.8) (21.6) (20.8) Provision for income taxes................. -- -- 0.0 -- -- 0.0 ------- ------- -------- -------- -------- -------- Net loss............... (6.3)% (8.6)% (21.4)% (17.8)% (21.6)% (20.8)% ======= ======= ======== ======== ======== ========
29 Our quarterly operating results have fluctuated in the past and may continue to fluctuate in the future based on a number of factors, not all of which are in our control. Liquidity and Capital Resources Due to our virtual operating model, we have generally operated with limited working capital. Most of our customers pay for their purchases by credit card over the Internet and as a result, we typically receive payment for shipments within four to five business days of purchase. Additionally, we rely on our distribution partners to manage inventory and ship products to our customers. We typically pay our distributors within 30 to 60 days after they have shipped our products, although we may take advantage of early payment discounts from time to time. As a result of these factors, our business does not experience the liquidity constraint faced by traditional retailers who must maintain large inventories. Since our inception, we have financed our operations with equity contributions and loans from our founder, loans from a commercial lender, and debt and equity financings. Net cash used in operating activities was $4.0 million for the year ended December 31, 1998 and $23.1 million for the nine months ended September 30, 1999. Net cash used in operating activities in 1998 and for the nine months ended September 30, 1999 was primarily attributable to the development and launch of our Web site, the expansion of our infrastructure, our marketing campaigns and operations. Net cash provided by financing activities was $15.9 million for the year ended December 31, 1998 and $19.5 million for the nine months ended September 30, 1999. Net cash used in investing activities was $2.8 million for the year ended December 31, 1998 and $2.4 million for the nine months ended September 30, 1999. Net cash used in investing activities was primarily attributable to purchases of property and equipment, partially offset by sales of equipment in conjunction with sales- leaseback transactions. We anticipate that we will have negative cash flows for the foreseeable future. We also currently anticipate that we will invest approximately $20.0 million in capital expenditures over the next twelve months to expand our infrastructure. These expenditures will include enhancements in our Web site to improve functionality and navigation, incorporating features that are intended to improve the customer shopping experience and scalability and performance of our Web site. These expenditures will also include, to a lesser extent, purchases of property and equipment in conjunction with the relocation of our offices. We expect to fund these expenditures with working capital, including the proceeds from this offering. In July 1999, we entered into an agreement with United Air Lines, Inc. to form BuyTravel.com LLC to market and sell travel services and products on the Internet. Each of us will own 50% of BuyTravel and will make capital contributions, in proportion to our respective ownership interest, necessary to provide advertising and marketing support for BuyTravel. We have each agreed to pay up to $18.0 million over three years from the effective date of the agreement. Subsequent to September 30, 1999, we acquired BuyGolf.com, Inc. in a stock- for-stock transaction in which the stockholders of BuyGolf.com received 4,142,927 shares of our common stock as consideration for their shares. In addition to our acquisition of BuyGolf.com, we entered into a sponsorship agreement with the PGA TOUR, Inc. and issued 1,800,000 shares of common stock in consideration for this sponsorship. Additionally, we have agreed to pay the PGA TOUR $8.5 million upon the completion of this offering and to secure a $17.0 million letter of credit. In October 1999, we also completed the private placement of our Series B convertible participating preferred stock to a group of investors led by SOFTBANK Capital Partners, L.P. and its affiliates for approximately $90.0 million. We have also entered into a binding letter of intent with SOFTBANK America, Inc. and its affiliates to form three separate international joint ventures in various international territories. As a part of these joint ventures, we have agreed to commit approximately $8.7 million of the proceeds of this offering in connection with the formation of these international joint ventures. We are not required to make any further capital contributions to these joint ventures. 30 We believe that the net proceeds from this offering, along with the proceeds of our Series B financing, will be sufficient to satisfy our working capital requirements through the next 12 months. Even if additional funds are not required, we may seek additional equity or debt financing. We may not be able to obtain additional funds on acceptable terms, if at all. Recent Accounting Pronouncements In March 1998, the Accounting Standards Executive Committee issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires all costs related to the development of internal use software other than those incurred during the application development stage to be expensed as incurred. Costs incurred during the application development stage are required to be capitalized and amortized over the estimated useful life of the software. SOP 98-1 is effective for our fiscal year ending December 31, 1999. We do not expect that the adoption of SOP 98-1 will have a material effect on our consolidated financial statements as our policies currently are substantially in compliance with SOP 98-1. In April 1998, the American Institute of Certified Public Accountants issued SOP 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 is effective for our fiscal year ending December 31, 1999. SOP 98-5 requires costs of start- up activities and organization costs to be expensed as incurred. We do not expect that the adoption of SOP 98-5 will have a material effect on our consolidated financial statements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income (loss) depending on whether a derivative is designed as part of a hedge transaction and, if so, the type of hedge transaction involved. We do not expect that adoption of SFAS No. 133 will have a material impact on our consolidated financial statements as we currently do not hold any derivative financial instruments. Year 2000 Compliance Many existing computer systems and software are coded to accept only two digit entries in the date code field and cannot distinguish 21st century dates from 20th century dates. If not corrected, there could be system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in normal business activities. As a result, many companies' software and computer systems may need to be upgraded or replaced to make them Year 2000 compliant. Our State of Readiness. We have assessed the impact that the Year 2000 problem may have on our operations. We have identified the following two areas of our business that may be affected: Internal Infrastructure. We have internally developed substantially all of the systems, transaction processing applications and software, and networking infrastructure that we use to operate and monitor all aspects of our business. In addition to these information technology systems, our non-information technology systems, including heating and air conditioning, security systems and other embedded technology may be subject to Year 2000 risks. Although we developed or acquired our software, systems and applications within the last two years and believe these systems are substantially Year 2000 compliant, we have hired an information systems consultant to verify the Year 2000 readiness of our systems. We have completed the full review of our systems and infrastructure and believe that our internal infrastructure is Year 2000 compliant. Third Party Suppliers and Partners. We use third party equipment and software that may not be Year 2000 compliant. As a result, our ability to address Year 2000 issues is, to a large extent, dependent upon the Year 2000 readiness of these third parties' hardware and software products. We have contacted the third parties from whom we have purchased hardware and software products and they have represented to us that their products are Year 2000 compliant. 31 We are also entirely dependent on our distribution and fulfillment partners to provide and distribute the merchandise we sell in our online stores. We have initiated formal communications with all of our distributors and fulfillment partners to determine the extent to which we are vulnerable to those third parties' Year 2000 issues. We have obtained Year 2000 readiness disclosure statements from each of these partners to confirm that their systems are Year 2000 compliant. Although we believe that our distributors and fulfillment partners are Year 2000 compliant, in the event they do not achieve Year 2000 compliance, we may have to retain alternative product and service suppliers. In addition, we have evaluated the Year 2000 compliance of CyberSource, our credit card processor, and other financial intermediaries through which our transactions are processed. We have evaluated the Year 2000 compliance of ClientLogic, our customer service and support partner, and Exodus Communications, our database server host. We have initiated formal discussions with, and obtained Year 2000 readiness disclosure statements from, each of these parties to verify the Year 2000 compliance of their systems. We currently do not have any back- up systems in place in the event these third party systems become inoperable. The Costs of Addressing our Year 2000 Issues. To date, our expenses in connection with identifying and addressing Year 2000 compliance issues have been immaterial. Our expenses have generally related to the operation costs associated with time spent by our employees and a consultant in the evaluation process and Year 2000 compliance in general. We anticipate that our costs will continue to include employee expenses and consultant expenses to verify the Year 2000 compliance of our systems, and that these costs could exceed $100,000 during the year ended December 31, 1999. Notwithstanding any unforeseen Year 2000 readiness issues, the costs of our Year 2000 compliance could be substantially higher than we anticipate, and therefore have a material adverse affect on our business. Our Contingency Plans. We have identified our worst case scenario as the interruption of our business resulting from Year 2000 failure of our third party systems to provide access to our Web site and transaction processing systems, and the failure of our credit card processing agent to process our orders. We have developed a worst case scenario plan concerning our Year 2000 issues. However, we cannot be certain that this plan will be successful. 32 BUSINESS General BUY.COM is a leading multi-category Internet superstore, offering a comprehensive selection of brand name computer hardware and peripherals, software, books, videos, DVDs, computer games, music and clearance products at everyday low prices. Through our seven online specialty stores, we offer more than 850,000 SKUs in a convenient, intuitive shopping interface that features extensive product information and multi-media presentations. Our e-commerce portal, www.buy.com, links all of our seven specialty stores and is designed to enhance the customer's online shopping experience 24 hours a day, seven days a week. We use a virtual operating model that includes outsourcing the majority of our operating infrastructure to leading national distribution and fulfillment partners with established expertise. This operating model allows us to add new product categories easily and rapidly and eliminates significant capital investments and the costs and risks of carrying inventory. We intend to expand our product offerings by establishing strategic relationships with leading partners similar to our recently announced joint venture with United Air Lines, Inc. Industry Background Growth of the Internet and E-Commerce The Internet has rapidly emerged as a significant interactive medium for worldwide communication, instant access to information and e-commerce. International Data Corporation estimates that the number of Internet users worldwide will increase from approximately 142 million at the end of 1998 to more than 502 million by the end of 2003. We believe this rapid growth is primarily attributable to the increasing number of personal computers in homes and offices, technological advancements that provide easier, faster and cheaper access to the Internet and the proliferation of products, content and services available on the Internet at competitive prices. We believe increasing numbers of customers will engage in e-commerce as online retailers take advantage of the recent technological improvements associated with the Internet that allow the integration of one-click buying, intelligent product recommendations and near real-time customer service. International Data Corporation estimates that the number of customers making purchases on the Internet will grow from approximately 31 million in 1998 to approximately 183 million in 2003. In addition, a recent industry survey predicted that 43% of businesses with fewer than 100 employees will be online by the end of 1999, and that 63% of small businesses currently on the Internet are already purchasing products on the Web. As a result, International Data Corporation predicts the total value of goods and services purchased annually over the Internet will increase from approximately $50.4 billion in 1998 to approximately $1.3 trillion in 2003. Limitations of Traditional and Catalog Retailers The emergence of the Internet as an alternative shopping channel has highlighted the limitations associated with shopping at traditional and catalog retailers. Traditional retailers face inherent structural limitations that may inhibit their ability to capitalize on the growing worldwide market for their goods and services. The space available in a traditional retail store limits merchandising flexibility and constrains the number of SKUs that a traditional retailer can offer at any given time. Traditional retailers must make significant investments in inventory that may quickly become obsolete. These retailers also face challenges in hiring, training and maintaining knowledgeable sales staff and preventing losses due to theft by customers and employees. Personnel costs typically limit operating hours, reducing customer convenience. Furthermore, traditional retailers generally have difficulties gathering customer demographics and preferences, and their potential customer base is typically limited to those who live within a reasonable geographic distance from the retail locations. While catalog retailers provide customers with the convenience of shopping from anywhere at anytime, the number of SKUs they can feature and the product information they can provide is limited due to catalog 33 mailing, printing and other related expenses. Since catalogs must be printed and mailed far in advance of sales, catalog retailers cannot readily change their product offerings or prices to adapt to an evolving market. Furthermore, the catalog shopping experience is, in general, neither interactive nor personalized, yet requires extensive personnel support to take and process orders. The Online Retail Opportunity In contrast to traditional retail channels, the Internet provides online retailers with the opportunity to offer a broad and evolving selection of merchandise to customers worldwide, while enabling customers to shop at their convenience without leaving their homes or offices. The Internet provides essentially unlimited shelf space without significant capital investments, allowing online retailers to build large global customer bases at an unprecedented pace and to potentially achieve superior economic returns over the long-term. The flexible structure of the Internet also enables online retailers to update product descriptions quickly and make new products immediately available for sale without incurring significant expenses. In addition, online retailers can easily obtain demographic and behavioral data about customers, increasing opportunities for targeted marketing. Forrester Research estimates that the single largest domestic Internet retail opportunity for the consumer and small office/home office market is the online sale of computer hardware. According to Forrester Research, annual online computer hardware sales are expected to grow from approximately $1.1 billion in 1998 to approximately $15.0 billion in 2003, representing approximately 14% of the entire computer hardware market in 2003. Media products such as software, books, videos and music also represent a fast growing segment of the online retail market. Forrester Research estimates that domestic annual online sales of these products will grow from approximately $1.6 billion in 1998 to more than $10.0 billion by 2003. The Online Advertising and Merchandising Opportunity The significant increase in online shopping has coincided with technological advances that provide advertisers with cost-effective means of targeting specific customer groups, interacting with and receiving feedback from customers and measuring effectiveness of the specific advertising campaigns. Online advertising also provides advertisers a unique opportunity to use a variety of advertisements and provide substantial product information. Because these methods generally are not economically available in traditional media, the Internet has rapidly emerged as a compelling vehicle for advertisers as Web sites have begun to aggregate a large number of visitors with attractive demographics. Accordingly, Forrester Research estimates that the amount of Internet advertising worldwide will grow from approximately $1.5 billion in 1998 to more than $24.1 billion by 2003. Challenges Faced by Online Retailers The Internet addresses many of the limitations faced by traditional and catalog retailers by providing unlimited shelf space, worldwide geographic reach for potential customers, customer convenience, significant flexibility with regard to vendor promotion and cross-merchandising opportunities, and on a comparable basis, extremely low costs. However, online retailing is new and evolving and presents a number of challenges, including: . Limited Brand Awareness and Customer Loyalty. Online retailers must build their brand recognition to attract potential new customers, to develop customer trust and loyalty in the absence of face-to-face interaction and to maintain high levels of customer traffic to their Web sites. Creating a strong brand, however, can be difficult and expensive, and many online retailers have had limited success developing their brand name. . Significant Price Competition. Online pricing engines enable customers to easily determine the lowest price for a particular product. Because online shoppers can quickly access pricing information with little effort, online retailers must be able to offer competitive prices to continue to draw traffic to their Web sites. 34 . Limited Product Offerings and Customer Convenience. Many online retailers focus on a single product category, which may frustrate customers who must visit a variety of online stores and pay multiple shipping fees to accommodate all of their online shopping needs. Among those online retailers who provide multiple product offerings, many have sites that are difficult to navigate, do not use sophisticated search capabilities and do not allow customers to purchase products using a single check-out process. . Inability to Scale Operations and Infrastructure. Many online retailers choose to handle most aspects of the online retail channel internally, including maintaining a large inventory of products, shipping and processing orders, and providing customer service. This requires significant time, capital investment and operating overhead that constrain the online retailers' ability to increase sales or expand into new product categories. Unexpected increases in sales can also strain the retailer's infrastructure, resulting in delayed or improper shipments, slow response time and dissatisfied customers. . Limited Content and Customer Service. Due to the increasing number of Web sites, online retailers must provide compelling content and other attractive features to differentiate their sites. Many first time online shoppers may experience concern over the absence of the face-to-face communication associated with e-commerce transactions. We believe a successful online retailer must provide immediate customer support, timely shipments, frequent status updates and knowledgeable advice. Competition among online retailers has increased as a result of the attractive commercial medium provided by the Internet and the relatively low barriers to enter this market. Therefore, we believe the success of online retailers will depend on their ability to develop brand awareness, offer competitive prices on a broad selection of products, and provide compelling content and superior customer service. The BUY.COM Solution BUY.COM is a leading multi-category Internet superstore offering a broad selection of brand name products to consumers and small businesses at everyday low prices. Through word of mouth and aggressive online and traditional media advertising, we are perceived as a low price leader and believe we have one of the most widely recognized e-commerce brands. Our easy-to-use Web site provides a rich shopping experience with extensive content and product information, backed by our commitment to superior customer service. Our key operating advantages include the following: . Leading Multi-Category Internet Superstore. We operate seven integrated online specialty stores that feature a broad range of brand name products and approximately 850,000 SKUs. Our sophisticated search engine allows customers to locate products by name or category, and our site facilitates easy navigation among our stores. Our customers can make purchases from any of our online stores using a single shopping basket, simplifying the check-out process. We believe the broad product offerings at our Internet superstore, combined with our convenient shopping experience, enables customers to save time by addressing many of their shopping needs at one site. We believe this one-stop shopping convenience also encourages repeat purchases from our Web site. During September 1999, approximately 48% of our orders and over 55% of our booked revenues have come from repeat customers. In addition, Media Metrix estimates that the number of unique visitors to our Web site in August 1999 was approximately 2.5 million, which represents an increase of 25% over the 2.0 million estimated unique visitors in July 1999. This rapid growth in customers has lead to a corresponding increase in revenues, which has enabled us to become one of the top five e-commerce providers, according to a number of industry studies. . Highly Scaleable Virtual Model. We use a virtual operating model that includes outsourcing the majority of our operating infrastructure to leading national distribution and fulfillment partners with established expertise. This operating model allows us to scale quickly within existing product lines and to add new product categories easily and rapidly without significant capital investments or the costs or risks of carrying inventory. By aligning with leading distributors in each of our product categories, we have access to their significant inventories and distribution capabilities. 35 . Low Operating Costs. We minimize our infrastructure and operating expenses by taking advantage of the cost efficiencies achieved by our distribution and fulfillment partners. By keeping our costs low, we are able to focus our efforts and resources on developing our brand and enhancing our customers' overall shopping experience. We believe our low operating overhead will enable us to continue to offer most products at prices below those of other leading online competitors, while still making a profit. . Superior Customer Experience. To build customer loyalty, we provide compelling content and extensive product information backed by superior customer service throughout the shopping experience. We are committed to customer satisfaction and regularly upgrade our services to ensure total customer care. Our user-friendly Web site provides a seamless shopping experience across all of our specialty stores and provides expanded content, including video and sound clips, detailed product information, professional and customer product reviews, and access to the first chapter of many of the books offered on our site. Our customer service representatives provide telephone and e-mail support 24 hours a day, seven days a week. Shoppers can also engage in e-mail interactions with our customer service representatives while online to enhance communication regarding order status, service, returns and product information. . Attractive Advertising Vehicle. We believe that our Web site, given the significant number of visitors, attracts advertisers seeking a large target audience of likely purchasers who spend relatively large amounts of money online. During September 1999, our average order size was more than $209 and our average daily product sales were over $1.7 million. Advertisers can place many different types of advertisements on our site, including supplemental product information that reaches customers at the point of purchase. Furthermore, we provide advertisers with demographic information and traffic feedback to enable them to evaluate the effectiveness of an advertising campaign. We also believe our virtual operating model, the strength of the BUY.COM brand name and our rich shopping experience provide us with significant competitive advantages and offer a compelling value proposition to both customers and advertisers that will enable us to apply our business model to a broad range of products and services. Strategy Our objective is to become the leading e-commerce destination offering a broad selection of brand name products and services to consumers and small businesses at everyday low prices. To achieve this objective, the key elements of our strategy include the following: . Build the BUY.COM Brand. We believe BUY.COM is one of the most widely recognized e-commerce brands. We intend to further increase customer loyalty and brand recognition by offering multiple comprehensive product lines at everyday low prices backed by superior customer service. In addition to our aggressive low price strategy, we plan to continue to promote our brand through a variety of marketing and promotional campaigns, including television, print, radio, direct mail and outdoor advertisements, as well as strategically placed online advertisements and promotional campaigns. . Pursue Additional E-Commerce Opportunities. We intend to expand our product offerings to include the most popular product categories on the Internet, encouraging one-stop shopping for multiple products and repeat purchases. We plan to use our strong market position in computer hardware sales to increase sales in other product categories. We also plan to continue to pursue and expand relationships with leading distributors in each of our existing product categories and in new product categories, to establish joint ventures and partnering relationships with major manufacturers and service providers, and to enter into referral arrangements with other e-commerce companies. . Improve Profitability and Achieve Higher Return on Capital. The cost efficiencies and economies of scale of our distribution and fulfillment partners enable us to operate with significantly lower operating expenses than many of our competitors. As our brand strengthens and we add additional products and 36 services, we believe we will be able to capture even greater efficiencies while improving gross margins on existing products. We will continue to modify our pricing strategy to maintain a group of aggressively low priced, high volume items, as well as promoting associated higher margin products and emphasizing advertising revenues. Because our business model enables the addition of higher margin products and services without significant capital investment in distribution infrastructure and inventory, we should be able to achieve higher returns on invested capital. . Continue to Improve the Customer Shopping Experience. Among our top priorities is to offer superior customer service and to continually improve our communications with customers. We intend to continuously update our Web site to increase its speed and functionality and to provide greater product information in a more user friendly, intuitive format. We plan to provide increased training for our customer service representatives and to continue to invest in technology that will improve our customer service and provide a more enjoyable shopping experience. . Expand Advertising and Merchandising Opportunities for Advertisers. We plan to aggressively pursue high margin advertising revenues by providing advertisers with opportunities to reach our large and attractive customer base. We currently offer a variety of options for advertisers, ranging from banner advertisements to tailored advertising and merchandising programs that target specific audiences. In addition, we can provide advertisers with detailed demographic information that enables them to measure and improve the effectiveness of their advertisements. We plan to continue to develop innovative programs for advertisers and expand our sales force to aggressively market these programs. . Expand and Improve Relationships with Distribution and Fulfillment Partners to be a Low Cost Supplier. We plan to continue to work with our distribution and fulfillment partners to obtain more timely and accurate product information, shipping and fulfillment. As our sales increase, we believe we will be able to achieve more favorable terms and pricing from our partners. We also intend to pursue new relationships with leading distributors and service providers as we expand into other categories. . Expand Internationally. The Internet offers a unique opportunity for retailers to quickly reach the international market. We believe our virtual retailing model will enable us to pursue this large market without significant investment by partnering with established international distributors. We intend to expand our presence in the international marketplace by initially targeting countries with high Internet usage and distribution networks complementary to our business model. We have recently entered into a binding letter of intent with SOFTBANK America, Inc. and several of its affiliates and a News Corporation affiliate to form an international joint venture in the United Kingdom, Australia, New Zealand and India. In addition, we have binding letters of intent to form international joint ventures with several SOFTBANK affiliates in other international territories. The BUY.COM Online Shopping Experience Our Web site is a multi-category Internet superstore offering a broad range of products. We have included compelling content in each of our online stores to allow customers to enjoy their visit to our Web site and make more informed purchase decisions. We believe that shopping at www.buy.com offers attractive benefits to customers, including convenience, ease of use, a broad selection, in-depth product information and content, and everyday low prices. The following highlights the key features of our online shopping experience: . Browsing. We have created a seamless interface between each of our seven online specialty stores that provides consistent functionality, look and feel. By clicking on the tabs at the top of every Web page, customers can move between stores quickly and easily. At the home page for each store, customers can view promotions and featured products or use a keyword search to locate a specific product. Our Web site also allows customers to conduct sophisticated searches based on pre-selected criteria designated in each store. We have organized our product offerings into a simple set of categories and subcategories within each store, each using the "BUY[product name]" format to promote a uniform shopping experience and to make it easier for the customer to link directly to a particular store. This simple 37 structure also allows customers to click on the designated category or subcategory to go to the desired location immediately. . Accessing Information. One of the key advantages of online shopping is the ability to access a broad range of information quickly and easily. On our Web site, customers can find detailed product information and specifications, as well as other value added features, including product pictures, video and music clips, book previews, professional and customer product reviews, supplemental information from the manufacturers, gift ideas and specialty shops. We believe this extensive information enables the customer to make a more educated purchase decision and enhances the overall shopping experience. . Selecting a Product and Checking Out. Customers can purchase products from each of our online stores using the same virtual shopping basket that is accessible from any product page on our Web site. Similar to a traditional retail store, customers can add and subtract products from their shopping basket as they browse, prior to making a final purchase decision. To execute orders, customers click on the "checkout" button. New customers are prompted to create an account and supply shipping and payment information. Repeat customers, through their personally created username and password, can access their account to view order status, view their history of previous orders or update their personal information. We store our customers' account information on our secure network, including multiple shipping addresses and billing options, which eliminates the need for repeat customers to complete their order information during future transactions. We charge our customer's credit card only after we have shipped the product. When the purchased products are in stock, we generally ship orders received before 4:00 p.m. Eastern Time at the BUYCOMP.COM and BUYSOFT.COM stores on the same day as the order is placed. We generally ship orders for other in-stock products within twenty-four hours of our receipt of the order. . Monitoring Order Status. To provide the highest level of customer service, we attempt to maintain communication with our customers throughout the purchase and fulfillment process. We confirm each order via an automatic e-mail within minutes of the order placement. To follow the progress of their order, we notify our customers via e-mail with the shipper's tracking number when their product has been shipped. We send additional e-mail communications to our customers in the event a product is back ordered, if the customer has requested a special order, when a change in order status occurs and to follow up after the order has been received by the customer. . Obtaining Assistance. Customers can access online assistance from every page on our site by clicking on either the "Customer Service" button or the "Help" button on each page in our specialty stores. Our online e- mail feature also enables customers to ask a customer service representative questions while online via a chat format. In addition, customers can call our prominently displayed toll-free phone number found throughout our Web site to reach our customer service representatives, 24 hours a day, seven days a week. Our Online Specialty Stores We have selected our seven online specialty stores based upon product lines that have large market potential, that are well suited for e-commerce, and that are in industries that allow us to partner with a dominant distributor. Our current online specialty stores include the following: . BUYCOMP.COM. This store offers over 29,000 computer products, including computers, printers, monitors, modems and peripherals from manufacturers such as Compaq, Hewlett-Packard, IBM, Viewsonic and 3COM. Customers may obtain detailed product descriptions, product pictures and reviews, as well as rebates and other promotional information. This store also offers extended warranties and permits customers to link from the store directly to the manufacturers' technical support pages. In addition, this store features vendor specific sub-stores that allow customers to browse products within the manufacturer's designated storefront. 38 . BUYSOFT.COM. This store offers over 9,000 computer software titles from leading manufacturers, including Microsoft, Symantec, Corel and Adobe. Similar to our BUYCOMP.COM store, we feature manufacturer's sub-stores, and our customers may link from this store directly to manufacturers' technical support pages. In addition, customers may obtain information on weekly specials, rebates and promotions, as well as reviews for top selling software products. . BUYBOOKS.COM. This store offers over 480,000 hardback, paperback and audio book titles. Customers may browse a variety of categories, including subject matter, New York Times bestsellers and new releases. Customers may also conduct targeted searches for their favorite authors or titles. Our site enables customers to read the first chapter of many books, to submit their own book reviews and to read professional reviews and reviews submitted by other customers. We also offer customers the opportunity to preorder upcoming releases. . BUYVIDEOS.COM. This store offers over 55,000 DVD and VHS titles from multiple categories, including comedy, action, drama, documentary and foreign films. The BUYVIDEOS.COM store includes video clips on many titles, preorder capabilities and a limited selection of video hardware. Customers may also focus their search to DVD titles within the DVD Only subcategory, accessible by a direct link from the home page. . BUYGAMES.COM. This store offers over 1,700 games for the Nintendo64, PlayStation, Sega Saturn, Dreamcast and Game Boy systems. This store offers PC and Mac games, strategy guides and gaming hardware. We provide detailed product descriptions, screen shots, video clips, professional and customer reviews, codes and game hints, as well as recommendations for related games. . BUYMUSIC.COM. This store was launched in April 1999 and offers over 300,000 music titles in both CD and cassette formats. Customers may order titles from various categories including pop/rock, alternative, electronica, heavy metal, rhythm and blues/soul, classical, jazz, country, rap/hip hop, folk, new age and soundtracks. This store offers detailed product descriptions, music clips, full song listings, recommended albums and customer reviews. The store also includes upcoming releases and new artist features. . BUYCLEARANCE.COM. This store was launched in May 1999 and offers brand name close-out inventory from some of the most popular manufacturers, including Compaq, Toshiba, Hewlett-Packard, Philips, NEC and Canon. Our inventory consists mainly of home electronics and computer hardware. We obtain this merchandise at substantial discounts through liquidations, overages and promotions. We also work with our vendor partners to ensure that this store's product selection serves to complement our other online stores. We plan to expand our product offerings within existing product categories and to add new product categories from time to time, including our recent acquisition of BuyGolf.com, to increase the overall shopping convenience for our customers. Strategic Relationship with United Air Lines, Inc. In July 1999, we formed a joint venture with United Air Lines, Inc. to create an online travel service that will offer a full range of airline tickets, automobile rentals and hotel reservations as well as other travel related services through the "BUYTRAVEL.COM" Web site. BUYTRAVEL.COM will be operated through a newly-formed limited liability company, in which we have a 50% ownership interest. In connection with the formation of BUYTRAVEL.COM, we entered into a Marketing and Services Agreement with United. Under this agreement, we will provide a storefront on our Web site and various other services and assistance, and United will provide availability to all of its fares, including all excess inventory or E-fares that are not widely available on other sites. United will also coordinate third party relationships with selected ticketing and infrastructure vendors. In addition, each of us has agreed to provide specified marketing and advertising support over the initial three years of the agreement. As consideration for United's commitment to this venture, we issued to United a warrant to purchase 2,000,000 shares of our common stock at an exercise price of $10.00 39 per share. The BUYTRAVEL.COM operating agreement requires both parties to approve various matters related to corporate governance. In the event we are unable to agree with United on one of these matters after the initial three years of this agreement, United has the right to require us to purchase its interest in BUYTRAVEL.COM at a price equal to the fair market value of its interest at the time of our purchase. Recent Acquisition of BUYGOLF.COM In October 1999, we acquired BuyGolf.com, Inc. for an aggregate purchase price of $23.5 million in a stock-for-stock transaction in which the current stockholders of BuyGolf.com received shares of our common stock as consideration for their shares. Through the online store located at www.buygolf.com, we offer a variety of golf equipment and other golf related products and accessories. As a result of the acquisition, we acquired a four year supply and distribution agreement with Las Vegas Golf & Tennis, Inc. through which they are the primary source for the golf equipment and accessories that we sell. The acquisition will be accounted for as a purchase transaction and the operating results of BuyGolf.com are included in our consolidated financial statements from the date of the acquisition. In October 1999, we also entered into a five year sponsorship agreement with the PGA TOUR in which we will become the exclusive title sponsor of the professional tour previously known as the Nike Tour. Our sponsorship of the BUY.COM Tour provides for television coverage of various BUY.COM Tour events, prominent featuring in the PGA TOUR's controlled media, including "Inside the PGA TOUR," prominent display of the BUY.COM Tour logo on the PGA TOUR's Web site and other sponsorship and media opportunities. We have also agreed with the PGA TOUR to establish the "Official World Golf Championships Online Store," which will be linked to all Web sites owned by the PGA TOUR, including www.pgatour.com. In connection with this sponsorship we also intend to launch a non-exclusive PGA TOUR online store and an exclusive BUY.COM Tour online store. In consideration for this sponsorship agreement, we issued the PGA TOUR 1,800,000 shares of our common stock and agreed to pay $8.5 million upon the completion of this offering and to secure a $17.0 million letter of credit. We believe this sponsorship provides an attractive marketing vehicle that enables us to target a customer demographic that is consistent with the customer demographics of our other online stores. International Joint Ventures In September 1999, we entered into a letter of intent with SOFTBANK America, Inc. and several of its affiliates and a News Corporation affiliate to form an international joint venture in the United Kingdom, Australia, New Zealand and India. In addition, we have a binding letter of intent with SOFTBANK America and its affiliates and Vivendi to form an international joint venture in continental Europe, and a joint venture with SOFTBANK America and its affiliates in Japan. We intend to have a 51% interest in each of these joint ventures and have committed approximately $8.7 million in connection with their formation. We are not required to make any further capital contributions to these joint ventures. Each of the joint ventures will hire its own management and other personnel and will establish relationships with local distribution partners for product categories suited for the particular territory. Each joint venture Web site is expected to have the same look and feel as the BUY.COM Web site. We intend to license, on a royalty free basis, our e-commerce technology and the right to use the BUY.COM name to each of these joint venture entities to use in their respective territories. Distribution Network We believe that the ability to maintain a virtual operating infrastructure is key to an efficient and profitable e-commerce model. As part of this strategy, we have entered into relationships with leading distribution partners in each of our product segments, including Ingram Micro for computer hardware and software, Ingram Entertainment for videos, DVDs and video games, Ingram Book for books, Valley Media for music and Nashville Computer Liquidators for our clearance products. These distribution partners carry a vast inventory of products located in warehouses throughout the country from which products are picked, packed and shipped directly to our 40 customers or our national fulfillment partner. Through this system, we have been highly effective at leveraging the inventory management and fulfillment capabilities of each of our partners to deliver products cost-effectively to our customers nationwide. For example, in September 1999, the average time for Ingram Micro to ship an in-stock product to a customer was less than one day. Our key distributors include the following: . Ingram Micro. In March 1999, we entered into an agreement with Ingram Micro through which they have agreed to provide, process and distribute the computer hardware and software products that we sell. Ingram Micro is one of the leading wholesalers of brand name computer hardware and software products, with net sales in excess of $22 billion for 1998. As part of our commitment with Ingram Micro, we have agreed to exclusively purchase all of our requirements for computer hardware and software from them to the extent they carry that particular product at the time an order is placed. This agreement expires in March 2000, but is subject to automatic one year renewal periods. The agreement may be terminated by either party for any reason upon 120 days prior written notice. We are currently in negotiations with Ingram Micro to renew our agreement with them. . Ingram Entertainment, Inc. In December 1998, we entered into an agreement with Ingram Entertainment through which they have agreed to supply us with the entertainment products for our online stores, including videos, video games, DVDs, audio books and other multimedia products and accessories. Ingram Entertainment is a leading distributor of videos, video games, DVD hardware and software and audio books, with net sales of over $1 billion in 1998. This agreement expires in December 2001, but they may terminate our contract if we become past due on our account or otherwise violate our credit terms with them. In August 1999, we amended this supply agreement to provide for co-op advertising dollars on certain purchases and include a guarantee that Ingram Entertainment will ship orders on the same day received if the order is received before 2:00 p.m. Eastern time, and next day shipment for orders placed after 2:00 p.m. This amendment also requires earlier fulfillment and shipment on orders for overnight or second day delivery service. . Valley Media, Inc. In February 1999, we entered into an agreement with iFill, a division of Valley Media, Inc., through which we will exclusively purchase all of our pre-recorded music products from Valley Media. Valley Media is a full line distributor of music and video entertainment products, with net sales in excess of $780 million for 1998. Valley Media is solely responsible for the order fulfillment and distribution of these pre-recorded music products. In addition, they have agreed to sell their products to us at a discount, provided that we purchase a designated minimum volume of products from them under this agreement. In the event we do not meet these volume levels, we will be required to pay an additional fee for the products that we purchase from them. This agreement expires in February 2001, but is subject to automatic one year renewal periods. This agreement may also be terminated if Valley Media discontinues sales to online vendors, or if we terminate online sales of pre-recorded music products. . Ingram Book Company. We have entered into agreements with Ingram Book Company and Ingram Fulfillment Services Inc., through which these companies have agreed to supply and distribute the books that we sell. Ingram Book Company is a leading wholesale distributor of books and stocks approximately 450,000 titles. These agreements expire in September 2003. . Nashville Computer Liquidators L.P. In April 1999, we entered into an agreement with Nashville Computer Liquidators L.P., a subsidiary of Ingram Entertainment Inc., through which Nashville Computer Liquidators has agreed to supply and distribute the liquidation products that we sell, including computers, consumer electronics and entertainment items. As part of this agreement, Nashville Computer Liquidators has agreed to process and deliver all of our orders from our online clearance store. In addition, as part of our commitment, we have agreed to purchase all of our liquidation products from them exclusively. This agreement expires in April 2001, but is subject to automatic one year renewal periods. Nashville Computer Liquidators may also terminate this agreement unilaterally if we become more than 15 days past due or otherwise violate our credit terms with them. 41 By using a secure electronic connection with each of our partners, orders placed by our customers are transmitted directly to the appropriate distributor. These orders are automatically fed into the distributor's system where they are processed and sent to a warehouse to be picked, packed and shipped. Orders are often processed and ready for shipment within minutes from the time a customer places an order at our Web site. In the event the products on a customer order are not located in the same warehouse, our system will cascade the order across several warehouses beginning with the one nearest to the customers' shipping address. By accessing distributor warehouses throughout the country, we have become more efficient in minimizing shipping costs as well as quickly delivering products to the customer. The integrated electronic connection with each of our distribution partners also provides us with data on inventory quantities, inventory location, shipping status, shipper tracking numbers and the estimated time of arrival for backordered products. Our Web site also provides a direct link from a customer's order information to both Federal Express and United Parcel Service to provide up-to-the-minute information on delivery status. Advertising Revenue Advertising revenue is a key component of our business model. The large volume of product sales on our site, together with our ability to attract proven online buyers, provides a high quality audience for our advertisers. According to a BUY.COM sponsored survey, our customers are primarily between 18 and 35 years old, and 80% of our customers visit our stores at least once a week. Additionally, according to this survey, 76% of our customers are college educated and 33% have annual household incomes in excess of $75,000. Furthermore, the structure of our Web site encourages impulse purchasing of products in various categories by shoppers who have come to the site to purchase a specific item. We believe our ability to deliver a high quality audience of proven online consumers creates a variety of opportunities for advertisers. We provide a range of advertising opportunities to reach Internet buyers. We presently derive advertising revenue from vendor co-op advertising and media advertising. Vendor co-op advertising is an industry standard practice that involves vendors who advertise their products for sale in our online stores in direct proportion to the amount of products sold in our stores. The primary objective of vendor co-op advertising is to drive product sales on our Web site. Vendors measure results in terms of the size, growth, breadth and depth of their product sales. We sell co-op advertising to the sales and/or channel groups within our vendors' organizations, often with the cooperation and support of our distribution partners. Currently, we derive most of our co-op advertising from our technology and entertainment vendors. However, as we expand into new product categories, we anticipate additional co-op advertising opportunities in these new markets. We derive advertising media revenue from click-through advertisements that direct the customer to the advertiser's Web site. We sell media advertising to the marketing groups within our advertisers' organization, as well as the advertising agencies that represent them. Media advertisers include both vendors who sell products on our technology or entertainment sites, as well as other advertisers, such as eBay and Visa, that want to reach our attractive audience. Our direct sales organization consists of individuals focused solely on selling advertising on the BUY.COM network of Web sites. From time to time, we also engage third party advertising sales representatives to assist us in selling our Web advertisements. We currently maintain sales offices in San Francisco and Southern California. Our sales organization is dedicated to maintaining close relationships with advertisers, advertising agencies and the sales and marketing organizations of our distribution partners. We work with our advertisers to build advertising programs that are tailored to their marketing and merchandising goals. We are also pursuing an increasing number of opportunities to combine both media and co-op advertising to create synergy for our vendors. Merchandising Strategies We believe that our strong brand and the breadth and depth of our product selection in our online stores enable us to pursue unique merchandising and pricing strategies. Each of our online stores provides an 42 extensive selection of high quality, name-brand products in an easy-to-use layout. Since our stores are not restricted by physical capacity limitations, we have a significant amount of flexibility with regard to the presentation and organization of our product categories and the product selection within each of those categories. In addition, we combine value added services and content with everyday low prices to create a unique value proposition for our customers. To date our merchandising and pricing efforts have focused on offering popular products with high brand awareness at low prices to drive traffic to our site. As customer loyalty and recognition of our brand name has increased, we have begun to augment this strategy by implementing the following: . cross-marketing higher margin products and services to our customers once they are in our online stores. By operating seven integrated online specialty stores featuring a broad range of brand name products, we can often present the customer with other higher margin products, including accessories and other products that are complementary to the customer's initial purchase as well as popular point-of-purchase impulse buys; . offering vendors the ability to create specialized promotional "stores within a store." We believe this will provide us greater flexibility in promoting higher margin products while capturing additional co-op advertising revenues available from our manufactures; . raising prices on selected SKUs. Since June 1999, we have raised prices on selected SKUs to refine our pricing strategy and increase our gross margins. For some of these SKUs the increase in price did not result in any decline in sales volumes. However, for other SKUs sales volumes declined. By analyzing the results of these selective price increases and customer buying pattern data, we believe we can identify products that are characterized by lower degrees of price sensitivity, which will provide the opportunity to raise margins through targeted price increases that do not diminish overall sales volumes. Within each online store, our customers can choose to shop in a particular product category. For example, our online bookstore allows customers to choose among multiple subject areas, including fiction, non-fiction and romance, and our online computer store allows users to choose among various product categories, such as computers, notebooks, scanners and modems. The intuitive nature of our stores is also enhanced by other product presentations and organization within each of our stores. For example, each of our online stores contains a top 25 list of products for sale, identifies certain "great buys" and highlights a combination of other featured offers, including new releases and coming attractions. For customers with a specific interest in a particular product or manufacturer, we offer the ability to locate products by manufacturer or product name. Marketing and Promotions We have taken a disciplined and selective approach in our marketing strategy to develop and strengthen the BUY.COM brand. We attempt to maximize the return from promotional expenditures by choosing advertising media based on the cost relative to the likely audience and ability to generate increased traffic for our Web site. Online Advertising. We place advertisements on various high profile and high traffic portal Web sites, including AOL, Excite@Home and Yahoo!, as well as Web sites targeted at a more focused audience, including About.com, CNET, Computer Shopper, rolling stone.com, Tech Shopper and women.com. Our advertisements on these sites are typically focused on building brand awareness or are product-specific permanent placements that encourage visitors to click through directly to our Web site. In addition, we periodically submit product data files to search engine Web sites in order to appear within these sites when visitors conduct product searches. These product listings link directly to our site and have been an effective means of generating sales. Traditional Advertising. We advertise in specific major markets and nationwide in a variety of media focused on our identified demographic of customers. In an effort to effectively establish the BUY.COM brand in the marketplace and position ourselves as a leading e-commerce superstore, we are currently participating in a nationwide media campaign that includes business, computer trade, general interest and niche publications, 43 including Fortune, Men's Journal and PC Magazine; newspapers such as the New York Times and The Wall Street Journal; national television programs such as ESPN SportsCenter and NBC Dateline; radio spots with CBS News and Sportstalk; as well as outdoor billboards located in high traffic areas. We use a variety of advertising campaigns to target specific demographic customers, including product specific campaigns, branding and comedy. Direct Mail. We engage in targeted direct mail campaigns to various segments of our database. Each month we identify and target a particular customer demographic for specific promotions designed to increase customer traffic and sales. In addition to special promotions, the direct mail campaigns promote our commitment to customer service and include either savings coupons or a unique gift to reward customers for their support. Sweepstakes and Giveaways. We have from time to time successfully hosted sweepstakes that have generated a substantial number of registrants. We register the entrants, with their approval, in our corporate database for future marketing opportunities. We plan to continue to offer customers various sweepstakes opportunities and product giveaways to increase traffic to our Web site and encourage return visits. PGA TOUR Sponsorship. We recently entered into a five year sponsorship agreement with the PGA TOUR in which we will become the exclusive title sponsor of the professional tour previously known as the Nike Tour. Our sponsorship of the BUY.COM Tour provides for television coverage of various BUY.COM Tour events, prominent featuring in the PGA TOUR's controlled media, including "Inside the PGA TOUR," prominent display of the BUY.COM Tour logo on the PGA TOUR's Web site and other sponsorship and media opportunities. We believe this sponsorship provides an attractive marketing vehicle that enables us to target a customer demographic that is consistent with the customer demographics of our other online stores. Customer Service and Support We are committed to providing superior customer service and plan to continue to make technological and systems advancements to enhance the overall shopping experience. We believe customer support throughout the shopping experience is a key element in providing a convenient shopping forum for our customers and establishing customer loyalty. As a result, we have made customer service a focal point of our operations. Customer service representatives are available for support 24 hours a day, seven days a week. In addition to offering customer support on existing orders, service representatives are available to assist shoppers in placing orders online. We believe this educational process builds customer loyalty and creates comfort and familiarity with the shopping experience. To maintain our virtual operating model strategy and enhance our ability to scale our operations quickly, we have outsourced our first level customer support to ClientLogic. This strategy also has enabled us to minimize capital expenditures, while ensuring that we are staffed to meet the service needs of our customers. We have entered into a four year contract with ClientLogic, which provides customer support to the high tech industry for organizations such as Dell, E*Trade, Microsoft and others. We currently maintain call centers in Albuquerque, New Mexico and Buffalo, New York where ClientLogic has staffed over 350 dedicated BUY.COM customer service representatives who are trained and managed on-site by BUY.COM management personnel. In addition to our outsourced customer support, we maintain a limited in-house staff of high level customer service representatives to address more complex customer inquiries. Customers can interact with our representatives by telephone, email or "chat" responses while the customer is online. Our contract with ClientLogic requires that at least 80% of all telephone calls be answered within 90 seconds and e-mail requests be answered in less than 12 hours. We also strive to keep customers informed concerning the status of their orders. We automatically send e-mails confirming receipt of an order, as well as follow-up e-mails to notify the customer of the product shipment, package tracking information, any back ordering and to confirm the customers' receipt of a product. In addition to our telephone and e-mail support, we have built an extensive self-help environment within our Web site. This tool allows customers to receive all information regarding their current orders and past order history. Within the Web site customers may track shipped orders with Federal Express and United Parcel 44 Service, check the status of orders being processed, and access links to our technology partners' Web sites for technical support. By providing this support through the Web site, we realize significant cost savings while providing the customer more efficient and timely information and service. Technology and Systems We have implemented a combination of proprietary technologies and commercially available licensed technologies. Our current strategy is to license available technology whenever possible rather than seek internally- developed solutions and to focus our internal development efforts on creating and enhancing our specialized, proprietary software. Our Web site's front-end is built on industry standard technologies, including IBM NetFinity servers, the Microsoft NT operating system, Microsoft Web Servers and Microsoft SQL server databases. The business logic of the site is contained in a variety of proprietary programs. These programs handle user interface, ordering and customer communications and operate on redundant IBM NetFinity servers. We expect to add additional servers and capacity as needed in the long-term. Our system includes redundant hardware on mission critical components, which we believe can survive the failure of several entire servers with relatively little downtime. We also believe we can quickly and easily expand capacity without significant additional development. We have historically run our key systems below capacity to support rapid growth. Consistent with our virtual operating strategy, we outsource the hosting of our Web servers to an Internet data center specialist, Exodus Communications, with an extensive national network backbone. Exodus provides redundant Internet connections to multiple Internet access points, a secure physical environment, climate control and redundant power. In addition, Exodus provides us with 24 hour a day, seven day a week system monitoring and escalation. Exodus currently hosts our Web operations in their Irvine, California data center, and we believe Exodus has adequate available floor space to support our growth in this facility. In addition, we expect to be able to support a distributed, redundant site by placing some of our servers in Exodus' other locations across the country. Order Processing Applications. We use a set of computer software applications for processing each customer order. These applications charge customer credit cards, print order information, transmit order information electronically to our distributors and deposit transaction information into our accounting system. All credit card numbers and financial and credit information are secured using the Internet security protocol Secure Socket Layer, Version 3, an encryption standard, and we maintain credit card numbers behind appropriate fire walls. Marketing Applications. We have developed a set of computer software applications for sending automated broadcast e-mails to customers on a frequent basis. This software extracts e-mail addresses from our mailing lists, sends e- mails to the designated recipients and automatically services requests from customers to remove them from the mailing list. Ad Reporting. We have developed an application that allows for the tracking and reporting of customer response to the Web advertisements we place throughout the Internet. The reports include click-through to the advertisements and orders and sales from those responses on a daily basis. These reports allow for comparison of similar site's performance, placements within a single site and the creative/graphic performance of the ads. Competition The e-commerce market is new, rapidly evolving and intensely competitive. We expect that competition will further intensify in the future. Barriers to entry are limited, and many traditional retailers are beginning to launch their own online operations. New technologies and the expansion of existing technologies may also increase competitive pressures. We currently compete with a variety of online vendors who specialize in computer hardware and software products, as well as those who sell books, music, videos, DVDs and other entertainment products. Moreover, all of the products we sell in our online stores are available through 45 traditional and catalog retailers. Consequently, we must compete with companies in the e-commerce market as well as the traditional retail industry. We believe that the primary competitive factors in online retailing include brand recognition, price, product selection, customer service, value-added services and ease of use. In the computer hardware, software, peripheral and clearance product markets, our primary competitors include, but are not limited to: . traditional computer retailers such as CompUSA and MicroCenter; . catalogue retailers such as CDW, Insight and PC Connection; . online computer retailers such as Cyberian Outpost, Egghead.com and Onsale; and . software and hardware manufacturers that market their products through their own Web sites such as Apple Computer, Dell Computer and Gateway 2000 Inc. Our current or potential competitors with respect to books, DVDs and videos, and other entertainment related products include, but are not limited to: . traditional entertainment product retailers such as Barnes & Noble, Blockbuster Video and Borders; . Internet-focused entertainment product retailers such as Amazon.com, CDNow and Reel.com; and . non-entertainment retailers that sell a limited selection of entertainment products at low prices, such as Wal-Mart. We also expect to experience significant competitive pressure if any of our distribution partners were to initiate their own retail operations. Since our distributors have access to merchandise at very low costs, they could sell products at lower prices than us and maintain a higher gross margin on their product sales than we are able to achieve. If this were to occur, our current and potential customers may decide to purchase directly from these distributors, which could reduce our market share. Intellectual Property We regard the protection of our copyrights, service marks, trademarks, trade secrets and other intellectual property rights as critical to our future success. We rely on various intellectual property laws and contractual restrictions to protect our proprietary rights in products and services. We have acquired and registered many of our domain names with regulatory bodies in an effort to protect these intellectual property rights. We have also entered into confidentiality and invention assignment agreements with our employees and contractors, and nondisclosure agreements with our suppliers and strategic partners in order to limit access to and disclosure of our proprietary information. We cannot assure you that these contractual arrangements or the other steps taken by us to protect our intellectual property will prove sufficient to prevent misappropriation of our technology or to deter independent third party development of similar technologies. In addition, we have pursued the registration of our key trademarks and service marks in the U.S. and internationally. We currently have pending trademark registrations for many marks, both internationally and in the U.S., including, but not limited to, BUY.COM, BUYBOOKS.COM, BUYCLEARANCE.COM, BUYCOMP.COM, BUYGAMES.COM, BUYMUSIC.COM, BUYSOFT.COM, BUYTRAVEL.COM, BUYVIDEOS.COM and "BUY.COM THE INTERNET SUPERSTORE". However, effective intellectual property protection may not be available in every country in which our services may be made available in the future. There is also no guarantee that the trademarks or servicemarks for which we have registered will offer adequate protection under applicable law. We have licensed in the past, and expect that we may license in the future, some of our intellectual property rights, including trademarks or copyrighted material, to third parties. While we attempt to ensure that the quality of the BUY.COM brand is maintained by these licensees, they could take actions that might materially and adversely affect the value of our intellectual property rights or reputation, which could harm our business. We also rely on technologies that we license from third parties. These licenses may not continue to be available to us on commercially reasonable terms in the future, if at all. As a result, we may be required to obtain substitute technology of lower quality or at greater cost, which could materially adversely affect our business, results of operations and financial condition. 46 As is customary with technology companies, from time to time we have received, and may continue to receive or become aware of, correspondence claiming potential infringement of other parties' proprietary rights. We could incur significant costs and diversion of management time and resources to defend claims regardless of the validity of these claims. We may not have adequate resources to defend these claims, and any associated costs and distractions could have a material adverse effect on our business, financial condition and results of operations. As an alternative to litigation, we may seek licenses for other parties' intellectual property rights. We may not be successful in obtaining any necessary licenses on commercially reasonable terms, if at all. Legal Proceedings From time to time, we have been subject to legal proceedings and claims in the ordinary course of our business. These claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. In March 1999, a class action suit was filed against us in the Orange County California Superior Court alleging breach of contract, fraud and violation of consumer protection laws. The plaintiffs in this action allege that we intentionally mispriced products and charged for orders knowing the orders could not be fulfilled. The plaintiffs are seeking compensatory and punitive damages in addition to injunctive relief. Also in March 1999, another class action suit was filed against us in Camden County, New Jersey. The New Jersey plaintiff seeks compensatory and punitive damages for breach of contract and common law fraud arising out of facts similar to the Orange County case. The judge in the New Jersey action has granted a temporary stay of the New Jersey action to monitor the progress of the California action. Discovery is in its early stages in the California action and a class has not yet been certified in either action. We intend to defend these lawsuits vigorously even though they could result in the expenditure of significant financial and managerial resources. We are not aware of any other material legal proceedings pending against us. Employees As of September 30, 1999, we had 196 full-time employees, including 75 employees engaged in engineering and Web development, 32 engaged in sales and marketing, and 89 engaged in general and administrative activities. We plan to continue to expand our workforce in the near future. Our employees are not represented by any collective bargaining agreement, and we have never experienced a work stoppage. We believe our employee relations are good. Facilities Our principal administrative and engineering facilities are located in two adjacent facilities in Aliso Viejo, California. We own a 12,000 square foot facility and currently lease, from our founder, the additional 11,000 square foot facility under a lease that expires in May 2000. Our monthly rental payments under this lease are approximately $12,000. We have entered into an agreement to lease approximately 50,000 square feet in Aliso Viejo, California, which we expect to occupy in December 1999. The lease expires in January 2006 and requires monthly base rental payments of approximately $92,000 for the first six months of the lease, and increases to approximately $126,000 per month thereafter. We believe our existing facility and our planned future facility will be sufficient for our needs for at least the next twelve months. 47 MANAGEMENT Executive Officers and Directors The following table provides information with respect to our executive officers and directors as of October 15, 1999:
Name Age Position(s) - ---- --- ---------- Gregory J. Hawkins........ 44 Chief Executive Officer and Chairman of the Board Mitch C. Hill(1).......... 40 Chief Financial Officer Robb Brock................ 35 Vice President, Technology John C. Herr.............. 33 Vice President, Sales and Marketing Anthony A. McAlister...... 40 Vice President, Information Services Brent Rusick.............. 37 Vice President, Sales and Operations Murray H. Williams........ 29 Vice President, Finance William L. Burnham........ 28 Director David B. Ingram........... 36 Director Donald M. Kendall(2)...... 78 Director Charles W. Richion........ 63 Director James B. Roszak(3)........ 58 Director Edward S. Russell(3)...... 39 Director John Sculley(3)........... 60 Director Wayne T. Thorson(2)....... 73 Director
- -------- (1) Mr. Hill has agreed to join us as soon as reasonably possible, and we expect his employment as our Chief Financial Officer to commence on November 1, 1999. (2) Member of the Compensation Committee (3) Member of the Audit Committee Gregory J. Hawkins has been our Chief Executive Officer and a Director since March 1999. Mr. Hawkins became our Chairman of the Board in September 1999. From 1991 to February 1999, Mr. Hawkins served as a Senior Vice President at Ingram Micro, Inc., a large computer hardware and software distributor. Mr. Hawkins received his B.S. in Business Administration from Oregon State University. Mitch C. Hill will be our Chief Financial Officer as of November 1, 1999. Mr. Hill served as the Chief Financial Officer and Senior Vice President at Walt Disney Imagineering from May 1996 to October 1999. From March 1995 to May 1996, Mr. Hill served as the Chief Financial Officer and Vice President of Disney Development Company, and from April 1992 to May 1995 he served as the Director of Finance and New Business. Mr. Hill received his B.S. in Business Accounting from Brigham Young University and his M.B.A. from the Harvard Graduate School of Business Administration. Robb Brock has been our Vice President, Technology since July 1997. From April 1985 to December 1996, Mr. Brock served as the Vice President of Software Development at Data Faction, Inc., a software development company. Mr. Brock received his B.A. in Computer Science from National University. John C. Herr has been our Vice President, Sales and Marketing since December 1998. From 1993 to December 1998, Mr. Herr served in several management roles at Ziff Davis, Inc., including the Vice President of International and Executive Vice President of Worldwide Marketing. Mr. Herr's previous experiences 48 include working in consumer marketing as a Johnson & Johnson brand manager, and as a strategy consultant at Bain & Company. Mr. Herr received his B.A. in Economics from Harvard University and his M.B.A. from the Harvard Graduate School of Business Administration. Anthony A. McAlister has served as our Vice President, Information Services since November 1998. Prior to joining us, from January 1998 to November 1998, he was employed as the Vice President of Information Services for SpeedServe.com, an online retailer of books, movies and games. From December 1987 to January 1998, Mr. McAlister served as a Director of Application Development for Ingram Entertainment, Inc. Mr. McAlister holds an Associate degree in Data Processing from Nashville State Technical Institute. Brent Rusick has been our Vice President, Sales and Operations since November 1997. Prior to that, Mr. Rusick served as a U.S. Channel Sales Manager at Packard Bell NEC, Inc. from March 1995 to November 1997. From August 1994 to March 1995, he served as a Regional Sales Manager for Tech Data Corp. Mr. Rusick received his B.S. in Business Administration and Finance from San Diego State University. Murray H. Williams has been our Vice President, Finance since November 1998. Prior to that, Mr. Williams served as our Director of Finance from February 1998 to November 1998. From January 1993 to February 1998, Mr. Williams served in various capacities at KPMG Peat Marwick, LLP, most recently as a Manager. Mr. Williams received his B.A. in Accounting and Real Estate from the University of Wisconsin, Madison. William L. Burnham has been a Director since September 1999. Since August 1999, Mr. Burnham has been a General Partner of SOFTBANK Capital Partners LP. From July 1998 to August 1999, Mr. Burnham was a Vice President at Credit Suisse First Boston. From May 1998 to July 1998, Mr. Burnham served as a Vice President at Deutsche Morgan Grenfell, and from April 1997 to May 1998, he served as a Vice President at US Bancorp Piper Jaffray. Prior to this, Mr. Burnham served as a Senior Associate at Booz Allen & Hamilton from August 1993 to March 1997. Mr. Burnham was elected to our Board as a representative of SOFTBANK Capital Partners as a result of our Series B preferred stock financing in October 1999. Mr. Burnham received his A.B. in Political Science from Washington University. David B. Ingram has been a Director since December 1998. Since July 1991, Mr. Ingram has served in various capacities at Ingram Entertainment Inc., most recently as its Chairman of the Board and President. Mr. Ingram currently serves on the board of directors of the Video Software Dealers Association, First American National Bank, Nashville Community Advisory Board, and is a board member of several privately held companies. Mr. Ingram was elected to our Board of Directors as a representative of Ingram Entertainment Inc. under a voting agreement that will terminate upon the closing of this offering. Mr. Ingram received his B.A. in History from Duke University and his M.B.A. from the Owen Graduate School of Management, Vanderbilt University. Donald M. Kendall has been a Director since August 1998. Since 1991, Mr. Kendall has served as a Consultant and Ambassador at Large for PepsiCo, Inc., and from 1986 to 1991, he served as the Chairman of the Executive Committee for PepsiCo. From 1965 to 1986, Mr. Kendall served as PepsiCo's Chairman of the Board and Chief Executive Officer. Mr. Kendall attended Western Kentucky University before becoming a Navy pilot in World War II. Charles W. Richion has been a Director since August 1998. From June 1997 to July 1998, Mr. Richion served as the Vice President of Corporate Development for Identix, Inc. From 1965 to 1996, Mr. Richion served as the Vice President of U.S. Sales and Vice President of Global Partners at Hewlett Packard, Co. Mr. Richion currently serves on the board of directors of Identix, Inc. He received his B.S.E.E. from the University of Pennsylvania. James B. Roszak has been a Director since August 1998. From June 1991 to June 1997, Mr. Roszak served as the President of the Life Insurance Division of Transamerica Life Companies. Mr. Roszak received his B.S. in Business from the University of Southern California. 49 Edward S. Russell has been a Director since August 1998. Since October 1996, Mr. Russell has served as a General Partner at SOFTBANK Technology Ventures, Inc. From 1988 to October 1996, Mr. Russell served as the Executive Director at SBC Warburg. Mr. Russell was elected to our Board as a representative of SOFTBANK Technology Ventures as a result of our Series A preferred stock financing in August 1998. Mr. Russell received his B.S. in Computer Science from Carnegie Mellon University. John Sculley has been a Director since August 1998. Since 1994, Mr. Sculley has served as a partner in the investment firm of Sculley Brothers LLC. From November 1993 to February 1994, Mr. Sculley served as the Chief Executive Officer of Spectrum Information Technologies, Inc. In January 1995, Spectrum, together with three of its four operating subsidiaries, filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of New York. From 1983 to 1993, Mr. Sculley served as the Chief Executive Officer of Apple Computer, Inc. Since 1984, Mr. Sculley has also been the Chief Executive Officer of Sculley Bros., Inc. Mr. Sculley serves on the board of directors of Netobjects Inc., Talk City, Inc. and NFO Worldwide, Inc. Mr. Sculley received his B.S. in Architecture from Brown University and his M.B.A. from the Wharton School of Business. Wayne T. Thorson has been a Director since August 1998. Since 1958, Mr. Thorson has served as the Chief Executive Officer of Thorson, Inc., a highway construction company. Mr. Thorson attended Concordia College where he studied business administration. Classified Board of Directors Our Board of Directors will be divided into three classes of directors serving staggered three-year terms upon the closing of this offering. As a result, approximately one-third of the Board of Directors will be elected each year. These provisions, together with the provisions of our certificate of incorporation, allow the Board of Directors to fill vacancies of or increase the size of the Board of Directors, and may deter our stockholders from removing incumbent directors and filling these vacancies with its own nominees to gain control of the Board. Our Board of Directors has designated that Messrs. , and will serve as Class I Directors, whose terms expire at the 2000 annual meeting of stockholders. Messrs. , and will serve as Class II Directors whose terms expire at the 2001 annual meeting of stockholders. Messrs. , and will serve as Class III Directors whose terms expire at the 2002 annual meeting of stockholders. Committees of the Board The Board of Directors has established two standing committees: the audit committee and the compensation committee. The audit committee consists of Messrs. Roszak, Russell and Sculley. The audit committee recommends the appointment of independent public accountants for the annual audit of our financial statements to the Board of Directors. The audit committee reviews the scope of the annual audit and other services the auditors are asked to perform. This committee also reviews the report on our financial statements prepared by the auditors following the audit, and our accounting and financial policies in general. The audit committee also reviews management's procedures and policies with respect to our internal accounting controls. The compensation committee consists of Messrs. Kendall and Thorson. The compensation committee reviews and approves salaries, benefits and bonuses for all executive officers. It reviews and recommends to the Board of Directors on matters relating to employee compensation and benefit plans. The compensation committee also administers our stock purchase, equity incentive and stock option plans. Compensation Committee Interlocks and Insider Participation We did not have a compensation committee for the fiscal year ended December 31, 1998. For the fiscal year ended December 31, 1998, all decisions regarding executive compensation were made by our Board of 50 Directors. We created our compensation committee in February 1999 and elected Messrs. Blum, Kendall and Thorson to serve as members of that committee. Mr. Blum served as our President and Chief Executive Officer and Director during the fiscal year ended December 31, 1998; however, Mr. Blum resigned his position as President in December 1998, his position as Chief Executive Officer on March 1, 1999, and his position as a Director in September 1999. No other interlocking relationship exists between any of our executive officers or any member of our compensation committee and any member of any other company's board of directors or compensation committee. Director Compensation Our directors receive no cash remuneration for serving on the Board of Directors or any Board committee. However, Directors are reimbursed for all reasonable expenses incurred by them in attending Board and committee meetings. Directors who are also employees are eligible to receive options and be issued shares of common stock directly under our 1999 Stock Incentive Plan. Nonemployee directors will also receive automatic option grants under our 1999 Stock Incentive Plan. Employment Contracts and Termination of Employment and Change of Control Arrangements As of March 1, 1999, Gregory J. Hawkins entered into a one year employment agreement with us to serve as our Chief Executive Officer. Mr. Hawkins' base salary under this agreement is $240,000 per year. We also granted Mr. Hawkins options to purchase 7,267,650 shares of our common stock at an exercise price of $2.39 per share, the fair market value on the grant date. We provide Mr. Hawkins with health and related benefits that are generally made available to our other senior executives and a monthly car allowance of $800. Mr. Hawkins is an at will employee and his employment can be terminated at any time by him or by us. If we terminate Mr. Hawkins' employment for any reason, other than for cause, Mr. Hawkins will have the right to exercise 1,635,225 options that would otherwise vest in February, 2000, and will be entitled to receive health benefits and monthly payments of his base salary for the remainder of his one year term, or six months, whichever is longer. Mitch C. Hill's employment as our Chief Financial Officer will commence on November 1, 1999. He will receive an annual base salary of $220,000. Our board also approved an option grant to Mr. Hill of 1,958,194 shares of our common stock at an exercise price of $5.71 per share, to be effective upon the commencement of his employment. If we terminate Mr. Hill's employment for any reason, other than willful wrongdoing or gross negligence, Mr. Hill will have the right to receive his annual base salary for one year and the right to exercise 498,548 options. We do not currently have any other employment contracts with any of our named executive officers. Accordingly, our Board of Directors may terminate the employment of any named executive officer at any time at its discretion. Our compensation committee has the authority to provide for an accelerated vesting of any outstanding options if an individual's employment is terminated following an acquisition or a hostile change in control of BUY.COM. Executive Compensation The following table summarizes the compensation earned by, and paid to, our Chief Executive Officer, our former Chief Executive Officer and founder, our Chief Financial Officer and our other two most highly compensated executive officers who received compensation in excess of $100,000 for the year ended December 31, 1998. We provide our officers with non-cash group life and health benefits generally available to all salaried employees. These benefits are not included in the table below due to applicable Securities and Exchange Commission rules. No named executive officer received personal benefits or perquisites that exceeded the lesser of $50,000 or 10% of his total annual salary and bonus for 1998. 51 Summary Compensation Table
Long-Term Compensation Annual Compensation Awards ----------------------------- ---------------- Shares of Common Other Annual Stock Underlying Name and Principal Position Salary Bonus Compensation Options - --------------------------- -------- ------- ------------ ---------------- Gregory J. Hawkins(1)........... $ -- $ -- $ -- -- Chief Executive Officer Scott A. Blum(2)................ 24 218 23,000(4) -- Founder Mitch C. Hill(3)................ -- -- -- -- Chief Financial Officer Brent Rusick.................... 180,000 203 -- 750,000 Vice President of Sales and Operations Murray H. Williams.............. 67,500 60,203 3,000(4) 1,125,000 Vice President of Finance
- -------- (1) Mr. Hawkins became our Chief Executive Officer in March 1999. Mr. Hawkins' annual salary for 1999 is currently $240,000. In March 1999, we granted Mr. Hawkins an option to purchase a total of 7,267,650 shares at an exercise price of $2.39 per share. (2) Mr. Blum served as our Chief Executive Officer from October 1996 until March 1999. Mr. Blum resigned from the Board of Directors in September 1999. (3) Mr. Hill has agreed to join us as soon as reasonably possible and we expect his employment to commence on November 1, 1999. Mr. Hill's annual salary for 1999 will be $220,000 and we have approved an option grant to purchase 1,958,194 shares of common stock at an exercise price of $5.71 per share, to be effective upon the commencement of his employment. (4) Consists of automobile lease payments. Option Grants in Last Fiscal Year Each option listed in the table below was granted under, or has been assumed under, the 1998 Stock Option/Stock Issuance Plan. All options granted under the 1998 plan are immediately exercisable. The following table indicates information regarding options granted to the named executive officers during 1998. We have not granted any stock appreciation rights.
Individual Grants --------------------------------------------------- Potential Realizable Value at Number of % of Total Assumed Annual Rates of Stock Securities Options Market Price Appreciation for Option Underlying Granted to Exercise Price on Term Options Employees Price Per Grant Expiration ------------------------------ Name Granted in 1998 Share Date Date 0% 5% 10% - ---- ---------- ---------- --------- -------- ---------- -------- ---------- ---------- Gregory J. Hawkins...... -- -- -- -- -- -- -- -- Scott A. Blum........... -- -- -- -- -- -- -- -- Mitch C. Hill........... -- -- -- -- -- -- -- -- Brent Rusick............ 750,000 4.2% $0.10 $1.03 06/01/08 $765,000 $1,249,249 $1,992,181 Murray H. Williams...... 750,000 4.2% $0.10 $0.10 02/09/08 -- $ 47,167 $ 119,493 375,000 2.1% $0.10 $1.03 06/01/08 $382,500 $ 624,624 $ 996,091
52 Potential realizable values are net of exercise price, but before the payment of taxes associated with exercise. Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. The 0%, 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Securities and Exchange Commission and do not represent our estimate or projection of our future common stock prices. These amounts represent assumed rates of appreciation in the value of the common stock from the fair market value on the date of grant. Actual gains, if any, on stock option exercises are dependent on the future performance of our common stock and overall stock market conditions. The amounts reflected in the table may not necessarily be achieved. All of the options in the foregoing table are immediately exercisable, but are subject to our right to repurchase the shares at their exercise price if the optionee ceases to be employed by us. This repurchase right lapses over a period of time. Our repurchase right for Mr. Hill's shares lapses in four annual installments. However, this repurchase right lapses as to 391,639 shares upon the completion of this offering. Our right of repurchase for Mr. Rusick's shares lapses over a three year period. Our right of repurchase for Mr. William's shares lapses equally over a three year period as to 750,000 shares. As for his remaining 375,000 shares, our right of repurchase lapses in five equal installments over a five year period. However, upon the completion of this offering, our repurchase right will lapse, as to any unvested portion of this option grant, in 36 equal monthly installments. Upon commencement of Mr. Hawkins' employment with us in March 1999, he was granted an option to purchase an aggregate of 7,267,650 shares of common stock at an exercise price of $2.39 per share. All of these options are immediately exercisable, and 6,540,884 of the shares are subject to our right to repurchase these shares at the exercise price in the event Mr. Hawkins ceases to be employed by us; 726,766 options were immediately vested upon the commencement of Mr. Hawkins employment. This repurchase right lapses equally over a four year period. Year-End Option Holdings The following table indicates aggregated option information for the named executive officers for the year ended December 31, 1998. There was no public trading market for our common stock as of December 31, 1998. Accordingly, we have calculated these values on the basis of the assumed initial public offering price of $ per share, less the applicable exercise price per share, multiplied by the number of shares underlying the options. No officers exercised any options during 1998. Aggregated Option Exercises in Last Fiscal Year and Year End Option Holdings
Number of Securities Underlying Unexercised Value of Unexercised Options In-the-Money Options ------------------------- ------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ------------- ----------- ------------- Gregory J. Hawkins.......... -- -- -- -- Scott A. Blum............... -- -- -- -- Mitch C. Hill............... -- -- -- -- Brent Rusick................ 750,000 -- -- Murray Williams............. 1,125,000 -- --
All of the options in the table above are immediately exercisable, but are subject to our right of repurchase which lapses periodically over time and in some cases upon the completion of our initial public offering. See "--Option Grants in Last Fiscal Year." Employee Benefit Plans 1998 Stock Option/Stock Issuance Plan In August 1998, we adopted the 1998 Stock Option/Stock Issuance Plan. The Board of Directors and our stockholder approved the 1998 plan in August 1998. A total of 34,539,960 shares of common stock have been 53 authorized and reserved for issuance under the 1998 plan. As of October 15, 1999, options to purchase an aggregate of 30,095,265 shares were outstanding and 1,276,695 shares are available for option grants under the 1998 plan. To the extent we cancel, terminate or repurchase any unvested shares of common stock issued under the 1998 plan, these shares will become available for future issuance under this plan. The 1998 plan is divided into two separate components: (i) the discretionary option grant program under which employees, non-employee members of the Board and consultants may be granted options to purchase shares of common stock; and (ii) the stock issuance program under which eligible individuals may purchase shares of common stock at a price not less than 85% of the fair market value at the time of issuance, or be issued shares of common stock as a bonus tied to the performance of services rendered. Both of these programs are administered by the Board of Directors or one or more committees appointed by the Board of Directors. The Board of Directors has complete discretion to determine which eligible individuals will receive option grants or stock issuances under those programs, determine the type, number, vesting requirements and other features and conditions of awards under the 1998 plan, interpret this plan and make all other decisions relating to the operation of the 1998 plan. Options may be either incentive stock options within the meaning of Section 422 of the Internal Revenue Code, which permits the deferral of taxable income related to the exercise of these options, or nonqualified options not entitled to this deferral. Incentive stock options may only be granted to employees and the term of an incentive stock option cannot exceed ten years. The exercise price of incentive stock options granted under the 1998 plan will in no event be less than 100% of the fair market value of the common stock on the date of grant, and the exercise price for non-statutory stock options will be no less than 85% of the fair market value of the common stock on the grant date. The exercise price for the shares of common stock subject to the option grants made under the 1998 plan may be paid in cash, check or in shares of common stock valued at the fair market value on the exercise date. The option may also be exercised through a same day sale program or delivery of a full recourse, interest bearing promissory note. In the event we are acquired by merger or sale of substantially all of our assets, each outstanding option under the discretionary option grant program not assumed by the successor corporation or otherwise continued in effect will automatically accelerate and become immediately vested and exercisable. Also, any outstanding repurchase rights will automatically terminate, and the shares subject to those repurchase rights will immediately vest, except to the extent our repurchase rights with respect to those shares are assigned to the successor corporation or otherwise prohibited at the time the option was granted or the repurchase right was created. Vesting under outstanding options will automatically accelerate in the event of the termination of the optionee's services within a designated period, not to exceed 18 months, following an acquisition in which those options are assumed or continued in effect and do not otherwise accelerate. Also, outstanding repurchase rights will automatically lapse and cease to be exercisable in the event the optionee or participant's service is terminated within a designated period, not to exceed 18 months, following the effective date of an acquisition in which those repurchase rights are assigned or otherwise continued. In some cases, a change in control of BUY.COM by acquisition of beneficial ownership of securities possessing more than 50% of the total combined voting power of our outstanding securities will result in each outstanding option accelerating and becoming vested. Also, any outstanding repurchase rights shall automatically terminate and these unvested shares shall become fully vested. The Board of Directors may amend or modify the 1998 plan at any time subject to any required stockholder approval. The 1998 plan will terminate on the earliest of (a) August 10, 2008, (b) the date on which all shares available for issuance under the 1998 plan shall have been issued as fully vested shares, or (c) the termination of all outstanding options in connection with a change in control or ownership of BUY.COM. 54 BuyGolf.com, Inc. 1998 Stock Option Plan In connection with our acquisition of BuyGolf.com, Inc., we assumed the BuyGolf.com, Inc. 1998 Stock Option Plan. Participation in the assumed BuyGolf plan is limited to officers, key employees, directors and services providers of BuyGolf, and a reserve of 520,000 shares of our common stock has been set aside for issuance under the assumed BuyGolf plan. As of , 1999, options for shares of common stock were outstanding under the assumed BuyGolf plan, and shares remained available for future issuance. Special Executive Stock Option Plan Our Special Executive Stock Option Plan was adopted by the Board of Directors in October 1999 and approved by our shareholders in , 1999. Participation in the executive plan is limited to our non-employee directors, officers and other highly compensated employees, and a reserve of 5,000,000 shares of our common stock has been set aside for issuance under the executive plan. As of October 15, 1999, options for 2,713,194 shares of common stock were outstanding under the executive plan, and 2,286,806 shares remained available for future issuance. To the extent we cancel, terminate or repurchase any unvested shares of common stock issued under the executive plan, those shares will become available for future issuance under this plan. All outstanding options under the executive plan will be transferred to the successor 1999 Stock Incentive Plan at the time the underwriting agreement for this offering is signed, and no further option grants or share issuances will be made under the executive plan. Our executive plan is administered by our Board of Directors. The Board of Directors has complete discretion under the executive plan to determine which eligible individuals are to receive option grants, the time or times when such grants are to be made, the number of shares subject to each such grant, the status of any granted option as either an incentive stock option or a non- statutory option under the federal tax laws, the vesting schedule (if any) to be in effect for the option grant and the maximum term for which any granted option is to remain outstanding. Incentive stock options permit the deferral of taxable income related to the exercise of those options. Non-statutory options are not entitled to this deferral. Incentive stock options may only be granted to employees, and the term of an incentive stock option cannot exceed ten years. The exercise price of an incentive stock option will in no event be less than 100% of the fair market value of the common stock on the date of grant. Each non-statutory option will have an exercise price per share not less than 85% of the fair market value per share of common stock on the option grant date, and will not have a term in excess of ten years. The options granted under the executive plan generally have been structured so that those options are immediately exercisable for all the option shares. However, any shares purchased under those options will be subject to repurchase by us, at the exercise price paid per share, if the optionee ceases service with us prior to vesting in those shares. Vesting of the option shares generally occurs over a four year period of service. The exercise price may be paid in cash, check or in shares of our common stock. The Board of Directors may allow one or more optionees to pay the exercise price by delivering a full-recourse note payable to us and secured by the purchased shares. Following the initial public offering of the common stock, outstanding options may also be exercised through a same-day sale program pursuant to which a designated brokerage firm will effect an immediate sale of the shares purchased under the option and pay over to us, out of the sale proceeds available on the settlement date, sufficient funds to cover the exercise price for the purchased shares plus all applicable withholding taxes. In the event that we are acquired by merger or asset sale, the shares subject to each outstanding option under the executive plan will vest, unless our repurchase rights with respect to those option shares are assigned to the acquiring entity, and the option will terminate except to the extent assumed by that entity. In addition, all unvested shares under the executive plan will immediately vest prior to such merger or asset sale, except to the extent our repurchase rights with respect to those shares are to be assigned to the acquiring entity. 55 Options held by several of our officers have special vesting acceleration provisions which will result in the immediate vesting of their option shares in the event their employment terminates within a designated period following a merger or asset sale in which the vesting of their options does not accelerate. The Board of Directors may amend or modify the executive plan at any time, subject to any shareholder approval required under applicable law or regulation. 1999 Stock Option/Stock Issuance Plan 1999 Stock Incentive Plan Introduction. The 1999 Stock Incentive Plan is intended to serve as the successor program to our 1998 Stock Option/Stock Issuance Plan and our Special Executive Stock Option Plan. The 1999 plan was adopted by the Board and approved by the stockholders on , 1999. The 1999 plan will become effective when the underwriting agreement for this offering is signed. At that time, all outstanding options under our existing 1998 Stock Option/Stock Issuance Plan and our Special Executive Stock Option Plan will be transferred to the 1999 plan, and no further option grants will be made under either the 1998 plan or the executive plan. The transferred options will continue to be governed by their existing terms, unless our compensation committee decides to extend one or more features of the 1999 plan to those options. Share Reserve. We have authorized shares of our common stock for issuance under the 1999 plan. This share reserve consists of the number of shares we estimate will be carried over from the 1998 plan and the executive plan plus an additional increase of approximately shares. The share reserve under our 1999 plan will automatically increase on the first trading day in January each calendar year, beginning with calendar year 2000, by an amount equal to three percent of the total number of shares of our common stock outstanding on the last trading day of December in the prior calendar year, but in no event will this annual increase exceed 10,000,000 shares. In addition, no participant in the 1999 plan may be granted stock options or direct stock issuances for more than shares of common stock in total in any calendar year. Programs. Our 1999 plan has five separate programs: . the discretionary option grant program, under which eligible individuals in our employ may be granted options to purchase shares of our common stock at an exercise price not less than the fair market value of those shares on the grant date; . the stock issuance program, under which eligible individuals may be issued shares of common stock directly, upon the attainment of performance milestones or the completion of a specified period of service or as a bonus for past services; . the salary investment option grant program, under which our executive officers and other highly compensated employees may be given the opportunity to apply a portion of their base salary each year to the acquisition of special below market stock option grants; . the automatic option grant program, under which option grants will automatically be made at periodic intervals to eligible non-employee Board members to purchase shares of common stock at an exercise price equal to the fair market value of those shares on the grant date; and . the director fee option grant program, under which our non-employee Board members may be given the opportunity to apply a portion of any retainer fee otherwise payable to them in cash each year to the acquisition of special below-market option grants. Eligibility. The individuals eligible to participate in our 1999 plan include our officers and other employees, our Board members and any consultants we hire. 56 Administration. The discretionary option grant and stock issuance programs will be administered by our compensation committee. This committee will determine which eligible individuals are to receive option grants or stock issuances under those programs, the time or times when the grants or issuances are to be made, the number of shares subject to each grant or issuance, the status of any granted option as either an incentive stock option or a nonstatutory stock option under the federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. The compensation committee will also have the authority to select the executive officers and other highly compensated employees who may participate in the salary investment option grant program in the event that program is put into effect for one or more calendar years. Plan Features. Our 1999 plan will include the following features: . The exercise price for any options granted under the plan may be paid in cash or in shares of our common stock valued at fair market value on the exercise date. The option may also be exercised through a same-day sale program without any cash outlay by the optionee. . The compensation committee will have the authority to cancel outstanding options under the discretionary option grant program, including any transferred options from our 1998 plan, in return for the grant of new options for the same or different number of option shares with an exercise price per share based upon the fair market value of our common stock on the new grant date. . Stock appreciation rights may be issued under the discretionary option grant program. These rights will provide the holders with the election to surrender their outstanding options for a payment from us equal to the fair market value of the shares subject to the surrendered options less the exercise price payable for those shares. We may make the payment in cash or in shares of our common stock. Change in Control. The 1999 plan will include the following change in control provisions which may result in the accelerated vesting of outstanding option grants and stock issuances: . In the event that we are acquired by merger or asset sale, each outstanding option under the discretionary option grant program which is not to be assumed by the successor corporation will immediately become exercisable for all the option shares, and all outstanding unvested shares will immediately vest, except to the extent our repurchase rights with respect to those shares are to be assigned to the successor corporation. . The compensation committee will have complete discretion to grant one or more options which will become exercisable for all the option shares in the event those options are assumed in the acquisition but the optionee's service with us or the acquiring entity is subsequently terminated. The vesting of any outstanding shares under our 1999 plan may be accelerated upon similar terms and conditions. . The compensation committee may grant options and structure repurchase rights so that the shares subject to those options or repurchase rights will immediately vest in connection with a successful tender offer for more than fifty percent of our outstanding voting stock or a change in the majority of our Board through one or more contested elections. This accelerated vesting may occur either at the time of the transaction or upon the subsequent termination of the individual's service. Salary Investment Option Grant Program. In the event the compensation committee decides to put this program into effect for one or more calendar years, each of our executive officers and other highly compensated employees may elect to reduce his or her base salary for the calendar year by an amount not less than $10,000 nor more than $50,000. Each selected individual who makes this election will automatically be granted, on the first trading day in January of the calendar year for which his or her salary reduction is to be in effect, an option to purchase that number of shares of common stock determined by dividing the salary reduction amount by two-thirds of the fair market value per share of our common stock on the grant date. The option will have an exercise price per share equal to one-third of the fair market value of the option shares on the grant date. As a result, the option will be structured so that the fair market value of the option shares on the 57 grant date less the exercise price payable for those shares will be equal to the amount of the salary reduction. The option will become exercisable in a series of twelve equal monthly installments over the calendar year for which the salary reduction is to be in effect. Automatic Option Grant Program. Each individual who first becomes a non- employee Board member at any time after the effective date of this offering will receive an option grant to purchase 150,000 shares of common stock on the date the individual joins the Board. In addition, on the date of each annual stockholders meeting held after the effective date of this offering, each non- employee Board member who is to continue to serve as a non-employee Board member, including each of our current non-employee Board members, will automatically be granted an option to purchase 15,000 shares of common stock, provided that the individual has served on the Board for at least six months. Each automatic grant will have an exercise price per share equal to the fair market value per share of our common stock on the grant date and will have a term of 10 years, subject to earlier termination following the optionee's cessation of Board service. The option will be immediately exercisable for all of the option shares; however, we may repurchase, at the exercise price paid per share, any shares purchased under the option which are not vested at the time of the optionee's cessation of Board service. The shares subject to each initial 150,000 share automatic option grant will vest in a series of six successive semi-annual installments upon the optionee's completion of each six- month period of Board service over the thirty-six month period measured from the grant date. However, the shares will immediately vest in full upon changes in control or ownership or upon the optionee's death or disability while a Board member. The shares subject to each annual 15,000 share automatic grant will be fully-vested when granted. Director Fee Option Grant Program. If this program is put into effect in the future, then each non-employee Board member may elect to apply all or a portion of any cash retainer fee for the year to the acquisition of a below- market option grant. The option grant will automatically be made on the first trading day in January in the year for which the non-employee Board member would otherwise be paid the cash retainer fee in the absence of his or her election. The option will have an exercise price per share equal to one-third of the fair market value of the option shares on the grant date, and the number of shares subject to the option will be determined by dividing the amount of the retainer fee applied to the program by two-thirds of the fair market value per share of our common stock on the grant date. As a result, the option will be structured so that the fair market value of the option shares on the grant date less the exercise price payable for those shares will be equal to the portion of the retainer fee applied to that option. The option will become exercisable in a series of twelve equal monthly installments over the calendar year for which the election is in effect. However, the option will become immediately exercisable for all the option shares upon the death or disability of the optionee while serving as a Board member. Additional Program Features. Our 1999 plan will also have the following features: . Outstanding options under the salary investment and director fee option grant programs will immediately vest if we are acquired by a merger or asset sale or if there is a successful tender offer for more than 50% of our outstanding voting stock or a change in the majority of our Board through one or more contested elections. . Limited stock appreciation rights will automatically be included as part of each grant made under the salary investment option grant program and the automatic and director fee option grant programs, and these rights may also be granted to one or more officers as part of their option grants under the discretionary option grant program. Options with this feature may be surrendered to us upon the successful completion of a hostile tender offer for more than 50% of our outstanding voting stock. In return for the surrendered option, the optionee will be entitled to a cash distribution from us in an amount per surrendered option share based upon the highest price per share of our common stock paid in that tender offer. . The Board may amend or modify the 1999 plan at any time, subject to any required stockholder approval. The 1999 plan will terminate no later than June 30, 2009. 58 1999 Employee Stock Purchase Plan. Introduction. Our 1999 Employee Stock Purchase Plan was adopted by the Board and approved by the stockholders in September 1999. This plan will become effective immediately upon the signing of the underwriting agreement for this offering. The plan is designed to allow our eligible employees and the eligible employees of our participating subsidiaries to purchase shares of our common stock, at semi-annual intervals, with their accumulated payroll deductions. Share Reserve. We have initially reserved 6,000,000 shares of our common stock for issuance under this purchase plan. The reserve will automatically increase on the first trading day in January each calendar year, beginning in calendar year 2000, by an amount equal to one percent of the total number of outstanding shares of our common stock on the last trading day in December in the prior calendar year. In no event will any annual increase exceed 1,000,000 shares. Administration. The purchase plan will be administered by our compensation committee. The compensation committee shall have full authority to interpret and construe any provisions of the purchase plan and adopt such rules and regulations for administering the purchase plan as it may deem necessary in order to comply with the requirements of Section 423 of the Internal Revenue Code. Offering Periods. The purchase plan will have a series of successive offering periods, each with a maximum duration of 24 months. The initial offering period will start on the date the underwriting agreement for this offering is signed and will end on the last business day in October 2001. The next offering period will start on the first business day in November 2001, and subsequent offering periods will set by our compensation committee. Eligible Employees. Individuals scheduled to work more than 20 hours per week for more than five calendar months per year may join an offering period on the start date or any semi-annual entry date within that period. Semi-annual entry dates will occur on the first business day of May and November each year. Individuals who become eligible employees after the start date of an offering period may join the plan on any subsequent semi-annual entry date within that offering period. Payroll Deductions. A participant may contribute up to 20% of his or her base salary through payroll deductions, and the accumulated deductions will be applied to the purchase of shares on each semi-annual purchase date. The purchase price per share will be equal to 85% of the fair market value per share on the participant's entry date into the offering period or, if lower, 85% of the fair market value per share on the semi-annual purchase date. Semi- annual purchase dates will occur on the last business day of April and October each year. However, a participant may not purchase more than 30,000 shares on any purchase date, and not more than 1,500,000 shares may be purchased in total by all participants on any purchase date. Our compensation committee will have the authority to change these limitations for any subsequent offering period. Reset Feature. If the fair market value per share of our common stock on any purchase date is less than the fair market value per share on the start date of the two-year offering period, then that offering period will automatically terminate, and a new two-year offering period will begin on the next business day. All participants in the terminated offering will be transferred to the new offering period. Change in Control. Should we be acquired by merger or sale of substantially all of our assets or more than fifty percent of our voting securities, then all outstanding purchase rights will automatically be exercised immediately prior to the effective date of the acquisition. The purchase price will be equal to the lesser of 85% of the market value per share on the participant's entry date into the offering period in which an acquisition occurs or 85% of the fair market value per share immediately prior to the acquisition. Plan Provisions. The following provisions will also be in effect under the plan: . The plan will terminate no later than the last business day of October 2009. . The Board may at any time amend, suspend or discontinue the plan. However, certain amendments may require stockholder approval. 59 Limitation on Liability and Indemnification Matters The certificate of incorporation that we will adopt immediately prior to the closing of this offering provides that, except to the extent prohibited by the Delaware General Corporation Law, our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty as directors. Under the Delaware General Corporation Law, the directors have a fiduciary duty to BUY.COM which is not eliminated by this provision of the certificate of incorporation and, in appropriate circumstances, equitable remedies including injunctive or other forms of nonmonetary relief will remain available. In addition, each director will continue to be subject to liability under the Delaware law for: . breach of the director's duty of loyalty; . acts or omissions which are found by a court of competent jurisdiction to be not in good faith or which involve intentional misconduct, or knowing violations of law; . actions leading to improper personal benefit to the director; and . payment of dividends or approval of stock repurchases or redemptions that are prohibited by Delaware law. This provision also does not affect a director's responsibilities under any other laws, including the federal securities laws or state or federal environmental laws. We have obtained liability insurance for our officers and directors. Section 145 of the Delaware law empowers a corporation to indemnify its directors and officers and to purchase insurance with respect to liability arising out of their capacity or status as directors and officers, provided that this provision shall not eliminate or limit the liability of a director: . for any breach of the director's duty of loyalty to the corporation or its stockholders; . for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . arising under Section 174 of the Delaware law; or . for any transaction from which the director derived an improper personal benefit. The Delaware law provides further that the indemnification permitted thereunder shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under the corporation's bylaws, any agreement, a vote of stockholders or otherwise. The certificate of incorporation provides that we will indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that the person is or was a director or officer, or is or was serving at our request as a director or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses, judgements, fines and amounts paid in settlement actually and reasonably incurred by the person in the action, suit or proceeding. We plan to enter into indemnification agreements with our directors and our executive officers containing provisions that may require us, among other things, to indemnify our directors and officers against liabilities that may arise by reason of their status or service as directors or officers other than liabilities arising from willful misconduct of a culpable nature, to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors and officers' liability insurance if maintained for other directors or officers. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent as to which indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding which may result in a claim for indemnification. The Securities and Exchange Commission is of the opinion that indemnification of directors, officers and persons controlling BUY.COM for violations of the Securities Act is against public policy as expressed in the Securities Act and is therefore unenforceable. 60 CERTAIN TRANSACTIONS Since our formation in June 1997, there has not been, nor is there any proposed transaction where we were or will be a party in which the amount involved exceeded or will exceed $60,000 and in which any director, executive officer, holder of more than 5% of any class of our voting securities, or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest, other than the compensation agreements and other agreements and transactions which are described in "Management" and the transactions described below. Sales of Securities In June 1997, BuyComp, LLC, a California limited liability company and our predecessor, issued 9,000,000 units to Scott and Audrey Blum in exchange for $50,000. In August 1998, we issued 130,129,725 shares of common stock to the Scott A. Blum Separate Property Trust u/d/t 8/2/95 ("The Blum Trust") in exchange for a majority of Scott and Audrey Blum's interest in BuyComp, LLC. Scott A. Blum is our founder and served as our President until December 1998, our Chief Executive Officer until March 1999, and one of our directors until September 1999. In August 1998, we issued (i) 4,870,275 shares of Series A convertible participating preferred stock to The Blum Trust; and (ii) 14,610,855 shares of Series A convertible participating preferred stock to SOFTBANK Technology Ventures IV L.P. and SOFTBANK Technology Advisors Fund L.P. at a purchase price of $1.03 per share. The Blum Trust sold a total of 4,870,275 shares of Series A convertible participating preferred stock to SOFTBANK Technology Ventures IV L.P. and SOFTBANK Technology Advisors Fund L.P. at $1.03 per share, and in September 1998, a total of 16,730,835 shares of common stock to SOFTBANK Holdings, Inc., SOFTBANK Ventures, Inc. and SOFTBANK Contents Fund at $2.39 per share. In December 1998, we issued a total of 8,847,315 shares of common stock in connection with our acquisition of SpeedServe, Inc. In connection with this acquisition, BUY.COM and its wholly-owned subsidiary, BUY.COM ENTERTAINMENT Inc., entered into various agreements with Ingram Entertainment Inc. and, with regard to a Non-Competition Agreement, David Ingram. David Ingram, who is one of our directors, is a majority stockholder, Chairman and President of Ingram Entertainment Inc., the majority stockholder of SpeedServe, Inc. Mr. Ingram is also a minority stockholder of Ingram Micro, our largest distributor. Between March 1999 and July 1999, we issued a total of 502,674 shares of common stock to Ingram Entertainment Inc., SOFTBANK Technology Ventures IV, L.P. and SOFTBANK Technology Advisors Fund, L.P. in connection with their exercise of a contractual right to purchase shares of our common stock upon our issuance of additional securities to third parties. Edward S. Russell, who is one of our directors, is a General Partner of these SOFTBANK Technology Ventures funds. In October 1999, we issued 15,877,249 shares of our Series B convertible participating preferred stock at a purchase price of $5.67 per share to a group of investors led by SOFTBANK Capital and its affiliates. In this financing, The Blum Trust also sold an aggregate of 13,188,700 shares of our common stock to SOFTBANK Capital and its affiliates at a purchase price of $5.67 per share. Transactions with Ingram In June 1998, and again in March 1999, we entered into a contract with Ingram Micro to supply and distribute the computer hardware, software and peripheral products that we sell in our stores. We also maintain a line of credit with Ingram Micro to purchase these goods and merchandise. As a part of that line of credit, we granted Ingram Micro a security interest in the inventory we purchase from them, the proceeds from this inventory and all of our accounts receivable. In December 1998, we entered into an agreement with Ingram Entertainment, under which they supply the videos, DVDs and video games that we sell. In August 1999, we amended this agreement to provide for certain 61 co-op advertising dollars and to include certain guarantees for the shipping of the products that we sell through them. In April 1999, we entered into an agreement with Nashville Computer Liquidators to supply and distribute the products we sell in our online clearance store. Nashville Computer Liquidators is a subsidiary of Ingram Entertainment. In October 1999, we issued a total of 4,142,927 shares of common stock in connection with our acquisition of BUYGOLF.COM, Inc. Both Scott Blum and David Ingram were directors of BUYGOLF.COM. Ingram Holdings, Inc., of which David Ingram is the Chairman and President, and The Blum Trust were stockholders of BUYGOLF.COM and received a total of 436,252 shares of our common stock in the merger. Transactions with Scott Blum and His Immediate Family On December 31, 1997, BuyComp LLC borrowed approximately $211,000 from Scott Blum. The loan was payable upon demand and accrued interest at the rate of 10.00% per annum. On October 7, 1998, we loaned Mr. Blum $1.0 million. This loan was also payable on demand and accrued interest at the rate of 8.00% per annum. Both of these loans have been repaid in full. In May 1999, we borrowed $10.0 million from The Blum Trust. The loan was payable upon demand and accrued interest at a rate of 10.00% per annum. This loan was repaid in July 1999 with the proceeds from our credit facility with a commercial lending institution. In August 1999, we borrowed $5.0 million from The Blum Trust pursuant to a note that is payable upon demand and accrues interest at a rate of 10.00% per annum. In addition, The Blum Trust has guaranteed our $15.0 million credit facility and our $1.2 million loan from The Bank of Yorba Linda. In May 1999, we entered into a one year lease agreement with The Blum Trust for our facility located at 27 Brookline, Aliso Viejo, California. Under this lease, our monthly rental obligation is approximately $12,000. This lease expires in May 2000. In October 1999, we entered into a voting trust agreement with Scott A. Blum, The Blum Trust, and three other trusts affiliated with Scott A. Blum, as grantor, and our outside directors, Donald Kendall, James Roszak and Wayne Thorson, as trustees under the voting trust agreement. At the time the voting trust agreement was executed, The Blum Trust and the other affiliated trusts held a total of 99,372,465 shares of our common stock, which represented approximately 56% of our total shares outstanding after giving effect to the conversion of all of our outstanding preferred stock into our common stock. At that time and as of the date of this prospectus, Mr. Blum did not directly own any shares of our capital stock. The voting trust agreement established a trust into which all shares held by The Blum Trust and the other affiliated trusts were deposited. The voting trust agreement requires that any shares of our capital stock that are acquired by The Blum Trust, the other affiliated trusts, Mr. Blum or his "affiliates," as that term is defined in the voting trust agreement, after the date of the voting trust agreement be immediately deposited into the trust. The voting trust agreement further requires that any shares of our capital stock previously deposited into The Blum Trust or the other affiliated trusts that are purchased by any individual or entity affiliated with Mr. Blum also be immediately deposited into the voting trust. This voting trust terminates upon the earlier of (a) the unanimous approval of our Board, two-thirds vote of our stockholders and the consent of our independent auditors, or (b) on the tenth anniversary of the closing of this offering, unless otherwise required by law or regulation. The voting trust agreement does not restrict the ability of The Blum Trust, the other affiliated trusts, Mr. Blum or any of his affiliates to sell, assign, transfer or pledge any of the shares deposited into the voting trust, nor does it prohibit The Blum Trust, the other affiliated trusts, Mr. Blum or his affiliates from purchasing additional shares of our common stock, provided any shares purchased by such parties also become subject to the voting trust agreement. The trustees of the voting trust agreement are required to be outside directors of BUY.COM who are not affiliated with Mr. Blum, or individuals nominated by our outside directors. On significant stockholder actions the trustees are required to vote all of the shares in the voting trust for the matter, against the matter or abstain 62 or cause to have the same effect as broker non-votes, in the same proportion as the non-affiliated votes are cast on such matter. The voting trust agreement provides that significant stockholder actions include the election of directors, the dissolution, consolidation, merger, reorganization, or recapitalization of BUY.COM, the lease, sale or license of all or a substantial portion of our assets, the issuance or sale of securities by us or our affiliate or the amendment to the voting trust agreement, in each case to the extent a stockholder vote is otherwise required by law. The voting trust agreement provides that non-affiliated shares include all shares of our outstanding capital stock other than shares held in the voting trust. On routine stockholder actions the trustees have the discretion to vote the shares held in the trust in any manner determined by a majority of the trustees. Mr. Blum resigned as our Chief Executive Officer in March 1999, and resigned from our Board of Directors in September 1999. He is not an employee of the Company and he has no authority to bind us as to any contracts, to commit funds or resources, or supervise or direct the activities of any of our officers or employees. In accordance with the terms of the voting trust agreement, Mr. Blum has withdrawn from participating in the management, business and operations of BUY.COM, and is required to cease all involvement with BUY.COM and with our operations, our advertising and product sales activities or efforts, our investor relations program and our financial and accounting matters, including personnel matters, accounting methodologies or practices. In July 1999, Scott Blum's father, William Blum, purchased 45,000 shares of common stock from one of our employees at a purchase price of $2.39 per share. Transactions With Pinnacle Micro On October 1, 1997, we entered into a consulting agreement with Pinnacle Micro, Inc. Scott Blum's father, William Blum, was the President, Chief Executive Officer and Chairman of the Board of Directors of Pinnacle Micro at the time this agreement was executed. In addition, before founding BUY.COM INC., Scott Blum served as an Executive Vice President of Pinnacle Micro. The payments made under this agreement suspended Pinnacle Micro's severance payments to Mr. Blum. On March 21, 1998, we entered into another consulting agreement with Pinnacle Micro, Inc. under which Scott Blum agreed to provide marketing and consulting services to Pinnacle Micro. In addition, several of our other employees consulted for Pinnacle Micro during the three month duration of this agreement. Under both consulting agreements, Pinnacle Micro made total payments of approximately $161,000 to us between October 1997 and June 1998. From September 1997 through December 1998, we made payments of approximately $155,000 on behalf of Pinnacle Micro for advertisements. Pinnacle Micro has repaid all such payments in full. Dividend of BUYNOW, INC. In October 1999, we declared a common stock dividend of 75% of the capital stock, on an as converted basis, of one of our wholly-owned subsidiaries, BUYNOW INC., to all of our stockholders of record as of October 13, 1999. Several of our directors and executive officers were stockholders as of the record date and participated in the dividend. We have retained Series A preferred stock representing 25% of the capital stock of BUYNOW on an as converted basis. The Series A preferred stock has a $7.5 million liquidation preference over the common stock and is convertible into common stock of BUYNOW. 63 We will be entering into a voting agreement with the other stockholders of BUYNOW that will provide for a five member Board of Directors and will grant us the right to elect two directors and will grant SOFTBANK the right to elect one director. We will be entering into a license agreement with BUYNOW under which we will license our e-commerce technology related to the BUYNOW business to BUYNOW on a royalty free basis. In addition, we will license to BUYNOW, on a royalty free basis, the "BUYNOW" trademark and domain name rights, which license may be terminated by us at any time. BUYNOW will be entering into a non-competition agreement prohibiting BUYNOW from soliciting any of our employees without obtaining our prior consent or from providing services to any computer equipment manufacturer without first obtaining our consent. International Joint Ventures In September 1999, we entered into a binding letter of intent with SOFTBANK America, Inc. to form three separate international joint ventures in various international territories in which we will have 51% ownership interests. Messrs. Burnham and Russell are affiliated with SOFTBANK and are directors of BUY.COM. 64 PRINCIPAL STOCKHOLDERS The following table indicates information as of October 15, 1999 regarding the ownership of our common stock by: . each person who is known by us to own more than 5% of our shares of common stock; . each named executive officer; . each of our directors; and . all of our directors and executive officers as a group. The number of shares beneficially owned and the percentage of shares beneficially owned are based on 178,281,189 shares of common stock outstanding as of October 15, 1999, and shares of common stock outstanding upon consummation of this offering. Beneficial ownership is determined in accordance with the rules and regulations of the Securities and Exchange Commission. Shares subject to options that are exercisable currently or within 60 days following October 15, 1999 are deemed to be outstanding and beneficially owned by the optionee for the purpose of computing share and percentage ownership of that optionee, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Except as indicated in the footnotes to this table, and as affected by applicable community property laws, all persons listed have sole voting and investment power for all shares shown as beneficially owned by them.
Percent of Shares Beneficially Owned ----------------- Number of Shares Prior to After Name and Address of Beneficial Owners (1) Beneficially Owned Offering Offering - ----------------------------------------- ------------------ -------- -------- Scott A. Blum(2)(13)...................... 99,164,465 55.6% SOFTBANK Affiliates(3).................... 61,272,462 34.4 William L. Burnham(4)..................... 38,783,101 21.8 Edward S. Russell(5)...................... 22,489,361 12.6 David B. Ingram(6)........................ 8,185,560 4.6 Gregory J. Hawkins(7)..................... 7,267,650 3.9 Mitch C. Hill(8).......................... 1,958,194 1.1 Brent Rusick(9)........................... 1,500,000 * Murray H. Williams(10).................... 1,125,000 * Donald M. Kendall(11)..................... 494,145 * Charles W. Richion(11).................... 494,145 * James B. Roszak(11)....................... 494,145 * John Sculley(11).......................... 494,145 * Wayne T. Thorson(11)...................... 494,145 * All directors and officers as a group (16 persons)(12)(13)..................... 186,581,556 96.2%
- -------- * Less than one percent (1) The address for each of our officers and directors is c/o BUY.COM at 21 Brookline, Aliso Viejo, California 92656. The address for the SOFTBANK Technology Funds is 200 West Evelyn Avenue, Suite 200, Mountain View, California 94043. The address for the other SOFTBANK funds is 10 Langley Road, Suite 403, Newton Center, Massachusetts 02159. (2) Consists of shares held by the Scott A. Blum Separate Property Trust, the Will Scott Blum Trust, the Emma Rose Blum Trust and the Scott Blum GRAT. The address for the Blum Trusts is 33971 Selva Road, Suite 200, Dana Point, California 92629. 65 (3) Includes 17,186,120 shares, 3,346,170 shares, 5,019,240 shares, 20,768,685 shares, 397,932 shares, 13,042,359 shares, 189,212 shares, 1,267,454 shares, 34,524 shares and 20,767 shares held by SOFTBANK America, Inc., SOFTBANK Ventures, Inc., SOFTBANK Contents Fund, SOFTBANK Technology Ventures IV, L.P. and SOFTBANK Technology Advisors Fund, L.P., SOFTBANK Capital Partners L.P., SOFTBANK Capital Partners Advisors Fund L.P., SOFTBANK Technology Ventures V, L.P., SOFTBANK Technology Ventures Advisors Fund V and SOFTBANK Technology Ventures Entrepreneurs Fund V, respectively. (4) Includes 17,186,120 shares, 3,346,170 shares, 5,019,240 shares, 13,042,359 shares and 189,212 shares held by SOFTBANK America, Inc., SOFTBANK Ventures, Inc., SOFTBANK Contents Fund, SOFTBANK Capital Partners LP and SOFTBANK Capital Advisors Fund, respectively. William Burnham is a Managing Director of the general partner of each of these SOFTBANK entities. Mr. Burnham disclaims beneficial ownership of these shares, except to the extent of his pecuniary interest. (5) Includes 20,768,685 shares, 397,932 shares and 1,267,454 shares, 34,524 shares and 20,767 shares held by SOFTBANK Technology Ventures IV, L.P., SOFTBANK Technology Advisors Fund, L.P., and SOFTBANK Technology Ventures V, L.P., SOFTBANK Technology Ventures Advisors Fund V and SOFTBANK Technology Ventures Entrepreneurs Fund V, respectively. Edward S. Russell is the Managing Director of the general partner of each of these SOFTBANK entities. Mr. Russell disclaims beneficial ownership of these shares except to the extent of his pecuniary interest. (6) Includes 7,785,615 shares held by Ingram Capital, Inc. and 144,945 shares held by Ingram Entertainment Inc. Mr. Ingram is the majority stockholder of Ingram Entertainment, Inc., which is the sole stockholder of Ingram Capital, Inc. Mr. Ingram disclaims beneficial ownership of these shares, except to the extent of his pecuniary interest. Also includes 255,000 shares issuable upon exercise of an option that is exercisable within 60 days of October 15, 1999. (7) Consists solely of shares issuable upon exercise of an option that is exercisable within 60 days of October 15, 1999. (8) Our Board of Directors has approved an option grant to Mr. Hill of 1,958,194 shares of our common stock to be effective upon the date his employment commences with us. The option is exercisable within 60 days of October 15, 1999. (9) Consists solely of shares issuable upon exercise of an option that is exercisable within 60 days of October 15, 1999. (10) This amount also includes a total of 67,500 shares of common stock transferred to the Murray Williams Children's Trust, the Murray Williams Sibling's Trust and the Murray Williams College Fund Trust. (11) Includes 285,000 shares issuable upon exercise of an option that is exercisable within 60 days of October 15, 1999. (12) Includes 15,532,844 shares issuable upon exercise of options that are exercisable within 60 days of October 15, 1999. (13) Includes Mr. Blum's shares of common stock that are held in a voting trust for which three of our outside directors serve as trustees. The voting trust, among other things, provides that the trustees of the voting trust will have the discretion to vote all of Mr. Blum's shares on issues related to routine corporate governance. However, in some instances, the trustees must vote Mr. Blum's shares in the same proportion as the votes cast for and against by the non-affiliated shares. For a more detailed discussion of this voting trust, see "Certain Transactions--Transactions with Scott Blum and His Immediate Family." 66 DESCRIPTION OF CAPITAL STOCK The following description of our securities and provisions of our certificate of incorporation and bylaws is only a summary. You should also refer to the copies of our certificate and bylaws which have been filed with the Securities and Exchange Commission as exhibits to our registration statement, of which this prospectus forms a part. The description of common stock and preferred stock reflect changes to our capital structure that will occur upon the closing of this offering in accordance with the terms of the certificate of incorporation that will be adopted by us immediately prior to the closing of this offering. Upon the closing of this offering, our authorized capital stock will consist of 850,000,000 shares of common stock, par value $0.0001, and 150,000,000 shares of preferred stock, par value $0.0001. Common Stock We are authorized to issue 850,000,000 shares of common stock. At October 15, 1999, 142,922,810 shares of common stock were deemed outstanding and held of record by approximately 44 holders. Under the certificate of incorporation and bylaws, holders of common stock do not have cumulative voting rights. Holders of shares representing a majority of the voting power of common stock can elect all of the directors. The holders of the remaining shares will not be able to elect any directors. The shares of common stock offered by this prospectus, when issued, will be fully paid and non-assessable and will not be subject to any redemption or sinking fund provisions. Holders of common stock do not have any preemptive, subscription or conversion rights. Holders of common stock are entitled to receive dividends declared by the Board of Directors out of legally available funds, subject to the rights of preferred stockholders and the terms of any existing or future agreements between us and our lenders. Since our inception, we have not declared or paid any cash dividends on our common stock. We presently intend to retain future earnings, if any, for use in the operation and expansion of our business. We do not anticipate paying cash dividends in the foreseeable future. See "Dividend Policy." In the event of our liquidation, dissolution or winding up, common stockholders are entitled to share ratably in all assets legally available for distribution after payment of all debts and other liabilities, and subject to the prior rights of any holders of outstanding shares of preferred stock. Preferred Stock Upon the closing of this offering, all 19,481,130 shares of our Series A convertible participating preferred stock and 15,877,249 shares of our Series B convertible participating preferred stock will convert into shares of common stock. Thereafter, the Board of Directors is authorized to issue from time to time up to an aggregate of 5,000,000 shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each of these series, including the dividend rights, dividend rates, conversion rights, voting rights, term of redemption, including sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of a series without further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of BUY.COM without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock. The issuance of preferred stock with voting and conversion rights may adversely affect the voting power of the holders of common stock, including the loss of voting control to others. We currently have no plans to issue any shares of preferred stock. We believe that the ability to issue preferred stock without the expense and delay of a special stockholders' meeting will provide us with increased flexibility in structuring possible future financings and acquisitions, and in meeting other corporate needs that might arise. This also permits the Board of Directors to issue preferred stock containing terms which could impede the completion of a takeover attempt, subject to limitations imposed by the securities laws. The Board of Directors will make any determination to issue these 67 shares based on its judgment as to the best interests of BUY.COM and its stockholders at the time of issuance. This could discourage an acquisition attempt or other transaction which stockholders might believe to be in their best interests or in which they might receive a premium for their stock over the then market price of the stock. Anti-Takeover Provisions We are subject to the provisions of Section 203 of the Delaware General Corporation Law. Subject to exceptions, Section 203 prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years from the date of the transaction in which the person became an interested stockholder, unless the interested stockholder attained this status with the approval of the Board of Directors or unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. This statute could prohibit or delay the accomplishment of mergers or other takeover or change in control attempts with respect to us and, accordingly, may discourage attempts to acquire us. Provisions of the certificate of incorporation and bylaws may make it more difficult to acquire control of BUY.COM. These provisions could deprive stockholders of the opportunity to realize a premium on the shares of common stock owned by them. In addition, these provisions may adversely affect the prevailing market price of the stock and are intended to: . enhance the likelihood of continuity and stability in the composition of the Board and in the policies formulated by the Board; . discourage transactions which may involve an actual or threatened change in control of BUY.COM; . discourage tactics that may be used in proxy fights; . encourage persons seeking to acquire control of BUY.COM to consult first with the Board of Directors to negotiate the terms of any proposed business combination or offer; and . reduce our vulnerability to an unsolicited proposal for a takeover that does not contemplate the acquisition of all of our outstanding shares or that is otherwise unfair to our stockholders. Classified Board of Directors; Removal; Filling Vacancies and Amendment. Upon the closing of this offering, the certificate of incorporation and bylaws will provide for the Board to be divided into three classes of directors serving staggered, three-year terms. The classification of the Board has the effect of requiring at least two annual stockholder meetings, instead of one, to replace a majority of members of the Board. Subject to the rights of the holders of any outstanding series of preferred stock, the certificate of incorporation will authorize only the Board to fill vacancies, including newly created directorships. Accordingly, this provision could prevent a stockholder from obtaining majority representation on the Board by enlarging the Board of Directors and filling the new directorships with its own nominees. The certificate of incorporation will also provide that directors may be removed by stockholders only for cause and only by the affirmative vote of holders of two- thirds of the outstanding shares of voting stock. Special Stockholder Meetings. The certificate of incorporation will provide that special meetings of the stockholders for any purpose or purposes, unless required by law, shall be called by: . the President or Secretary following a request in writing of the President; . a majority of the entire Board; or . stockholders owning not less than 50% of the entire voting stock of BUY.COM then issued and outstanding. 68 A special meeting of the stockholders may not be held absent a written request of this nature. The request shall state the purpose or purposes of the proposed meeting. This limitation on the right of stockholders to call a special meeting could make it more difficult for stockholders to initiate actions that are opposed by the Board of Directors. These actions could include the removal of an incumbent director or the election of a stockholder nominee as a director. They could also include the implementation of a rule requiring stockholder ratification of specific defensive strategies that have been adopted by the Board of Directors with respect to unsolicited takeover bids. In addition, the limited ability of the stockholders to call a special meeting of stockholders may make it more difficult to change the existing Board and management. Written Consent; Special Meetings of Stockholders. The certificate of incorporation will prohibit the taking of stockholder action by written consent without a meeting. These provisions will make it more difficult for stockholders to take action opposed by the Board of Directors. Amendment of Provisions in the Certificate of Incorporation. The certificate of incorporation will generally require the affirmative vote of the holders of at least two-thirds of the outstanding voting stock in order to amend any provisions of the certificate of incorporation concerning: . the removal or appointment of directors; . the authority of stockholders to act by written consent; . the required vote to amend the certificate of incorporation; . calling a special meeting of stockholders; . procedure and content of stockholder proposals concerning business to be conducted at a meeting of stockholders; and . director nominations by stockholders. These voting requirements will make it more difficult for minority stockholders to make changes in the certificate of incorporation that could be designed to facilitate the exercise of control over us. Furthermore, SOFTBANK and its affiliates will effectively control the voting power with respect to approximately % of our common stock, based on the terms of the voting trust agreement covering shares beneficially owned by our founder. This gives them absolute power with respect to any stockholder action or approval requiring either a two-thirds vote or a simple majority. For a more detailed discussion of this voting trust, see "Certain Transactions--Transactions with Scott Blum and His Immediate Family." Warrants In July 1999, we issued a warrant to United Air Lines to purchase 2,000,000 shares of common stock at an exercise price of $10.00 per share. This warrant is fully vested and may be exercised at any time and expires in July 2004. In July 1999, we issued a warrant to our commercial lending institution to purchase shares of common stock at an exercise price of $ . This warrant is exercisable any time after the completion of this offering and expires in July 2001. However, this warrant terminates if the lender perfects a security interest in Mr. Blum's investment portfolio or otherwise enforces any of its rights under its credit facility with us. In October 1999, we issued a warrant to another party to purchase 1,000,000 shares of common stock at an exercise price of $5.67 per share. This warrant may be exercised at any time and expires in December 2001. Registration Rights After this offering, holders of 158,090,672 shares of common stock will be entitled to registration rights with respect to their shares. Subject to conditions, these holders can require us to register all or part of their shares. In addition, these holders may require us to include their shares in future registration statements that we 69 file and may require us to register their shares on Form S-3. Upon registration, these shares will be freely tradable in the public market without restriction. United Air Lines also holds registration rights with respect to the 2,000,000 shares of common stock subject to their outstanding warrant, and subject to conditions, may require us to register all or a part of their shares. Our commercial lender holds piggyback registration rights with respect to the common stock issuable under their warrants and we intend to grant another party similar piggyback registration rights with respect to their warrant. Transfer Agent and Registrar The transfer agent and registrar for our common stock is U.S. Stock Transfer Corporation. 70 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the offering, we will have shares of common stock outstanding assuming no exercise of options after October 15, 1999. Of this amount, the shares offered by this prospectus will be available for immediate sale in the public market as of the date of this prospectus. Following the expiration of 180-day lockup agreements with the representatives of the underwriters or BUY.COM, shares will be available for sale in the public market, subject in some cases to compliance with the volume and other limitations of Rule 144.
Approximate Number Days after the Date of Shares Eligible of this Prospectus for Future Sale Comment ------------------- ------------------ ----------------------------------- Upon Freely tradable shares sold in this effectiveness..... offering 180 days........... Lock-up released; shares saleable under Rule 144, 144(k) or 701 Over 180 days...... Restricted securities held for less than one year
In general, under Rule 144 as currently in effect, a person who has beneficially owned shares for at least one year is entitled to sell, within any three-month period commencing 90 days after the date of this prospectus, a number of shares that does not exceed the greater of: . 1% of the then outstanding shares of common stock; or . the average weekly trading volume during the four calendar weeks preceding the sale, subject to the filing of a Form 144 with respect to the sale. A person who is not deemed to have been an affiliate of ours at any time during the 90 days immediately preceding the sale and who has beneficially owned his or her shares for at least two years is entitled to sell his or her shares under Rule 144(k) without regard to the limitations described above. Persons deemed to be affiliates must always sell under Rule 144, even after the applicable holding periods have been satisfied. We are unable to estimate the number of shares that will be sold under Rule 144, since this will depend on the market price for our common stock, the personal circumstances of the sellers and other factors. Prior to the offering, there has been no public market for the common stock, and there can be no assurance that a significant public market for the common stock will develop or be sustained after the offering. Any future sale of substantial amounts of the common stock in the open market may adversely affect the market price of the common stock offered by this prospectus. BUY.COM, its directors, executive officers, stockholders with registration rights and other stockholders and optionholders have agreed, under the purchase agreement and other agreements, that they will not sell any common stock without the prior written consent of Merrill Lynch for a period of 180 days from the date of this prospectus, except that we may, without consent, grant options and sell shares under our stock plans. Any employee or consultant who purchased his or her shares under a written compensatory plan or contract is entitled to rely on the resale provisions of Rule 701, which permits nonaffiliates to sell their Rule 701 shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144 and permits affiliates to sell their Rule 701 shares without having to comply with the Rule 144 holding period restrictions, in each case commencing 90 days after the date of this prospectus. As of October 15, 1999, the holders of options to purchase approximately 32,808,459 shares of common stock will be eligible to sell their shares upon the expiration of the 180-day lockup period, subject to the vesting of those options. We intend to file a registration statement on Form S-8 under the Securities Act as soon as practicable after the completion of the offering to register 39,539,960 shares of common stock subject to outstanding stock options or reserved for issuance under our 1998 Stock Option/Stock Issuance Plan and the Special Executive Option Plan. This registration will permit the resale of these shares by nonaffiliates in the public market 71 without restriction under the Securities Act, upon completion of the lock-up period described above. Shares registered under the Form S-8 registration statement held by affiliates will be subject to Rule 144 volume limitations. See "Management--Executive Compensation," "--1998 Stock Option/Stock Issuance Plan" and "--Special Executive Option Plan." In addition, holders of 158,090,672 shares of common stock have registration rights with respect to their shares. Registration of these securities would enable these shares to be freely tradable without restriction under the Securities Act. We also have given, or intend to give, registration rights to our warrant holders with respect to shares of common stock. See "Risk Factors--A large number of additional shares may be sold into the public market in the near future. These sales could cause the market price of our common stock to decline significantly, even if our business is doing well." 72 UNDERWRITING General Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear Stearns & Co. Inc. and Hambrecht & Quist LLC are acting as representatives of each of the underwriters named below. Subject to the terms and conditions set forth in a purchase agreement among us and the underwriters, we have agreed to sell to the underwriters, and each of the underwriters severally and not jointly has agreed to purchase from us, the number of shares of common stock set forth opposite its name below.
Number Underwriter of Shares ----------- --------- Merrill Lynch, Pierce, Fenner & Smith Incorporated.............................................. Bear Stearns & Co. Inc............................................. Hambrecht & Quist LLC.............................................. --- Total......................................................... ===
In the purchase agreement, the several underwriters have agreed, subject to its terms and conditions, to purchase all of the shares of common stock being sold under the terms of the agreement if any of the shares of common stock are purchased. In the event of a default by an underwriter, the purchase agreement provides that, in certain circumstances, the purchase commitments of the non- defaulting underwriters may be increased or the purchase agreement may be terminated. We have agreed to indemnify the underwriters against certain liabilities, including certain liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities. The shares of common stock are being offered by the several underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the underwriters and certain other conditions. The underwriters reserve the right to withdraw, cancel or modify this offer and to reject orders in whole or in part. Commissions and Discounts The representatives have advised us that the underwriters propose initially to offer the shares of common stock to the public at the initial public offering price set forth on the cover page of this prospectus, and to certain dealers at such price less a concession not in excess of $ per share of common stock. The underwriters may allow, and such dealers may reallow, a discount not in excess of $ per share of common stock to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. 73 The following table shows the per share and total public offering price, underwriting discount to be paid by us to the underwriters and the proceeds before expenses to us. This information is presented assuming either no exercise or full exercise by the underwriters of their over-allotment option.
Per Share Without Option With Option --------- -------------- ----------- Public offering price... $ $ $ Underwriting discount... $ $ $ Proceeds, before expenses, to BUY.COM... $ $ $
The expenses of this offering (exclusive of the underwriting discount and commissions) are estimated at $ and are payable by us. Over-Allotment Option We have granted an option to the underwriters, exercisable for 30 days after the date of this prospectus, to purchase up to an aggregate of additional shares of common stock at the public offering price set forth on the cover page of this prospectus, less the underwriting discount. The underwriters may exercise this option solely to cover over-allotments, if any, made on the sale of the common stock offered hereby. To the extent that the underwriters exercise this option, each underwriter will be obligated, subject to certain conditions, to purchase a number of additional shares of common stock proportionate to such underwriter's initial amount reflected in the foregoing table. Reserved Shares At the request of BUY.COM, the underwriters have reserved for sale, at the initial public offering price, up to of the shares offered hereby to be sold to certain directors, officers, employees, distributors, dealers, business associates and related persons of BUY.COM. The number of shares of common stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares which are not orally confirmed for purchase within one day of the pricing of this offering will be offered by the underwriters to the general public on the same terms as the other shares offered in this prospectus. No Sales of Similar Securities For a period of 180 days after the date of this prospectus, we, our executive officers, directors and other stockholders beneficially owning substantially all of the outstanding shares of common stock have agreed, subject to certain exceptions, not to directly or indirectly: . offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of or otherwise dispose of or transfer any shares of common stock or securities convertible into or exchangeable or exercisable for common stock, whether now owned or thereafter acquired by the person executing the agreement or with respect to which the person executing the agreement thereafter acquires the power of disposition, or file a registration statement under the Securities Act with respect to the foregoing; . enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of the common stock whether any swap or transaction is to be settled by delivery of common stock or other securities, in cash or otherwise; or . make any demand for, or exercise any right with respect to, the registration of any share of common stock or any securities convertible into or exchangeable for common stock, without the prior written consent of Merrill Lynch on behalf of the underwriters. Nasdaq National Market Listing Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined through negotiations between us and the representatives. The factors to be considered 74 in determining the initial offering price, in addition to prevailing market conditions, include the valuation multiples of publicly-traded companies that the representatives believe to be comparable to us, certain of our financial information, the history of, and the prospects for, our company and the industry in which we compete, and an assessment of our management, its past and present operations, the prospects for, and timing of, our future revenues, the present state of our development and the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours. There can be no assurance that an active trading market will develop for our common stock or that our common stock will trade in the public market subsequent to this offering at or above the initial public offering price. We have applied to list our common stock for quotation on the Nasdaq National Market under the symbol "BUYC." The underwriters do not expect sales of the common stock to be made to any accounts over which they exercise discretionary authority to exceed five percent of the number of shares being offered in this offering. Price Stabilization and Short Positions Until the distribution of the common stock is completed, rules of the Securities and Exchange Commission may limit the ability of the underwriters and certain selling group members to bid for and purchase our common stock. As an exception to these rules, the representatives are permitted to engage in certain transactions that stabilize the price of our common stock in connection with this offering. These transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of our common stock. If the underwriters create a short position in our common stock in connection with the offering contemplated hereby, i.e., if they sell more shares of common stock than are set forth on the cover page of this prospectus, the representatives may reduce that short position by purchasing our common stock in the open market. The representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. Penalty Bids The representatives may also impose a penalty bid on certain underwriters and selling group members. This means that if the representatives purchase shares of our common stock in the open market to reduce the underwriters' short position or to stabilize the price of our common stock, they may reclaim the amount of the selling concession from the underwriters and selling group members who sold those shares. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of these purchases. The imposition of a penalty bid might also have an effect on the price of our common stock to the extent that it discourages resales of our common stock. Neither we nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters makes any representation that the representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued. LEGAL MATTERS The validity of the issuance of the shares of common stock offered by this prospectus will be passed upon for us by Brobeck, Phleger & Harrison LLP, Irvine, California. Legal matters relating to the sale of common stock in this offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. 75 EXPERTS The consolidated balance sheets of BUY.COM INC. as of December 31, 1997 and 1998 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the period from June 7, 1997 (Inception) to December 31, 1997, and the year ended December 31, 1998, included in this prospectus and elsewhere in the registration statement, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving such reports. The balance sheets of BuyGolf.com, Inc. as of December 31, 1998 and June 30, 1999 and the related statements of operations, stockholders' equity, and cash flows for the period from December 1, 1998 (Inception) to December 31, 1998, and the six months ended June 30, 1999, included in this prospectus and elsewhere in the registration statement, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving such reports. WHERE YOU CAN FIND MORE INFORMATION We have filed a registration statement on Form S-1 with the Securities and Exchange Commission under the Securities Act with respect to the common stock offered by this prospectus. This prospectus does not contain all of the information in the registration statement and its exhibits and schedules. For further information with respect to us and our common stock, please see the registration statement and the exhibits and schedules filed with the registration statement. Statements contained in this prospectus concerning the contents of any contract or other document referred to are not necessarily complete. Please refer to the copies of these contracts or other documents filed as an exhibit to the registration statement. Each of these statements is qualified in all respects by this reference. The registration statement, including its exhibits and schedules, may be inspected without charge at the principal office of the Commission in Washington, D.C. Copies of all or any part of the registration statement may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. These copies may also be inspected and copied at the Commission's Regional Offices located at: . Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and . 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of this material may be obtained at prescribed rates by mail from the public reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the Securities and Exchange Commission maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants, including us, that file electronically. 76 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants................................. F-2 Consolidated Balance Sheets.............................................. F-3 Consolidated Statements of Operations.................................... F-4 Consolidated Statements of Stockholders' Equity (Deficit)................ F-5 Consolidated Statements of Cash Flows.................................... F-6 Notes to Consolidated Financial Statements............................... F-8 FINANCIAL STATEMENTS OF BUYGOLF.COM, INC. Report of Independent Public Accountants................................. F-25 Balance Sheets........................................................... F-26 Statements of Operations................................................. F-27 Statements of Stockholders' Equity....................................... F-28 Statements of Cash Flows................................................. F-29 Notes to Financial Statements............................................ F-30 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS Basis of Presentation.................................................... PF-1 Unaudited Pro Forma Condensed Combined Statement of Operations for the nine months ended September 30, 1999.................................... PF-2
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors BUY.COM INC.: We have audited the accompanying consolidated balance sheets of BUY.COM INC. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1998, and the related statements of operations, stockholders' equity (deficit) and cash flows for the period from June 7, 1997, (Inception) to December 31, 1997, and the year ended December 31, 1998. 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 generally accepted auditing standards. 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 consolidated financial position of BUY.COM INC. and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for the period from June 7, 1997, (Inception) to December 31, 1997, and the year ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Orange County, California October 26, 1999 F-2 BUY.COM INC. CONSOLIDATED BALANCE SHEETS (amounts in thousands, except share and per share data)
Pro forma December 31, Stockholders' --------------------------------- September 30, Equity (Deficit) at 1997 1998 1999 September 30, 1999 --------------- ---------------- ---------------- ------------------- (unaudited) (unaudited) (see note 8) Assets Current Assets: Cash................... $ 34 $ 9,221 $ 3,231 Accounts receivable, net of allowances of $0 and $50 at December 31, 1997 and 1998, respectively, and $766 at September 30, 1999.............. 178 4,986 16,062 Prepaid expenses and other current assets.. 4 1,258 1,422 --------------- ---------------- ---------------- Total current assets.............. 216 15,465 20,715 Property and equipment, net.................... 50 2,895 5,286 Intangibles, net........ -- 8,212 7,187 Other noncurrent assets................. 1 265 701 --------------- ---------------- ---------------- $ 267 $ 26,837 $ 33,889 =============== ================ ================ Liabilities and Stockholders' Equity (Deficit) Current Liabilities: Accounts payable....... $ 361 $ 16,270 $ 68,455 Line of credit......... -- -- 12,377 Accrued expenses....... 11 438 3,695 Deferred revenue....... 22 2,295 826 Income taxes payable... 2 3 3 Note payable to stockholder........... 211 -- 5,000 Current portion of long-term debt........ -- 21 313 --------------- ---------------- ---------------- Total current liabilities......... 607 19,027 90,669 --------------- ---------------- ---------------- Long-Term Debt, net of current portion........ -- 1,175 1,818 --------------- ---------------- ---------------- Commitments and Contingencies Stockholders' Equity (Deficit): Convertible preferred stock--Series A, $0.0001 par value; Authorized shares-- 19,481,130 at December 31, 1998 and 150,000,000 at September 30, 1999; Issued and outstanding-- 19,481,130 at December 31, 1998 and at September 30, 1999, and 0 pro forma (unaudited), including additional paid-in capital............... -- 14,943 14,943 $ -- Common stock, $0.0001 par value; Authorized shares-- 189,998,130 at December 31, 1998 and 850,000,000 at September 30, 1999; Issued and outstanding-- 138,977,040 at December 31, 1998, 142,922,810 at September 30, 1999, and 162,403,940 pro forma (unaudited)........... -- 14 14 16 Additional paid-in capital............... -- 12,351 33,593 48,534 Deferred compensation.. -- (2,439) (8,387) (8,387) Members' capital, no par value; Authorized units--11,000,000 at December 31, 1997; Issued and outstanding--9,000,000 at December 31, 1997.. 50 -- -- -- Accumulated deficit.... (390) (18,234) (98,761) (98,761) --------------- ---------------- ---------------- ---------------- Total stockholders' equity (deficit).... (340) 6,635 (58,598) $ (58,598) --------------- ---------------- ---------------- ================ $ 267 $ 26,837 $ 33,889 =============== ================ ================
The accompanying notes are an integral part of these consolidated balance sheets. F-3 BUY.COM INC. CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands, except share and per share data)
June 7, 1997 Nine Months Ended (Inception) to Year Ended September 30, December 31, December 31, ------------------------ 1997 1998 1998 1999 -------------- ------------ ----------- ----------- (unaudited) Net revenues............ $ 878 $ 125,290 $ 63,761 $ 397,601 Cost of goods sold...... 832 123,527 61,165 401,214 ----------- ----------- ----------- ----------- Gross profit (loss)..... 46 1,763 2,596 (3,613) Operating expenses: Sales and marketing.... 130 13,430 2,770 44,094 Product development.... 30 950 404 3,851 General and administrative........ 260 4,250 3,624 12,872 Depreciation and amortization.......... 7 377 61 3,009 Amortization of deferred compensation.......... -- 795 422 5,417 Charge for warrants.... -- -- -- 7,021 ----------- ----------- ----------- ----------- Total operating expenses............. 427 19,802 7,281 76,264 ----------- ----------- ----------- ----------- Operating loss.......... (381) (18,039) (4,685) (79,877) Other income (expense): Interest income (expense), net........ (7) 202 78 (721) Other.................. -- (4) (58) 74 ----------- ----------- ----------- ----------- Total other income (expense)............ (7) 198 20 (647) ----------- ----------- ----------- ----------- Loss before provision for income taxes....... (388) (17,841) (4,665) (80,524) Provision for income taxes.................. 2 3 3 3 ----------- ----------- ----------- ----------- Net loss................ $ (390) $ (17,844) $ (4,668) $ (80,527) =========== =========== =========== =========== Net loss per share: Basic and diluted...... $ (0.00) $ (0.14) $ (0.04) $ (0.57) Weighted average number of common shares outstanding: Basic and diluted...... 130,129,725 130,905,390 130,129,725 141,814,477
The accompanying notes are an integral part of these consolidated statements. F-4 BUY.COM INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (amounts in thousands, except share data)
Convertible Members' Capital Preferred Stock Common Stock ------------------- -------------------- --------------------------- Total Additional Stockholders' Preferred Paid-in Deferred Accumulated Equity Units Capital Shares Stock Shares Par Capital Compensation Deficit (Deficit) ---------- ------- ---------- --------- ----------- ---- ---------- ------------ ----------- ------------- Inception of Company, June 7, 1997 Members' contributions.... 9,000,000 $ 50 -- $ -- -- $ -- $ -- $ -- $ -- $ 50 Net loss......... -- -- -- -- -- -- -- -- (390) (390) ---------- ---- ---------- ------- ----------- ---- ------- -------- -------- -------- Balance, December 31, 1997......... 9,000,000 50 -- -- -- -- -- -- (390) (340) Reorganization of Company, August 3, 1998: Retirement of members' units.. (9,000,000) (50) -- -- -- -- -- -- -- (50) Issued Series A Preferred stock........... -- -- 4,870,275 2 -- -- -- -- -- 2 Issued Common stock........... -- -- -- -- 130,129,725 13 35 -- -- 48 Issuance of Series A preferred stock for cash......... -- -- 14,610,855 14,941 -- -- -- -- -- 14,941 Issuance of common stock for acquisition of Speedserve....... -- -- -- -- 8,847,315 1 9,082 -- -- 9,083 Deferred compensation related to stock options granted.. -- -- -- -- -- -- 3,234 (3,234) -- -- Amortization of deferred compensation..... -- -- -- -- -- -- -- 795 -- 795 Net loss......... -- -- -- -- -- -- -- -- (17,844) (17,844) ---------- ---- ---------- ------- ----------- ---- ------- -------- -------- -------- Balance, December 31, 1998......... -- -- 19,481,130 14,943 138,977,040 14 12,351 (2,439) (18,234) 6,635 Exercise of stock options for cash............. -- -- -- -- 3,168,000 -- 21 -- -- 21 Issuance of common stock for cash............. -- -- -- -- 507,675 -- 1,974 -- -- 1,974 Common stock issued for purchases of domain names for cash and common stock............ -- -- -- -- 270,095 -- 861 -- -- 861 Issuance of warrants for supply and debt agreements....... -- -- -- -- -- -- 7,021 -- -- 7,021 Deferred compensation related to stock options granted.. -- -- -- -- -- -- 11,365 (11,365) -- -- Amortization of deferred compensation..... -- -- -- -- -- -- -- 5,417 -- 5,417 Net loss......... -- -- -- -- -- -- -- -- (80,527) (80,527) ---------- ---- ---------- ------- ----------- ---- ------- -------- -------- -------- Balance, September 30, 1999 (unaudited)...... -- $ -- 19,481,130 $14,943 142,922,810 $ 14 $33,593 $ (8,387) $(98,761) $(58,598) ========== ==== ========== ======= =========== ==== ======= ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. F-5 BUY.COM INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands)
June 7, 1997 Nine Months Ended (Inception) to Year Ended September 30, December 31, December 31, ---------------------- 1997 1998 1998 1999 -------------- ------------ ---------- ---------- (unaudited) Cash flows from operating activities: Net loss.................. $ (390) $ (17,844) $ (4,668) $ (80,527) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............. 7 377 61 3,009 Gain on sale of fixed assets................... -- -- -- (249) Amortization of deferred compensation............. -- 795 422 5,417 Charge for warrants....... -- -- -- 7,021 Changes in assets and liabilities: Accounts receivable...... (178) (4,211) (3,176) (11,076) Prepaid expenses and other current assets.... (4) (1,128) (121) (164) Other noncurrent assets.. (1) (264) (19) (478) Accounts payable......... 361 15,641 5,170 52,185 Accrued expenses......... 11 384 85 3,257 Deferred revenue......... 22 2,272 1,006 (1,469) Income taxes payable..... 2 1 (2) -- ---------- ---------- ---------- ---------- Net cash used in operating activities... (170) (3,977) (1,242) (23,074) ---------- ---------- ---------- ---------- Cash flows from investing activities: Purchase of property and equipment................ (57) (2,681) (737) (2,728) Proceeds from sale of equipment................ -- -- -- 735 Costs incurred in connection with acquisition.............. -- (81) -- -- Acquisition of domain names.................... -- -- -- (380) ---------- ---------- ---------- ---------- Net cash used in investing activities... (57) (2,762) (737) (2,373) ---------- ---------- ---------- ---------- Cash flows from financing activities: Formation of Company...... 50 -- -- -- Borrowings from (repayments to) stockholder, net......... 211 (211) (211) 5,000 Proceeds from issuance of preferred stock.......... -- 14,941 14,941 -- Proceeds from issuance of common stock............. -- -- -- 1,974 Exercise of stock options.................. -- -- -- 21 Borrowings under line of credit, mortgage and other obligations........ -- 1,196 42 12,462 ---------- ---------- ---------- ---------- Net cash provided by financing activities... 261 15,926 14,772 19,457 ---------- ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents............... 34 9,187 12,793 (5,990) Cash, beginning of period.. -- 34 34 9,221 ---------- ---------- ---------- ---------- Cash, end of period........ $ 34 $ 9,221 $ 12,827 $ 3,231 ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements. F-6 BUY.COM INC. CONSOLIDATED STATEMENTS OF CASH FLOWS -- (Continued) (amounts in thousands)
June 7, 1997 Nine Months Ended (Inception) to Year Ended September 30, December 31, December 31, --------------------- 1997 1998 1998 1999 -------------- ------------ --------- ----------- (unaudited) Supplemental cash flow information: Cash paid during the year for: Interest................... $ -- $ 15 $ -- $ 306 ========= =========== ========= =========== Income taxes............... $ -- $ 2 $ -- $ 7 ========= =========== ========= =========== Summary of non-cash investing and financing activity: Equipment acquired under capital lease............. $ -- $ -- $ -- $ 850 ========= =========== ========= =========== Domain name purchases...... $ -- $ -- $ -- $ 861 ========= =========== ========= =========== ACQUISITIONS: 1998--Acquired all of the outstanding capital stock of Speedserve.com, Inc. The following table outlines the assets acquired, liabilities assumed and cash paid: Fair value of assets acquired.................. $ -- $ 9,476 $ -- $ -- Less: Liabilities assumed....... -- (312) -- -- Fair value of common stock issued................... -- (9,083) -- -- --------- ----------- --------- ----------- Cash paid in connection with acquisitions......... $ -- $ 81 $ -- $ -- ========= =========== ========= ===========
The accompanying notes are an integral part of these consolidated statements. F-7 BUY.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Company Background BUY.COM Inc. and subsidiaries, collectively (the "Company" or "BUY.COM"), is a multi-category Internet superstore, offering a selection of brand name computer hardware and peripherals, software, books, videos, DVDs, computer games and music. Through seven online specialty stores, the Company offers products through a shopping interface that features extensive product information and multi-media presentations. The Company's e-commerce portal, www.buy.com, links all of the seven specialty stores and is designed to enhance the customer's online shopping experience 24 hours a day, seven days a week. BUY.COM uses a virtual operating model that includes outsourcing the majority of its operating infrastructure to national distribution and fulfillment partners. BUY.COM (formerly BuyComp, LLC and Buy Corp.) was formed in June 1997 and began offering products for sale through its web site in November 1997. From BUY.COM's inception through mid-November 1997, the Company had no sales. During this period, the Company's operating activities primarily involved the development of the necessary infrastructure and the original BuyComp.com web site. In August 1998, the Company changed its web site designation to www.buy.com. In December 1998, the Company formed BUY.COM Entertainment, Inc., a wholly owned subsidiary, for the purpose of acquiring Speedserve, Inc. ("Speedserve"), an online retailer of books, videos, DVD's and video games. As a result, effective December 1998, the operations of Speedserve's retail web sites were consolidated with the operations of the Company's existing computer hardware, software and peripheral retail web sites. 2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned and majority controlled subsidiaries, including, BuyCorp Europe, Inc., BUY.COM Entertainment, Inc., Computerstore.com Inc., BuyNow, Inc. and InternetComputerstore.com, Inc. The Company's investments in joint ventures and related companies that represent a 20% to 50% ownership interest over which the Company has significant influence, but not control, are accounted for using the equity method. All significant intercompany balances and transactions have been eliminated. 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 reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Accounts Receivable Accounts receivable consist of credit card and trade receivables arising in the normal course of business as well as an accrual for products shipped to customers but not yet billed by the Company. Substantially all of the Company's accounts receivable serve as collateral for purchases made from Ingram Micro, Inc. ("Ingram"), one of the Company's vendors. F-8 BUY.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Property and Equipment Property and equipment is stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Fixed assets purchased under capital leases are amortized on a straight-line basis over the lesser of the estimated useful life of the asset or the lease term. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed and any gain or loss is reflected in the results of operations. Maintenance and repair expenditures are charged to operations as incurred. Intangibles Intangible assets consist of the portion of the purchase price of businesses acquired in excess of the fair value of identifiable net tangible assets acquired and the cost of internet domain names acquired. Amortization is computed using the straight-line method over the estimated useful lives of the assets. Long-Lived Assets The Company assesses the recoverability of its long-lived assets on an annual basis or whenever adverse events of changes in circumstances or business climate indicate that expected undiscounted future cash flows related to such long-lived assets may not be sufficient to support the net book value of such assets. If undiscounted cash flows are not sufficient to support the recorded assets, an impairment is recognized to reduce the carrying value of the long- lived assets to the estimated fair value. Cash flow projections, although subject to a degree of uncertainty, are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. Additionally, in conjunction with the review for impairment, the remaining estimated lives of certain of the Company's long-lived assets are assessed. Deferred Financing Costs Costs incurred in connection with obtaining financing are capitalized and amortized over the maturity period or expected term of the debt and are included in prepaid expenses and other current assets. Fair Value of Financial Instruments The carrying amounts for the Company's cash, prepaid expenses and other current assets, accounts payable, accrued expenses, long-term debt, and other liabilities approximate fair value. Revenue Recognition The Company recognizes revenue from product sales, net of discounts and estimated sales returns, when the products are shipped to customers. Outbound shipping and handling charges are included in net sales. The Company provides an allowance for sales returns, which is based on historical experience. Advertising Costs The cost of advertising is expensed as incurred. For the years ended December 31, 1997 and 1998, and for the nine months ended September 30, 1999, the Company incurred advertising expense of $70,000, $7.8 million, and $23.6 million, respectively. Income Taxes The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that are expected to be in F-9 BUY.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) effect when the differences are expected to be recovered. Under the Tax Reform Act of 1986, the benefits from net operating losses carried forward may be impaired or limited in certain circumstances. In addition, a valuation allowance has been provided for deferred tax assets when it is more likely than not that all or some portion of the deferred tax asset will not be realized. The Company has established a full valuation allowance on the aforementioned deferred tax assets due to the uncertainty of realization. Loss Per Share Basic earnings per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common stock and common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive. Comprehensive Income (Loss) As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, which establishes standards for the reporting and display of comprehensive income (loss) and its components in the financial statements. Components of comprehensive income (loss) include amounts that, under SFAS No. 130, are included in comprehensive income (loss) but are excluded from net income (loss). There were no significant differences between the Company's net loss and comprehensive loss. Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its employee stock options rather than the alternative fair value accounting allowed by SFAS No. 123, Accounting for Stock-Based Compensation. APB No. 25 provides that the compensation expense relative to the Company's employee stock options is measured based on the intrinsic value of stock options granted. SFAS No. 123 requires companies that continue to follow APB No. 25 to provide a pro forma disclosure of the impact of applying the fair value method of SFAS No. 123. This method recognizes the fair value of stock options granted at the date of grant in earnings over the vesting period of the options. Foreign Currency Translation The functional currency of the Company's foreign subsidiaries is the local currency. Assets and liabilities of subsidiaries with international operations are translated into U.S. dollars at year-end exchange rates, and revenues and expenses are translated at average exchange rates prevailing as they occur. Translation adjustments, if material, are included in accumulated other comprehensive income (loss), a separate component of stockholders' equity. Transaction gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved, which are immaterial, are included in the consolidated statements of operations. The Company has not entered into any foreign currency exchange contracts or other derivative financial instruments. Segment and Geographic Information The Company operates in one principal business segment across domestic markets. Substantially all of the operating results and identifiable assets are in the United States. Concentration Risks At December 31, 1997 and 1998, the Company had no significant concentrations of credit risk. F-10 BUY.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) The Company purchases substantially all of its products from four major vendors: Ingram, Ingram Entertainment, Inc. ("Ingram Entertainment"), Ingram Book Company, Inc. ("Ingram Book") and Valley Media, Inc. ("Valley Media"). The Company does not have long-term contracts or arrangements with any of these vendors. Loss of any of these vendors could have a material adverse effect on the Company's operations. The Company is heavily dependent upon a number of other third parties for credit card processing, customer service and support, and hosting its system infrastructure and database servers. In addition, Federal Express Corporation, the United Parcel Service of America, Inc. and the United States Postal Service deliver substantially all of the Company's products. If the services of any of these third parties is interrupted, it could have a material adverse impact on the Company's operations. Unaudited Interim Financial Information The accompanying financial information for the nine months ended September 30, 1998 and 1999, is unaudited. In the opinion of management, this information has been prepared on substantially the same basis as the annual consolidated financial statements and contains all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position and results of operations as of such date and for such periods. New Accounting Pronouncements In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires all costs related to the development of internal use software other than those incurred during the application development stage to be expensed as incurred. Costs incurred during the application development stage are required to be capitalized and amortized over the estimated useful life of the software. SOP 98-1 was adopted by the Company on January 1, 1999. Adoption did not have a material effect on the Company's consolidated financial position or results of operations. In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 was adopted by the Company on January 1, 1999, and requires costs of start-up activities and organization costs to be expensed as incurred. Adoption did not have a material effect on the Company's consolidated financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income (loss) depending on whether a derivative is designed as part of a hedge transaction and, if so, the type of hedge transaction involved. The Company does not expect that adoption of SFAS No. 133 will have a material impact on its consolidated financial position or results of operations as the Company does not currently hold any derivative financial instruments. 3. Business Acquisitions, Dispositions and Investments Business Acquisitions In December 1998, the Company acquired all of the outstanding capital stock of Speedserve. Speedserve was an internet retailer of books, videos, DVD's and video games. The aggregate purchase price of the F-11 BUY.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) acquisition was approximately $9.1 million. The consideration for the acquisition consisted of 8,847,315 shares of the Company's common stock, with an estimated value of $1.03 per share. The Speedserve acquisition was accounted for under the purchase method of accounting, with approximately $8.4 million of the purchase price allocated to goodwill. In October 1999, the Company issued a total of 4,142,927 shares of common stock to acquire the remaining 95% of the outstanding common stock of BuyGolf.com, Inc. ("BuyGolf") that it did not previously own. BuyGolf is a retailer of golf supplies and equipment. The pro forma combined consolidated financial information, as though the acquisitions had occurred on June 7, 1997 (Inception) would have resulted in operating results as follows (amounts in thousands, except per share data):
June 7, 1997 (Inception) Year ended to December 31, 1997 December 31, 1998 ------------------------ ----------------- Net revenues.................... $ 992 $ 126,568 Net loss........................ $ 2,319 $ 22,519 Basic and diluted weighted average net loss per share..... $ (0.02) $ (0.17)
The pro forma net losses include amortization of goodwill and purchased intangibles of approximately $1.6 million and $2.8 million for the period ended December 31, 1997 and the year ended December 31, 1998, respectively. This unaudited pro forma combined consolidated financial information is presented for illustrative purposes only and is not necessarily indicative of the consolidated results of operations in future periods or the results that actually would have been realized had BUY.COM and Speedserve been a combined company during the specified periods. Business Disposition In October 1999, the Company declared a common stock dividend of 75% of the capital stock, on an "as converted" basis, of one wholly owned subsidiary, BuyNow, Inc. ("BuyNow") to all stockholders of record as of October 13, 1999. The Company has retained preferred stock representing 25% of the capital stock of BuyNow, on an "as converted" basis. The BuyNow preferred stock has a liquidation preference over the common stock and is convertible into BuyNow common stock. Joint Ventures In July 1999, the Company entered into an agreement with United Airlines Inc. ("UA") to form BuyTravel.com LLC ("Buy Travel") to market and sell travel services and products on the internet. The Company and UA will each own 50% of BuyTravel. The Company and UA have each agreed to provide advertising and marketing support to BuyTravel up to a gross amount of $18.0 million over three years from the effective date of the agreement. Furthermore, the Company and UA have each committed to contribute capital of $2.0 million within the first four months of the agreement to establish and support continuing operations. In addition, the Company granted UA warrants to purchase 2,000,000 shares of the Company's common stock at an exercise price of $10.00 per share. The estimated fair market value of these warrants of $7.0 million was expensed as contract costs in the period the warrants were issued. The BuyTravel operating agreement requires both parties to approve various matters related to corporate governance. In the event the Company is unable to agree with UA on one of these matters after the initial three years of this agreement, UA has the right to require the Company to purchase UA's interest in BuyTravel at a price equal to the fair market value of UA's interest at the time of the Company's purchase. In September 1999, the Company entered into a letter of intent with SOFTBANK America, Inc. ("SOFTBANK America") to form three separate international joint ventures in which the Company will have 51% ownership interests. F-12 BUY.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Domain Name Transactions During 1999, the Company entered into several agreements to purchase internet domain names. Domain names were purchased in various transactions for 270,095 shares of the Company's common stock and approximately $380,000 in cash. On April 15, 1999, the Company entered into an agreement with BuyFlowers.com LLC ("BuyFlowers"). Under the agreement, the Company granted BuyFlowers an exclusive, non-transferable, non-sublicensable and royalty-free license to use domain names owned by the Company solely in connection with the operation of an internet retail florist selling floral products and related hard goods, gifts, greeting cards, etc., within the florist category. In consideration for the license, BuyFlowers agreed to issue the Company a 5% ownership in BuyFlowers. The Company's investment in this entity has been recorded at cost and is immaterial to the consolidated statements of position and results of operations for all periods. On May 24, 1999, the Company entered into an agreement with BuyGolf to grant an exclusive, non-transferable and non-sublicensable license to use domain names owned by the Company solely in connection with the operation of an internet golf product retailer. In consideration for the license, the Company receives a fee of $1 per three-month term and any renewal thereof. Additionally, the Company received approximately 5% (subject to anti-dilution provisions) of the outstanding common stock of BuyGolf. Furthermore, the Company signed a twelve-month portal sponsorship/advertising contract with BuyGolf. This contract commences on June 1, 1999 at a rate of $10,000 per month. The Company's investment in this entity has been recorded at cost and is immaterial to the consolidated statements of position and results of operations for all periods. 4. Property and Equipment Property and equipment consists of the following (dollar amounts in thousands):
December 31, Useful ---------------- September 30, Lives 1997 1998 1999 ------ ------- ------- ------------- (unaudited) Building and improvements.......... 20-40 $ -- $ 1,341 $ 1,446 Computers and equipment............ 3-5 47 1,168 3,536 Furniture and fixtures............. 7 10 404 636 Leasehold improvements............. 1-6 -- 131 452 ------- ------- ------- 57 3,044 6,070 Less--accumulated depreciation.... (7) (149) (784) ------- ------- ------- Property and equipment, net........ $ 50 $ 2,895 $ 5,286 ======= ======= ======= 5. Intangible Assets Intangible assets consist of the following (dollar amounts in thousands): December 31, Useful ---------------- September 30, Lives 1997 1998 1999 ------ ------- ------- ------------- (unaudited) Domain names....................... 3 $ -- $ -- $ 1,241 Goodwill........................... 3 -- 8,447 8,447 ------- ------- ------- -- 8,447 9,688 Less--accumulated amortization.... -- (235) (2,501) ------- ------- ------- Intangibles, net................... $ -- $ 8,212 $ 7,187 ======= ======= =======
F-13 BUY.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 6. Long-Term Debt In December 1998, the Company borrowed $1.2 million from a bank for the purchase of an office building. The building serves as collateral on the loan. Monthly installments of principal and interest are $10,000. The loan bears interest at a rate of prime plus 1.00% and matures in 2024. On July 20, 1999, the Company obtained a $15.0 million revolving credit facility with a commercial bank. The interest rate on the amounts drawn on this facility is prime plus 2.00% or LIBOR plus 3.00%, at the Company's election. In connection with this credit facility, the Company must pay a non-refundable supplemental fee of $675,000 at the earlier of an initial public offering of the Company's stock or the six month anniversary of the facility. Additionally, the Company issued to the bank warrants to purchase a number of shares of the Company's common stock to be determined by an agreed-upon formula at an exercise price per share equal to the price per share of the Company's initial public offering. The estimated fair market value of these warrants of $71,000 was allocated to deferred financing costs and amortized over the life of the related debt. On July 27, 1999, the Company drew $12.4 million against this credit facility. In October 1999, the Company repaid the amounts drawn on this facility along with $229,000 in interest. On July 21, 1999, the Company obtained an irrevocable standby letter of credit in the amount of $2.6 million from a commercial bank in order to secure additional office space to be used by the Company. 7. Commitments and Contingencies Leases During 1997 and 1998, the Company leased office facilities and fixed assets under non-cancelable operating leases. Rental expense under operating lease agreements for 1997 and 1998 was approximately $12,000 and $195,000, respectively. In June 1999, the Company entered into a five-year non-cancelable capital lease agreement for office furniture and equipment with monthly lease payments of approximately $5,000. In July 1999, the Company also entered into a three- year non-cancelable capital lease agreement for computer software with monthly lease payments of approximately $18,000. In September 1999, the Company entered into a two-year non-cancelable capital lease agreement for telephone systems with monthly payments of approximately $6,700. Future minimum commitments on leases, including those leases entered into subsequent to December 31, 1998, are as follows (amounts in thousands):
Capital Operating Leases Leases ------- --------- Year ending December 31, 1999................................................... $ 173 $ 629 2000................................................... 363 1,851 2001................................................... 335 1,721 2002................................................... 173 1,514 2003................................................... 63 1,511 Thereafter............................................. 51 2,141 ------ ------ Total minimum lease payments............................. 1,158 $9,367 ====== Less--Amount representing interest....................... 156 ------ Present value of net minimum lease payments.............. 1,002 Less--Current portion.................................... 173 ------ $ 829 ======
F-14 BUY.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Supply, Fulfillment and Other Arrangements In June 1998, and again in March 1999, the Company entered into a contract with Ingram to supply and distribute the computer hardware, software and peripheral products that are sold in the Company's web stores. The Company also maintains a line of credit with Ingram to purchase these goods and merchandise. As a part of that line of credit, the Company granted Ingram a security interest in the inventory purchased from them, the proceeds from this inventory, and all of the Company's accounts receivable. In December 1998, the Company acquired Speedserve in exchange for shares of the Company's common stock. In conjunction with this acquisition, the Company obtained a three-year supply commitment from Ingram Entertainment, Speedserve's former parent company. On January 18, 1999, the Company entered into an agreement to provide extended warranties to customers on computer hardware products sold on the Company's web site. In accordance with the terms of the agreement, the Company's liability on the extended warranties is assumed by a national insurance provider. The extended warranties are sold on the Company's web site and payments are received by the Company. The Company remits a fixed fee based upon the type of warranty purchased by the customer as mutually agreed upon in the agreement. On February 1, 1999, the Company entered into a two-year agreement to outsource the picking, packing and shipping functions for orders placed on the Company's BuyMusic.com web site. Pricing is based on a fee that is contingent upon sales volume levels, which increase over the term of the agreement. On March 11, 1999, the Company entered into a five-year agreement to outsource certain services and functions related to the fulfillment of customer orders made on the Company's BuyBooks.com web site. Consideration for the services is based on a fixed, per-order fee. The Company must be notified within six months of any rate increases to be in effect after the first year of the agreement. The rate increases cannot exceed 8% of the preceding year's rates. The agreement is terminable by either party with 90 days notice. On March 19, 1999, the Company entered into an agreement with Nashville Computer Liquidators L.P. ("NCL"). Under the terms of the agreement, NCL will merchandise and supply refurbished, open-box and end-of-life computer hardware, electronics and exceptional value household products to the Company. The products are offered on the Company's BuyClearance.com web site, which was launched in the second quarter of 1999. BuyClearance.com changed its name from BuySurplus.com in October 1999. F-15 BUY.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) In October 1999, the Company entered into agreements with a third party supplier whereby the Company will be entitled to certain programs and services. In connection with these agreements, the Company has issued warrants to purchase 1,000,000 shares of the Company's common stock at an exercise price of $5.67 per share. The estimated fair market value of these warrants of $2.7 million will be recorded as a current asset and will be amortized over the initial term of the contract. In connection with the acquisition of BuyGolf, the Company acquired a supply and distribution contract with Las Vegas Golf & Tennis, Inc. to be the Company's primary source of the golf equipment and accessories the Company sells. In October 1999, the Company entered a five-year sponsorship agreement with the PGA TOUR in which the Company will become the exclusive title sponsor of a circuit of golf tournaments. In consideration for this agreement, the Company issued 1,800,000 shares of common stock. The Company has agreed to make an advance payment of $17.0 million, which will be refunded upon obtaining a letter of credit, and to pay $8.5 million upon the completion of an initial public offering as payment for the first year sponsorship fee. The Company will take a $8.5 million charge per year in connection with this agreement. The Company will enter into a license and services agreement with BuyNow under which the Company will license technology, trademarks and domain names as well as provide certain administrative and customer support services. Legal Proceedings From time to time, the Company has been subject to legal proceedings and claims in the ordinary course of business. These claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. In March 1999, a class action suit was filed against the Company in the Orange County California Superior Court alleging breach of contract, fraud and violation of consumer protection laws. The plaintiffs in this action allege that the Company intentionally mispriced products and charged for orders knowing the orders could not be fulfilled. The plaintiffs are seeking compensatory and punitive damages in addition to injunctive relief. Also in March 1999, another class action suit was filed against the Company in Camden County, New Jersey. The New Jersey plaintiff seeks compensatory and punitive damages for breach of contract and common law fraud arising out of facts similar to the Orange County case. The judge in the New Jersey action has granted a temporary stay of the New Jersey action to monitor the progress of the California action. Discovery is in its early stages in the California action and a class has not yet been certified in either action. The Company intends to defend all of these lawsuits vigorously even though they could result in the expenditure of significant financial and managerial resources. Management is not aware of any other material legal proceedings pending against the Company. 8. Stockholders' Equity Incorporation and Authorized Capital Effective August 3, 1998, the Company terminated its status as a limited liability company ("LLC") and incorporated in the State of Delaware as Buy Corp. On November 16, 1998, the Company changed its name to BUY.COM INC. In conjunction with the reorganization, the State of Delaware authorized the Company to issue 189,998,130 shares of common stock and 19,481,130 shares of Series A convertible participating preferred F-16 BUY.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) stock ("Series A Preferred Stock"). The 9,000,000 issued membership units of the LLC converted into 130,129,725 shares of $0.0001 par value common stock and 4,870,275 shares of $0.0001 par value Series A Preferred Stock. Each share of Series A Preferred Stock is convertible into one share of the Company's common stock (subject to antidilution protections). Series A Preferred Stock is convertible at the option of the holder or automatically upon the consummation of a corporate transaction that meets certain minimum conditions. On March 10, 1999, the Board of Directors approved an increase in the number of authorized common stock, par value $0.0001 per share, from 189,998,130 shares to 850,000,000 shares. In addition, the Board of Directors approved an increase in the number of authorized Series A preferred stock, par value $0.0001 per share, from 19,481,130 to 150,000,000 shares. These increases in authorized shares were approved by the stockholders of the Company by written consent dated March 22, 1999. On June 29, 1999, the Board of Directors declared a fifteen-for-one common stock split and a fifteen-for-one Series A preferred stock split for all issued and outstanding shares which was distributed July 14, 1999 to the Company's stockholders. All share and per share data included in the consolidated financial statements and the accompanying notes have been adjusted to reflect the stock split. SOFTBANK Investment The Company and a trust controlled by Scott A. Blum (the "Founder/Shareholder") entered into an agreement with SOFTBANK Technology Ventures IV L.P., and SOFTBANK Technology Advisors Fund L.P., ("SOFTBANK") for an aggregate investment of $20.0 million. In accordance with the terms of the Series A Preferred Stock Purchase Agreement, dated August 18, 1998, SOFTBANK received 14,610,855 shares of Series A Preferred Stock for cash of $14.9 million paid to the Company. Additionally, SOFTBANK received 4,870,275 shares of Series A Preferred Stock in consideration for its $5.0 million payment to the trust controlled by the Founder/Shareholder. On September 2, 1999, the Company entered into an agreement with SOFTBANK. SOFTBANK received 15,877,249 shares of Series B convertible participating preferred stock ("Series B Preferred Stock") from the Company for $90.0 million. This agreement has a provision which will result in the issuance or transfer of additional shares and/or an adjustment in the Series B Preferred Stock conversion rate if the valuation of a proposed initial public offering of the Company's common stock or of other financing is less than 125% of the Series B Preferred Stock valuation. This transaction was completed in October 1999. Unaudited Pro forma Stockholders' Equity (Deficit) Concurrent with the consummation of an initial public offering of the Company's common stock as defined by the Series A Preferred Stock Purchase Agreement described above, the Company will cause the conversion of all existing Series A Preferred Stock into 19,481,130 shares of the Company's common stock. The unaudited pro forma stockholders' equity (deficit) at September 30, 1999 gives effect to this conversion. 9. Stock and Stock Option Plans 1998 Stock Option/Issuance Plan In August 1998, the Company adopted and approved an incentive stock option plan (the "1998 ISO Plan"). Under the 1998 ISO Plan, the number of shares of the Company's common stock to be granted or subject to options or rights may not exceed 34,539,960 shares. F-17 BUY.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Subject to Internal Revenue Service limitations, options granted under the ISO Plan generally become exercisable immediately. Shares issued upon exercise of options that are unvested are restricted and subject to repurchase by the Company upon termination of employment or services, and such restrictions lapse over the original vesting schedule. At December 31, 1998, there were no shares subject to repurchase. The following table summarizes the Company's stock option activity:
June 7, 1997 (Inception) to Year Ended Nine Months Ended December 31, 1997 December 31, 1998 September 30, 1999 ------------------ ------------------- -------------------- (unaudited) Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------- -------- ---------- -------- ---------- -------- Options outstanding, Beginning of period... -- $ -- 3,375,000 $0.01 23,263,470 $1.03 Granted.............. 3,375,000 0.01 19,888,470 1.21 12,007,155 2.90 Exercised............ -- -- -- -- (3,168,000) 0.01 Forfeited/expired.... -- -- -- -- (1,503,750) 1.58 --------- ----- ---------- ----- ---------- ----- Options outstanding, End of period........... 3,375,000 $0.01 23,263,470 $1.03 30,598,875 $1.85 ========= ===== ========== ===== ========== =====
The following table summarizes all stock options outstanding as of September 30, 1999:
Options Outstanding Options Exercisable ------------------------------------------------------------- -------------------------- Weighted Average Number of Remaining Weighted Number of Weighted Range of Shares Contractual Life Average Shares Average Exercise Price Outstanding (years) Exercise Price Exercisable Exercise Price -------------- ----------- ----------------- -------------- ----------- -------------- $ 0.01 8,142,000 9.48 $0.01 3,103,390 $0.01 $ 1.03 1,837,500 9.69 $1.03 456,180 1.03 $ 2.38 to $2.39 18,924,855 7.83 $2.39 -- -- $ 4.24 to $5.71 1,694,520 9.50 $5.51 -- -- ---------- --------- 30,598,875 3,559,570 ========== =========
F-18 BUY.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Had compensation cost for stock options awarded under this plan been determined consistent with SFAS No. 123, the Company's net loss and loss per share would have reflected the following pro forma amounts (amounts in thousands, except per share data):
September 30, December 31, December 31, ---------------------- 1997 1998 1998 1999 ------------ ------------ ----------- ---------- (unaudited) (unaudited) Net loss, as reported....... $ (390) $(17,844) $(4,668) $(80,527) Pro forma compensation expense.................... -- (281) -- (2,090) ------ -------- ------- -------- Pro forma net loss.......... $ (390) $(18,125) $(4,668) $(82,617) ====== ======== ======= ======== Basic and diluted net loss per share, as reported..... $(0.00) $ (0.14) $ (0.04) $ (0.57) Basic and diluted net loss per share, pro forma....... $(0.00) $ (0.13) $ (0.04) $ (0.58)
The weighted average fair value at the date of grant for options granted during fiscal 1997, 1998, and the nine months ended September 30, 1999, were $0.001, $0.33 and $0.54, respectively, and were estimated using the minimum value method with the following assumptions used: weighted average risk-free interest rate of 6.04%, 4.89%, and 5.21%, respectively; expected life of 3.00 years, 3.82 years, and 4.00 years, respectively; and weighted average volatility and weighted average dividend yield of 0.00% for all periods. On March 1, 1999, 9,622,635 common stock options were approved by the Board of Directors for grants to employees from the Company's 1998 ISO Plan. Of the additional 9,622,635 stock options approved, 7,267,650 were issued to a key employee hired in February 1999. Special Executive Stock Option Plan In October 1999, the Company adopted and approved the Special Executive Stock Option Plan (the "Executive Plan"). Participation in the Executive Plan is limited to non-employee directors, officers and other highly-compensated employees of the Company. A reserve of 5,000,000 shares of the Company's common stock has been made for issuances under the Executive Plan. All options outstanding under the Executive Plan will be transferred to a successor plan at the time an underwriting agreement for an initial public offering of the Company's common stock is signed, at which time no further option grants or stock issuances will be made under the Executive Plan. The options may be issued as "Incentive Stock Options" (as defined by the Internal Revenue Code of 1986) or as nonqualified options. The plan provides that the exercise price for all Incentive Stock Options shall not be less than 100%, and all nonqualified options shall not be less than 85%, of the fair market value of the shares on the date of grant. Further, no portion of the options may be exercised beyond 10 years from the grant date. For Incentive Stock Options granted to individuals who own more than 10% of the total combined voting power of all classes of the stock of the Company, the option price shall be at least 110% of the fair value at the date of grant. Options vest over a period determined by the Company's board of directors. Subject to Internal Revenue Service limitations, options granted under the Executive Plan generally become exercisable immediately. 1999 Stock Incentive Plan The Company expects to adopt and approve the 1999 Stock Incentive Plan (the "1999 Plan") in November 1999. The 1999 Plan is intended to be the successor plan to the 1998 ISO Plan and the Executive Plan. The 1999 Plan will become effective at the time an underwriting agreement for an initial public offering of the Company's common stock is signed. F-19 BUY.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) The 1999 plan has five separate programs: . the discretionary option grant program, under which eligible individuals in our employ may be granted options to purchase shares of common stock at an exercise price not less than the fair market value of those shares on the grant date; . the stock issuance program, under which eligible individuals may be issued shares of common stock directly, upon the attainment of performance milestones or the completion of a specified period of service or as a bonus for past services; . the salary investment option grant program, under which executive officers and other highly compensated employees may be given the opportunity to apply a portion of their base salary each year to the acquisition of special below market stock option grants; . the automatic option grant program, under which option grants will automatically be made at periodic intervals to eligible non-employee board members to purchase shares of common stock at an exercise price equal to the fair market value of those shares on the grant date; and . the director fee option grant program, under which non-employee board members may be given the opportunity to apply a portion of any retainer fee otherwise payable to them in cash each year to the acquisition of special below-market option grants. The exercise price for any options granted under the 1999 Plan may be paid in cash or in shares of the Company's common stock valued at fair market value at the exercise date. The 1999 Plan also includes provisions which may result in the accelerated vesting of outstanding option grants and stock issuances upon a change in control of the Company. 1999 Employee Stock Purchase Plan The 1999 Employee Stock Purchase Plan (the "Stock Purchase Plan") was adopted and approved by the Company in September 1999. The Stock Purchase Plan will become effective at the time an underwriting agreement for an initial public offering of the Company's common stock is signed. The Stock Purchase Plan is designed to allow eligible employees of the Company to purchase shares of common stock at semi-annual intervals with accumulated payroll deductions. BuyGolf Stock Option Plan In connection with the acquisition of BuyGolf in October 1999, the Company has assumed the incentive stock option plan of BuyGolf. Stock Option Deferred Compensation The Company recorded aggregate deferred compensation of $0, $3.2 million, and $11.4 million in the period ended December 31, 1997, the year ended December 31, 1998, and the nine month period ended September 30, 1999, respectively. The amounts recorded represent the difference between the grant price and the estimated fair value of the Company's common stock based upon independent appraisals. Deferred stock option compensation is charged to operations using the straight-line method over the vesting period of the underlying options, which is typically three or four years. Total amortization recognized was $0, $795,000, and $5.4 million, respectively, for the period ended December 31, 1997, the year ended December 31, 1998, and the nine months ended September 30, 1999. F-20 BUY.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 10. Loss Per Share The following is the calculation for net loss per share (amounts in thousands):
June 7, 1997 Nine Months Ended (Inception) to Year Ended September 30, December 31, December 31, -------------------------- 1997 1998 1998 1999 -------------- ------------ ------------ ------------ (unaudited) Basic: Net loss................ $ (390) $ (17,844) $ (4,668) $ (80,527) Weighted average common shares................. 130,129,725 130,905,390 130,129,725 141,814,477 ------------ ------------ ------------ ------------ Net loss per common share.................. $ (0.00) $ (0.14) $ (0.04) $ (0.57) ============ ============ ============ ============ Diluted: Net loss................ $ (390) $ (17,844) $ (4,668) $ (80,527) Weighted average common shares................. 130,129,725 130,905,390 130,129,725 141,814,477 Stock options adjustment............. -- -- -- -- Convertible preferred stock adjustment....... -- -- -- -- ------------ ------------ ------------ ------------ Average common shares outstanding............ 130,129,725 130,905,390 130,129,725 141,814,477 ------------ ------------ ------------ ------------ Net loss per common share.................. $ (0.00) $ (0.14) $ (0.04) $ (0.57) ============ ============ ============ ============
At December 31, 1997, December 31, 1998, and September 30, 1999, respectively, options to purchase 3,375,000, 23,263,470, and 30,598,875 shares of common stock, as well as preferred shares convertible into 0, 19,481,130, and 19,481,130 shares of common stock were not included in the computation of diluted earnings per share as the effect would be antidilutive. 11. Income Taxes The Company incurred taxable losses for federal and state purposes for the period ended December 31, 1997, the year ended December 31, 1998, and the nine months ended September 30, 1999. Accordingly, the Company did not incur any federal income tax expense for those periods other than the minimum required taxes for certain state and local jurisdictions. Prior to August 3, 1998, the Company was taxed as a limited liability company. All tax benefits arising from operating losses as a limited liability company were passed to the individual shareholders. At December 31, 1998, and September 30, 1999, the Company has net operating loss carryforwards of approximately $12.8 million and $84.6 million respectively, related to federal and state income taxes which can be used to offset future federal and state taxable income from operations. Substantially all of these carryforwards will begin to expire in 2004. F-21 BUY.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Significant components of the Company's deferred tax asset at December 31, 1997 and 1998, and September 30, 1999, are as follows (amounts in thousands):
December 31, ---------------- September 30, 1997 1998 1999 ------- -------- ------------- (unaudited) Net operating loss carryforwards............. $ -- $ 5,128 $ 33,838 Depreciation and amortization................ -- 1,758 1,666 Other........................................ -- 47 717 ------- -------- -------- Gross deferred tax assets.................. -- 6,933 36,221 Valuation allowance.......................... -- (6,933) (36,221) ------- -------- -------- Net deferred tax assets.................... $ -- $ -- $ -- ======= ======== ========
12. Related Party Transactions Transactions with the Founder/Shareholder and Directors At December 31, 1997, a loan to the Founder/Shareholder in the amount of $211,000 was outstanding. This loan was paid in full in 1998. Interest income earned during 1998 in connection with this loan was $7,000. On October 8, 1998, the Company loaned the Founder/Shareholder $1.0 million. The loan was repaid in two equal installments of $500,000 during October 1998. Interest income earned during 1998 in connection with this loan was $4,000. On October 15, 1998, the Company paid $125,000 to an unrelated party as consideration to terminate a building lease early. The Founder/Shareholder purchased the building with the intent of leasing the building to the Company. This lease commenced in 1999. In December 1998, the Company acquired all of the outstanding capital stock of Speedserve. Speedserve was a subsidiary of Ingram Entertainment, a company controlled by an outside director of the Company. Ingram Entertainment supplies books, videos, DVD's and video games to the Company. In December 1998, the Company borrowed $1.2 million for the purchase of an office building. A trust controlled by the Founder/Shareholder guaranteed this loan. In five separate transactions, the Founder/Shareholder sold 209,145 shares of common stock to each of five independent directors of the Company. These sales occurred on various dates from October 1998 through March 1999 and were at the estimated fair values of the Company's stock based upon independent appraisals and other third party transactions. The Company leased three automobiles for use by the Founder/Shareholder and other key employees of the Company. Total lease expense incurred by the Company during fiscal year 1998 in connection with these automobiles was approximately $26,000. On May 26, 1999, a trust controlled by the Founder/Shareholder loaned the Company $10.0 million. This loan bears interest at a rate of 10.00% per annum and is payable on demand or subsequent to the closing and funding of a credit facility obtained from a commercial bank. This loan was repaid in full in August 1999. Interest paid in connection with this loan was approximately $194,000. F-22 BUY.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) In May 1999, the Company entered into an agreement with a trust controlled by the Founder/Shareholder to lease office space in a building owned by the trust. The lease, which commenced on June 1, 1999, has a term of twelve months with rent payments, consistent with current market value, of approximately $12,000 per month. In July 1999, the Founder/Shareholder's father purchased 45,000 shares of common stock from an employee of the Company at a purchase price of $2.39 per share. On July 20, 1999, a trust controlled by the Founder/Shareholder guaranteed a $15.0 million credit facility obtained by the Company from a commercial bank. On August 16, 1999, a trust controlled by the Founder/Shareholder loaned the Company $5.0 million. This loan bears interest at a rate of 10.00% per annum and is payable upon the Company's receipt of qualified financing. Interest accrued in connection with this loan was approximately $63,000 at September 30, 1999. In October 1999, the Founder/Shareholder entered into an agreement to transfer all of his shares of the Company's common stock, as well as those of certain of his affiliates, into an irrevocable voting trust. This agreement also provides that all shares of the Company's common stock acquired by the Founder/Shareholder or any of his affiliates be transferred to the trust. The trustees of the irrevocable voting trust consist of three outside directors of the Company. In October 1999, the Company acquired all of the outstanding capital stock (95%) of BuyGolf, which it did not own at the time of acquisition, in exchange for shares of the Company's common stock. The Company issued a total of 4,142,927 shares of common stock in connection with our acquisition of BuyGolf. The Founder/Shareholder of the Company owned 400,000 shares or 4.7% of the total outstanding shares of BuyGolf prior to the acquisition by the Company. The Founder/Shareholder and an outside director were stockholders and directors of BuyGolf and received a total of 436,253 shares of the Company's common stock in the merger. Shares of the Company received by the Founder/Shareholder resulting from this transaction are subject to the terms of the irrevocable voting trust. In October 1999, the Company declared a dividend of 75% of the capital stock of BuyNow. Several directors and officers of the Company were shareholders of BuyNow. The Founder/Shareholder performed consulting services for Pinnacle Micro, Inc. ("Pinnacle Micro"), a related party, totaling approximately $44,000 and $117,000 in consulting revenue in 1997 and 1998, respectively. During 1997 and 1998, the Company paid $8,000 and $147,000, respectively, in operating expenses on behalf of Pinnacle Micro. These expenses were reimbursed to the Company by Pinnacle Micro in 1998. Transactions with SOFTBANK On September 30, 1998, the trust controlled by the Founder/Shareholder entered into an agreement with SOFTBANK Holdings, Inc. ("SOFTBANK Holdings") to sell 16,730,835 shares of the common stock owned by the trust controlled by the Founder/Shareholder for $40.0 million. This transaction was completed on October 30, 1998. The Company received no proceeds from this sale. In October 1998, the Company entered into an agreement with Upgrade Corporation of America d/b/a Softbank Services Group ("SSG"), a related party to SOFTBANK. Under this agreement, SSG provides F-23 BUY.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) certain customer relations services on the Company's behalf for a monthly fee, a portion of which is based upon usage volume. These services include, but are not limited to, servicing questions concerning orders, shipment returns, refunds, inventory levels, and marketing and demographic surveys. The contract extends through October 2002 with an automatic annual renewal unless terminated by either party. Amounts paid to SSG for services provided to the Company were $905,000 and $7.2 million for the year ended December 31, 1998 and the nine months ended September 30, 1999, respectively. In September 1999, the Company entered into a letter of intent to form three international joint ventures with SOFTBANK America. Two outside directors of the Company are affiliated with SOFTBANK America. In September 1999, SOFTBANK purchased 13,231,040 shares of common stock from a trust controlled by the Founder/Shareholder, the Founder/Shareholder as an individual, and two other employee/shareholders for $75.0 million. This transaction was completed in October 1999. The Company received no proceeds from the sale of common shares from this sale. F-24 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors BuyGolf.com, Inc.: We have audited the accompanying balance sheets of BuyGolf.com Inc. (a Delaware corporation) as of December 31, 1998, and June 30, 1999, and the related statements of operations, stockholders' equity and cash flows for the period from December 1, 1998, (Inception) to December 31, 1998, and for the period ended June 30, 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 generally accepted auditing standards. 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 BuyGolf.com Inc. as of December 31, 1998 and June 30, 1999, and the results of their operations and their cash flows for the period from December 1, 1998, (Inception) to December 31, 1998, and for the period ended June 30, 1999, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Orange County, California October 26, 1999 F-25 BUYGOLF.COM, INC. BALANCE SHEETS (amounts in thousands, except share and per share data)
December 31, June 30, 1998 1999 ------------ ---------- Assets Current Assets: Cash................................................. $ 125 $ 635 Accounts receivable, net of allowance of $2.......... -- 83 Prepaid expenses and other current assets............ -- 72 ---------- ---------- Total current assets.............................. 125 790 Property and equipment, net........................... -- 149 Intangibles, net...................................... -- 648 ---------- ---------- $ 125 $ 1,587 ========== ========== Liabilities and Stockholders' Equity Current Liabilities: Accounts payable..................................... $ -- $ 299 Accrued expenses..................................... -- 16 ---------- ---------- Total current liabilities......................... -- 315 Commitments and Contingencies Stockholders' Equity: Common stock, $0.0001 par value; Authorized shares--10,000,000 at December 31, 1998, and June 30, 1999; Issued and outstanding--6,500,000 at December 31, 1998, and 8,340,000 at June 30, 1999 .................................................... 1 1 Additional paid-in capital........................... 125 2,985 Accumulated deficit.................................. (1) (1,714) ---------- ---------- Total stockholders' equity........................ 125 1,272 ---------- ---------- $ 125 $ 1,587 ========== ==========
The accompanying notes are an integral part of these balance sheets. F-26 BUYGOLF.COM, INC. STATEMENTS OF OPERATIONS (amounts in thousands, except share and per share data)
December 1, 1998 Six Months (Inception) to Ended December 31, 1998 June 30, 1999 ----------------- ------------- Net revenues.................................. $ -- $ 220 Cost of goods sold............................ -- 192 ---------- ---------- Gross profit.................................. -- 28 Operating expenses: Sales and marketing.......................... -- 680 General and administrative................... 1 928 Depreciation and amortization................ -- 134 ---------- ---------- Total operating expenses.................... 1 1,742 ---------- ---------- Operating loss.............................. (1) (1,714) Other income: Interest income, net......................... -- 2 ---------- ---------- Total other income.......................... -- 2 ---------- ---------- Loss before provision for income taxes........ (1) (1,712) Provision for income taxes.................... -- 1 ---------- ---------- Net loss.................................... $ (1) $ (1,713) ========== ========== Net loss per share: Basic and diluted............................ $ -- $ (0.24) ========== ========== Weighted average number of common shares outstanding: Basic and diluted............................ 6,456,667 7,086,298 ========== ==========
The accompanying notes are an integral part of these statements. F-27 BUYGOLF.COM, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (amounts in thousands, except share data)
Common Stock ----------------------------- Additional Paid-in Accumulated Stockholders' Shares Par Capital Deficit Equity --------- -------- ---------- ----------- ------------- Inception of Company, December 1, 1998....... -- $ -- $ -- $ -- $ -- Initial capital contribution........... 6,000,000 1 -- -- 1 Issuance of common stock in connection with obtaining license of domain names........... 400,000 -- -- -- -- Issuance of common stock for cash............... 100,000 -- 125 -- 125 Net loss................ -- -- -- (1) (1) --------- -------- -------- -------- -------- Balance, December 31, 1998................... 6,500,000 1 125 (1) 125 Issuance of common stock for cash............... 1,300,000 -- 1,625 -- 1,625 Issuance of common stock for services........... -- -- 500 -- 500 Issuance of common stock for purchase of domain names.................. -- -- 60 -- 60 Issuance of common stock in connection with supply and fulfillment agreement.............. 540,000 -- 675 -- 675 Net loss................ -- -- -- (1,713) (1,713) --------- -------- -------- -------- -------- Balance, June 30, 1999.. 8,340,000 $ 1 $ 2,985 $ (1,714) $ 1,272 ========= ======== ======== ======== ========
The accompanying notes are an integral part of these statements. F-28 BUYGOLF.COM, INC. STATEMENTS OF CASH FLOWS (amounts in thousands)
December 1, 1998 Six Months (Inception) to Ended December 31, 1998 June 30, 1999 ----------------- ------------- Cash flows from operating activities: Net loss...................................... $ (1) $(1,713) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization................. -- 134 Non cash expenditure for services............. -- 500 Changes in assets and liabilities: Accounts receivable.......................... -- (83) Prepaid expenses and other current assets.... -- (72) Accounts payable............................. -- 299 Accrued expenses............................. -- 16 Income taxes payable......................... -- -- ------- ------- Net cash used in operating activities....... (1) (919) ------- ------- Cash flows from investing activities: Purchase of property and equipment............ -- (165) Acquisition of domain names................... -- (31) ------- ------- Net cash used in investing activities....... -- (196) ------- ------- Cash flows from financing activities: Formation of Company.......................... 126 -- Proceeds from issuance of common stock........ -- 1,625 ------- ------- Net cash provided by financing activities... 126 1,625 ------- ------- Net increase in cash and cash equivalents...... 125 510 Cash, beginning of period...................... -- 125 ------- ------- Cash, end of period............................ $ 125 $ 635 ======= ======= Supplemental cash flow information: Cash paid during the year for income taxes.... $ -- $ 1 ======= ======= Summary of non-cash investing and financing activity: Common stock issued in conjunction with supply and fulfillment agreement.................... $ -- $ 675 ======= ======= Common stock issued in conjunction with domain name purchase................................ $ -- $ 60 ======= =======
The accompanying notes are an integral part of these statements. F-29 BUYGOLF.COM, INC. NOTES TO FINANCIAL STATEMENTS 1. Company Background BuyGolf.com Inc. (the "Company") is an internet golf superstore offering a selection of brand name golf equipment and accessories. Through its online specialty store, the Company offers golf equipment and golf related products in a convenient, intuitive shopping interface 24 hours a day, seven days a week. The Company uses a virtual operating model that includes outsourcing the majority of its operating infrastructure to a national supply and fulfillment partner. The Company was formed in December 1998 and began offering products for sale through its web site in May 1999. In October 1999, the Company was acquired by BUY.COM INC. ("BUY.COM") in a purchase transaction. In connection with this transaction, BUY.COM acquired all of the outstanding capital stock (95%) of the Company that BUY.COM did not own at the time of acquisition, in exchange for 4,142,927 shares of BUY.COM's common stock. 2. Summary of Significant Accounting Policies 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 reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Accounts Receivable Accounts receivable consist of credit card and trade receivables arising in the normal course of business as well as an accrual for products shipped to customers but not yet billed by the Company. Deposits The Company is required to maintain a security deposit in connection with its credit card merchant account. The balance of this deposit is approximately $51,000 at June 30, 1999, and is included in prepaid expenses and other current assets. Property and Equipment Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed and any gain or loss is reflected in the results of operations. Maintenance and repair expenditures are charged to operations as incurred. Intangibles Intangible assets reflect the value of an exclusive supply and fulfillment agreement and internet domain names acquired. Amortization is computed using the straight-line method over the estimated useful lives of the assets. Long-Lived Assets The Company assesses the recoverability of its long-lived assets on an annual basis or whenever adverse events of changes in circumstances or business climate indicate that expected undiscounted future cash flows related to such long-lived assets may not be sufficient to support the net book value of such assets. If undiscounted cash flows are not sufficient to support the recorded assets, an impairment is recognized to reduce F-30 BUYGOLF.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) the carrying value of the long-lived assets to the estimated fair value. Cash flow projections, although subject to a degree of uncertainty, are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. Additionally, in conjunction with the review for impairment, the remaining estimated lives of certain of the Company's long- lived assets are assessed. Fair Value of Financial Instruments The carrying amounts for the Company's cash, prepaid expenses and other current assets, accounts payable and accrued expenses approximate fair value. Revenue Recognition The Company recognizes revenue from product sales, net of discounts and estimated sales returns, upon shipment to its customers. Outbound shipping and handling charges are included in net sales. Advertising Costs The cost of advertising is expensed as incurred. No advertising expense was incurred in the period ended December 31, 1998. For the six months ended June 30, 1999, the Company incurred advertising expense of approximately $618,000. Income Taxes The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. Under the Tax Reform Act of 1986, the benefits from net operating losses carried forward may be impaired or limited in certain circumstances. A valuation allowance has been provided for the deferred tax asset when it is more likely than not that all or some portion of the deferred tax asset will not be realized. The Company has established a full valuation allowance on the aforementioned deferred tax asset due to the uncertainty of realization. Loss Per Share Basic earnings per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of common stock and common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive. Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its employee stock options rather than the alternative fair value accounting allowed by the Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation. APB No. 25 provides that the compensation expense relative to the Company's employee stock options is measured based on the intrinsic value of the stock option. SFAS No. 123 requires companies that continue to follow APB No. 25 to provide a pro forma disclosure of the impact of applying the fair value method of SFAS No. 123. F-31 BUYGOLF.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) Segment and Geographic Information The Company operates in one principal business segment across domestic markets. Substantially all of the operating results and identifiable assets are in the United States. Concentration Risks At December 31, 1998, the Company has no significant concentrations of credit risk. The Company purchases substantially all of its products from one major vendor, Las Vegas Golf and Tennis, Inc. The Company has a long-term contract or arrangement with this vendor. Loss of this vendor could have a material adverse effect on the Company's operations. New Accounting Pronouncements In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires all costs related to the development of internal use software other than those incurred during the application development stage to be expensed as incurred. Costs incurred during the application development stage are required to be capitalized and amortized over the estimated useful life of the software. SOP 98-1 was adopted by the Company on January 1, 1999. Adoption did not have a material effect on the Company's financial position or results of operations. In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 was adopted by the Company on January 1, 1999, and requires costs of start-up activities and organization costs to be expensed as incurred. Adoption did not have a material effect on the Company's financial position or results of operations. 3. Property and Equipment Property and equipment consists of the following (amounts in thousands):
Useful December 31, June 30, Lives 1998 1999 ------ ------------ -------- Computers and equipment......................... 3-5 $ -- $148 Furniture and fixtures.......................... 7 -- 17 ---- ---- -- 165 Less--accumulated depreciation.................. -- (16) ---- ---- Property and equipment, net................... $ -- $149 ==== ====
4. Intangibles Intangibles consist of the following (amounts in thousands):
Useful December 31, June 30, Lives 1998 1999 ------ ------------ -------- Supply and fulfillment agreement................ 1 $ -- $ 675 Domain names.................................... 3 -- 91 ---- ----- -- 766 Less--accumulated amortization.................. -- (118) ---- ----- Intangibles, net.............................. $ -- $ 648 ==== =====
F-32 BUYGOLF.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) 5. Commitments and Contingencies Leases Future minimum commitments on leases, including those leases entered into subsequent to June 30, 1999, are as follows (amounts in thousands):
Operating Leases --------- Year ending December 31, 1999.......................................................... $22 2000.......................................................... 28 2001.......................................................... 2 2002.......................................................... -- 2003.......................................................... -- Thereafter.................................................... -- --- Total future minimum lease payments............................. $52 ===
During the six months ended June 30, 1999, the Company leased office facilities under non-cancelable operating leases. Rental expense under operating lease agreements for the six months ended June 30, 1999, was $13,000. Supply and Fulfillment and Arrangement On May 3, 1999, the Company entered into an exclusive one-year agreement with Las Vegas Golf and Tennis, Inc. ("LVG"). This agreement provides that LVG sell goods to the Company at cost plus shipping costs and a $1 per order packaging fee. Per this agreement, LVG received 7.5% of the Company's outstanding common stock. An intangible asset has been recognized (based on the value of the common stock at the time of the transaction) related to this agreement that is being amortized over the life of the agreement. Amortization expense related to this agreement was $112,000 in the six months ended June 30, 1999. Marketing Agreements The Company has entered into certain marketing agreements, which include fixed fees payable through the year 2000. The total of these commitments are $1.0 million for the remaining six months ended December 31, 1999 and $652,000 for the year ended December 31, 2000. 6. Stockholders' Equity Effective December 1, 1998, the Company incorporated in the State of Delaware as BuyGolf.com, Inc. The State of Delaware authorized the Company to issue 10,000,000 shares of common stock and 5,000,000 shares of preferred stock. In December 1998 the Company commenced negotiations with BUY.COM to acquire a non-transferable and non-sublicensable license to use domain names owned by BUY.COM, solely in connection with the operation of an internet retail operation selling golf equipment and golf-related products. In consideration for the license, the Company agreed to issue BUY.COM a 5% ownership (subject to anti-dilution provisions) in the Company. The distribution of said shares occurred at the time negotiations commenced. In May 1999, the Company finalized the agreement with BUY.COM for such license. F-33 BUYGOLF.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) During the six months ended June 30, 1999, the Company entered into various stock purchase agreements with private investors to sell an aggregate of 1,300,000 shares of common stock at $1.25 per share. Total capital raised in these agreements was $1.6 million. Subsequent to June 30, 1999, the Company has entered into a stock purchase agreement with a private investor to sell 219,473 shares of common stock at $2.28 per share. In accordance with the domain name acquisition agreement between the Company and BUY.COM, and in conjunction with the shares of common stock issued during the six months ended June 30, 1999, the Company is liable to issue BUY.COM 47,632 shares of common stock to maintain the agreed-upon five percent ownership, on a fully-diluted basis, of BUY.COM. As of June 30, 1999 the Company has not issued these shares. BUY.COM's ownership is reflected in additional paid-in capital at June 30, 1999. 7. Stock Option Plans On December 2, 1998, the Company adopted and approved an incentive stock option plan (the "ISO Plan"). Under the ISO Plan, the number of shares of the Company's common stock to be granted or subject to options or rights may not exceed 1,000,000 shares. The options may be issued as "Incentive Stock Options" (as defined by the Internal Revenue Code of 1986) or as nonqualified options. The plan provides that the exercise price for all Incentive Stock Options shall not be less than 100%, and all nonqualified options shall not be less than 85%, of the fair market value of the shares on the date of grant. Further, no portion of the options may be exercised beyond 10 years from the grant date. For Incentive Stock Options granted to individuals who own more than ten percent of the total combined voting power of all classes of the stock of the Company, the option price shall be at least 110 percent of the fair value at the date of grant. Options vest ratably over three to four years from the date of grant. No compensation expense was recognized during 1998 and the six months ended June 30, 1999, as the exercise price of the options was equal to the estimated fair value of the Company's common stock on the date of grant. Subject to Internal Revenue Service limitations, options granted under the ISO Plan generally become exercisable immediately. Shares issued upon exercise of options that are unvested are restricted and subject to repurchase by the Company upon termination of employment or services, and such restrictions lapse over the original vesting schedule. At December 31, 1998, there were no shares subject to repurchase. F-34 BUYGOLF.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) The following table summarizes the Company's stock option activity:
December 1, 1998 (Inception) to Six Months Ended December 31, 1998 June 30, 1999 ----------------- ------------------ Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price -------- -------- -------- -------- Options outstanding, Beginning of period.................. -- $ -- -- $ -- Granted............................. -- -- 665,000 1.25 Exercised........................... -- -- -- -- Forfeited........................... -- -- (182,000) 1.25 -------- -------- -------- -------- Options outstanding, End of period........................ -- $ -- 483,000 $ 1.25 ======== ======== ======== ========
At June 30, 1999, all options outstanding have an exercise and weighted average exercise price of $1.25, a weighted average remaining contractual life of 9.15 years, and none of these options are exercisable. Had compensation cost for stock options awarded under this plan been determined consistent with SFAS No. 123, the Company's net loss and loss per share would have reflected the following pro forma amounts (amounts in thousands, except per share data):
December 1, 1998 (Inception) Six Months to December 31, Ended 1998 June 30, 1999 ---------------- ------------- Net loss, as reported..................... $ (1) $ (1,713) Pro forma compensation expense............ -- (14) ------------ ------------ Pro forma net loss........................ $ (1) $ (1,727) ============ ============ Basic and diluted net loss per share, as reported................................. $ -- $ (0.24) Basic and diluted net loss per share, pro forma.................................... $ -- $ (0.24)
The weighted average fair value at the date of grant for options granted through the six months ended June 30, 1999, was $0.17, and was estimated using the minimum value method with the following assumptions used: weighted average risk-free interest rate of 5.00%; weighted average volatility of 0.00%; expected life of 3.0 years; and weighted average dividend yield of 0.00%. Subsequent to June 30, 1999, the Company issued 53,000 options to purchase common shares with an exercise price of $1.25 and 13,000 options to purchase common shares with an exercise price of $2.28. F-35 BUYGOLF.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) 8. Loss Per Share The following is the calculations for net loss per share (amounts in thousands):
December 1, 1998 (Inception) Six Months to December 31, Ended 1998 June 30, 1999 ---------------- ------------- Basic: Net loss.................................... $ (1) $ (1,713) Weighted average common shares.............. 6,456,667 7,086,298 --------- --------- Net loss per common share................... $ (0.00) $ (0.24) ========= ========= Diluted: Net loss.................................... $ (1) $ (1,713) Weighted average common shares.............. 6,456,667 7,086,298 Stock option adjustments.................... -- -- --------- --------- Average common shares outstanding........... 6,456,667 7,086,298 --------- --------- Net loss per common share................... $ (0.00) $ (0.24) ========= =========
At December 31, 1998, and June 30, 1999, respectively, options to purchase 0 and 483,000 shares of common stock were not included in the computation of diluted earnings per share as the effect would be antidilutive. 9. Income Taxes At June 30, 1999, the Company has net operating loss carryforwards of approximately $1.7 million related to federal and state income taxes which can be used to offset future federal and state taxable income from operations. Substantially all of these carryforwards will begin to expire in 2006. Significant components of the Company's deferred tax asset at December 31, 1998, and June 30, 1999, are as follows (amounts in thousands):
December 31, June 30, 1998 1999 ------------ -------- Net operating loss carryforwards....................... $ -- $ 690 Depreciation, amortization and other................... -- (7) ---- ----- -- 683 Valuation allowance.................................... -- (683) ---- ----- Net deferred tax assets.............................. $ -- $ -- ==== =====
10. Related Party Transactions In December 1998 Bradford W. Allen (the "Founder/Shareholder") allocated 400,000 shares of common stock owned by the Founder/Shareholder to a director in exchange for consulting services to be rendered to the Company from January through June 1999. These shares were issued in June 1999. During 1999 the Founder/Shareholder loaned the Company $9,000. The loan was paid in full prior to June 30, 1999. F-36 BUYGOLF.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) In May 1999, the Company entered into a one-year agreement with BUY.COM to purchase advertising of $10,000 per month commencing in June 1999 and ending in May 2000. As of June 30, 1999, the Company had incurred $10,000 in advertising fees under this agreement. In August 1999, the Company and the Founder/Shareholder entered into a stock purchase agreement with Ingram Entertainment Holdings, Inc. ("Ingram"), a company controlled by a director/shareholder, to sell 438,946 shares of common stock for an aggregate purchase price of $1.0 million. The agreement also includes preemptive rights for Ingram to purchase additional shares on a pro rata basis for any new stock issuances. Effective September 11, 1999, the Company amended its supply and fulfillment agreement with LVG. The amended terms include an extension of the existing contract until March 31, 2003, and new pricing terms commencing April 1, 2000. The new pricing terms call for LVG to sell its products to the Company at its cost plus a specified percentage. F-37 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS BASIS OF PRESENTATION The following Unaudited Pro Forma Condensed Combined Financial Statements and related notes contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed herein. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. In the opinion of our management, all adjustments necessary to fairly present this pro forma information have been made. The Unaudited Pro Forma Condensed Combined Financial Statements are based upon, and should be read in conjunction with, the historical financial statements of BUY.COM and BuyGolf.com, and the respective notes to such financial statements presented elsewhere in this Prospectus. The pro forma information is based upon tentative allocations of purchase price for the acquisitions and may not be indicative of the results that would have been reported had such events actually occurred on the dates specified, nor is it indicative of the Company's future results. Purchase accounting is based upon preliminary asset valuations, which are subject to change. The Unaudited Pro Forma Condensed Combined Statements of Operations for the nine months ended September 30, 1999 are presented as if BUY.COM had completed the acquisition as of January 1, 1999. The impact of the acquisition of BuyGolf.com to the Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1998, is immaterial and therefore has not been shown. In addition, the Unaudited Pro Forma Condensed Combined Financial Statements do not reflect purchase price adjustments and future contingent payments contained in the agreements relating to certain acquisitions. You should read "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." PF-1 BUY.COM INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (amounts in thousands, except share and per share data)
Nine Months Ended September 30, 1999 ----------------------------------------------- Buy.com BuyGolf. com, Pro Forma Pro Forma Inc. Inc.(a) Adjustments Combined -------- ------------- ----------- --------- Net revenues................... $397,601 $ 1,025 $ (40)(b) $398,586 Cost of goods sold............. 401,214 883 -- 402,097 -------- ------- ------- -------- Gross profit................... (3,613) 142 (40) (3,511) -------- ------- ------- -------- Operating expenses: Sales and marketing.......... 44,094 1,841 (40)(b) 45,895 Product development.......... 3,851 -- -- 3,851 General and administrative... 12,872 1,402 -- 14,274 Depreciation and amortization................ 3,009 341 5,858 (c) 9,208 Amortization of deferred compensation................ 5,417 -- -- 5,417 Charge for warrants.......... 7,021 -- -- 7,021 -------- ------- ------- -------- Total operating expenses... 76,264 3,584 5,818 85,666 -------- ------- ------- -------- Operating loss............. (79,877) (3,442) (5,858) (89,177) -------- ------- ------- -------- Other income (expense): Interest income (expense), net......................... (721) 7 -- (714) Other........................ 74 -- -- 74 -------- ------- ------- -------- Total other income (expense)................. (647) 7 -- (640) -------- ------- ------- -------- Loss before provision for income taxes.................. (80,524) (3,435) (5,858) (89,817) Provision for income taxes..... 3 1 -- 4 -------- ------- ------- -------- Net loss....................... $(80,527) $(3,436) $(5,858) $(89,821) ======== ======= ======= ======== Net loss per share: Basic and diluted.................................. $ (0.62) Weighted average number of common shares outstanding: Basic and diluted.................................. 145,642,459
- -------- (a) The results of operations of BuyGolf.com will be included in our consolidated results commencing October 1, 1999. This presentation shows the pro forma effects of the operations of BuyGolf.com as if the acquisition occurred on January 1, 1999. (b) Represents advertising revenues/expenses recorded for the nine months ended September 30, 1999, that should be eliminated upon the acquisition of BuyGolf.com by BUY.COM. (c) Represents the amortization of goodwill that would have been recorded for the nine months ended September 30, 1999, if the acquisition of BuyGolf.com occurred on January 1, 1999. PF-2 [Inside Back Cover] Inside Back Cover of Prospectus 1. BUY.COM LOGO (center) 2. Annotation for logo: a. "BUY.COM" b. "The Internet Superstore" =========================================================================== Through and including , 1999 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. Shares [LOGO OF BUY.COM APPEARS HERE] Common Stock ------------------- P R O S P E C T U S ------------------- Merrill Lynch & Co. Bear, Stearns & Co. Inc. Hambrecht & Quist October , 1999 =========================================================================== 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 in connection with the sale and distribution of the securities being registered. All amounts are estimated except the SEC and NASD registration fees. All of the expenses below will be paid by us.
Item ---- SEC Registration fee................................................ $41,700 NASD filing fee..................................................... 15,500 Nasdaq National Market listing fee.................................. 90,000 Blue sky fees and expenses.......................................... 5,000 Printing and engraving expenses..................................... * Legal fees and expenses............................................. * Accounting fees and expenses........................................ * Transfer Agent and Registrar fees................................... * Miscellaneous....................................................... * ------- Total........................................................... $ =======
-------- * To be filed by amendment. Item 14. Indemnification of Directors and Officers. Under Section 145 of the Delaware General Corporation Law, we can indemnify our directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). Our bylaws (Exhibit 3.4 to this registration statement) provide that we will indemnify our directors and officers to the fullest extent permitted by law and require us to advance litigation expenses upon our receipt of an undertaking by the director or officer to repay such advances if it is ultimately determined that the director or officer is not entitled to indemnification. Our bylaws further provide that rights conferred under such bylaws do not exclude any other right such persons may have or acquire under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. Our certificate of incorporation (Exhibit 3.2 to this registration statement) provides that, pursuant to Delaware law, our directors shall not be liable for monetary damages for breach of the directors' fiduciary duty of care to us and our stockholders. This provision in the certificate of incorporation does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to us or our stockholders, for acts or omissions not in good faith or involving intentional misconduct or knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. In addition, our certificate of incorporation provides that we shall indemnify our directors and officers if such persons acted (1) in good faith, (2) in a manner reasonably believed to be in or not opposed to our best interests, and (3) with respect to any criminal action or proceeding, with reasonable cause to believe such conduct was lawful. The certificate of incorporation also provides that, pursuant to Delaware law, our directors shall not be liable for monetary damages for breach of the directors' fiduciary duty of care to us and our stockholders. This provision in the certificate of incorporation does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as injunctive or other forms of non- monetary relief will II-1 remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to us for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. The certificate of incorporation further provides that we are authorized to indemnify our directors and officers to the fullest extent permitted by law through the bylaws, agreement, vote of stockholders or disinterested directors, or otherwise. We intend to obtain directors' and officers' liability insurance in connection with this offering. In addition, we have entered or, concurrently with this offering, will enter, into agreements to indemnify our directors and certain of our officers in addition to the indemnification provided for in the certificate of incorporation and bylaws. These agreements will, among other things, indemnify our directors and some of our officers for certain expenses (including attorneys fees), judgments, fines and settlement amounts incurred by such person in any action or proceeding, including any action by or in our right, on account of services by that person as a director or officer of BUY.COM or as a director or officer of any of our subsidiaries, or as a director or officer of any other company or enterprise that the person provides services to at our request. The purchase agreement (Exhibit 1.1 to this registration statement) provides for indemnification by the underwriters of us and our officers and directors, and by us of the underwriters, for certain liabilities arising under the Securities Act or otherwise. Item 15. Recent Sales of Unregistered Securities The following is a summary of our transactions since our formation in June 1997, involving sales of our securities that were not registered under the Securities Act of 1933, as amended: (1) In June 1997, BuyComp, LLC issued 9,000,000 units to Scott and Audrey Blum for $50,000. (2) In August 1998, we sold 130,129,725 shares of common stock and 4,870,275 shares of Series A convertible participating preferred stock to The Scott A. Blum Separate Property Trust u/t/d 8/2/95 in exchange for 9,000,000 units of BuyComp, LLC. (3) In August 1998, we sold an aggregate of 14,610,855 shares of Series A convertible participating preferred stock to SOFTBANK Technology Ventures IV, L.P. and SOFTBANK Technology Advisors Fund L.P. for $1.03 per share. (4) In December 1998, a wholly-owned subsidiary of BUY.COM, BUY.COM ENTERTAINMENT, Inc., acquired SpeedServe, Inc. in a stock-for-stock transaction. As consideration for all 10,000 outstanding shares of SpeedServe, Inc., we issued 8,847,315 shares of our common stock to the shareholders of SpeedServe, Inc. (5) In March 1999, we issued 180,000 shares of our common stock, valued at $2.39 per share, to the Benson York Group, Inc. in exchange for certain domain names. (6) In March 1999, we issued an aggregate of 260,894 shares of common stock to Ingram Entertainment Inc., SOFTBANK Technology Advisors Fund L.P. and SOFTBANK Technology Ventures IV, L.P. for $2.39 per share. (7) In April 1999, we issued an aggregate of 40,110 shares of common stock to Ingram Entertainment Inc., SOFTBANK Technology Advisors Fund L.P. and SOFTBANK Technology Ventures IV, L.P. for $2.12 per share. (8) In April 1999, we issued 25,094 shares of common stock to Harrison Uhl in exchange for a domain name. II-2 (9) In June 1999, we issued an aggregate of 206,670 shares of common stock to Ingram Entertainment Inc., SOFTBANK Technology Advisors Fund L.P. and SOFTBANK Technology Ventures IV, L.P. for $5.71 per share. (10) In July 1999, we issued a warrant to purchase 2,000,000 shares of common stock to United Airlines, Inc. for $10.00 per share. We also issued another warrant for shares of common stock at an exercise price of $ (determined by IPO price). (11) In August 1999, we issued 65,000 shares of common stock to Raj Patel in exchange for a domain name. (12) In October 1999, we sold an aggregate of 15,877,249 shares of our Series B convertible participating preferred stock to SOFTBANK Capital Partners L.P., SOFTBANK Capital Advisors Fund L.P., SOFTBANK Technology Ventures IV L.P., SOFTBANK Technology Advisors Fund L.P., SOFTBANK Technology Ventures V, L.P., ePartners and Vivendi for $5.67 per share. (13) In October 1999, we issued a warrant to purchase 1,000,000 shares of common stock for $5.67 per share. (14) In October 1999, we acquired BuyGolf.com, Inc. in a stock for stock transaction. As consideration for all of the outstanding capital stock of BuyGolf.com, we issued 4,142,927 shares of our common stock to the stockholders of BuyGolf.com. (15) In October 1999, we issued 1,800,000 shares of common stock to the PGA TOUR, Inc. in exchange for a sponsorship agreement with them. (16) Between July 1, 1997 and June 19, 1998, our predecessor entity, BuyComp, LLC granted 12,187,500 options to employees, non-employee directors and consultants to purchase units of BuyComp LLC at an exercise price of $0.14 per unit. All options were assumed under our 1998 Stock Option/Stock Issuance Plan and currently represent options to purchase an aggregate of shares of our common stock of BUY.COM. (17) Between September 1, 1998 and September 14, 1998, we granted options to purchase 1,837,500 shares of our common stock at an exercise price of $1.03 per share to certain employees and consultants. Between October 6, 1998 and March 10, 1999, we granted options to purchase 19,251,105 shares of common stock at an exercise price of $2.39 per share to employees, non-employee directors and consultants. On November 23, 1998 and December 15, 1998 we granted options to purchase an aggregate of 37,500 shares of common stock at an exercise price of $2.50 per share to a consultant. From April 1, 1999 to April 29, 1999, we granted options to purchase 237,000 shares of common stock at an exercise price of $4.24 per share to certain employees and a consultant. On June 29, 1999, we granted options to purchase 1,101,000 shares of common stock at an exercise price of $5.71 per share to employees and consultants. On August 1, 1999, we granted options to purchase 619,020 shares of common stock at an exercise price of $5.71 per share to employees and consultants. Between September 2, 1999 and October 11, 1999, we granted options to purchase 5,051,194 shares of common stock at an exercise price per share of $5.71 to employees and consultants. (18) Between January 1, 1999 and July 31, 1999, we issued and sold 45,787,500 shares of common stock upon the exercise of stock options for aggregate consideration of $20,350. The sale and issuance of securities in the above transactions were deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) or Rule 701 thereof, or Regulation D, as transactions by an issuer not involving a public offering. Appropriate legends are affixed to the stock certificates issued in such transactions. Similar legends were imposed in connection with any subsequent sales of any such securities. All recipients either received adequate information about BUY.COM or had access, through employment or other relationships, to such information. II-3 Item 16. Exhibits and Financial Statement Schedules The following Exhibits are attached hereto and incorporated herein by reference.
Exhibit Number Description -------------- ----------- 1.1* Form of Purchase Agreement. 2.1 Agreement and Plan of Merger and Reorganization dated October 26, 1998 by and among BUY.COM, Speedserve.com Inc., Ingram Entertainment Inc., David C. Mason and Michael G. Mason. 2.2 Agreement and Plan of Merger and Reorganization dated October 25, 1999 by and among BUY.COM INC., BGLF Acquisition Corporation, BuyGolf.com, Inc. and all of the stockholders listed therein. 3.1 Amended and Restated Certificate of Incorporation of BUY.COM. 3.2* Proposed Amended and Restated Certificate of Incorporation of BUY.COM. 3.3 Bylaws of BUY.COM INC. 3.4* Proposed Bylaws of BUY.COM. 4.1* See Exhibit 3.1, 3.2, 3.3 and 3.4 for provisions of the BUY.COM's Certificate of Incorporation and Bylaws defining the rights of holders of BUY.COM's common stock. 4.2* Specimen common stock certificates. 5.1* Opinion of Brobeck, Phleger and Harrison LLP. 9.1* Voting Trust Agreement dated June 7, 1999 by and between Scott Blum, The Scott A. Blum Separate Property Trust, BUY.COM and certain of BUY.COM's outside directors. 9.2* Amended and Restated Voting Trust Agreement dated October 26, 1999 by and between Scott Blum, The Scott A. Blum Separate Property Trust, BUY.COM and certain of BUY.COM's outside directors. 10.1 Third Amended and Restated Investors' Rights Agreement dated September 2, 1999 by and among BUY.COM and the parties named therein. 10.2 Voting Agreement dated December 3, 1998 by and among BUY.COM and the Stockholders named therein. 10.3* Supply Agreement dated December 3, 1998 by and between Ingram Entertainment Inc. and BUY.COM's wholly-owned subsidiary. 10.4* Order Fulfillment Agreement dated February 1, 1999 by and between BUY.COM and i.FILL, a division of Valley Media, Inc. 10.5* Merchandising and Supply Agreement dated April 19, 1999 by and between BUY.COM and Nashville Computer Liquidators, L.P. 10.6* Fulfillment Services Agreement dated March 11, 1999 by and between BUY.COM and National Fulfillment Incorporated. 10.7* Master Service Agreement dated October 1, 1998 by and between BUY.COM and SOFTBANK Services Group. 10.8* Resale Agreement dated March 10, 1999 by and between BUY.COM and Ingram Micro, Inc.; Amendment dated August 11, 1999. 10.10* Employment Agreement dated March 1, 1999 by and between BUY.COM and Gregory Hawkins; Amendment No. 1 to the Employment Agreement dated July , 1999.
II-4
Exhibit Number Description -------------- ----------- 10.11 1998 Stock Option/Stock Issuance Plan. 10.12* 1999 Stock Incentive Plan. 10.13* 1999 Employee Stock Purchase Plan. 10.14 Deed of Trust dated December 23, 1998 by and between BUY.COM and the Bank of Yorba Linda for the property located at 21 Brookline, Aliso Viejo, California 92656. 10.15 Loan Agreement and related documents dated December 23, 1998 by and between BUY.COM and the Bank of Yorba Linda. 10.16 Industrial Lease dated May 12, 1999 by and between BUY.COM and The Scott A. Blum Separate Property Trust u/d/t 8/2/95. 10.17 Summit Lease dated June 1999 by and between BUY.COM and AEW/Parker II, LLC. 10.18 Operating Agreement of BUYTRAVEL.COM LLC dated July 19, 1999. 10.19 Marketing and Services Agreement dated July 19, 1999 by and between BUY.COM and United Air Lines, Inc. 10.20 Common Stock Purchase Warrant dated July 19, 1999 by and between BUY.COM and United Air Lines, Inc. 10.21 Credit Agreement dated July 20, 1999 by and between BUY.COM and certain commercial lending institutions and The Bank of Nova Scotia. 10.22 Promissory Note dated July 20, 1999 by and between BUY.COM and The Bank of Nova Scotia. 10.23 Common Stock Purchase Warrant dated July 20, 1999 by and between BUY.COM and The Bank of Nova Scotia. 10.24* Series A Convertible Participating Preferred Stock Agreement dated August 18, 1998 by and between BUY.COM and certain investors. 10.25 Promissory Note dated May 26, 1999 by and between BUY.COM and The Scott A. Blum Separate Property Trust u/d/t 8/2/95. 10.26 Agreement dated May 26, 1999 by and between BUY.COM and The Scott A. Blum Separate Property Trust u/d/t 8/2/95, Waiver of Certain Rights, dated August 5, 1999. 10.27 Form of Option Agreement pursuant to 1998 Stock Option/Stock Issuance Plan. 10.28 Non-Competition Agreement dated December 3, 1998 by and between BUY.COM, BUY.COM's wholly-owned subsidiary, Ingram Entertainment, Inc. and David Ingram. 10.29 Promissory Note dated August 16, 1999 by and between the Scott A. Blum Separate Property Trust u/d/t 8/2/95. 10.30 Series B Convertible Participating Preferred Stock Purchase Agreement dated September 2, 1999 by and between BUY.COM and certain investors. 10.31 Common Stock Purchase Warrant dated October 8, 1999 by and between BUY.COM and Harpeth Holdings Inc. 10.32 Non-Competition Agreement dated October 25, 1999 by and between BUY.COM INC., BuyGolf.com, Inc. and Bradford W. Allen.
II-5
Exhibit Number Description -------------- ----------- 10.33* Letter of Intent dated September 2, 1999 by and between BUY.COM INC. and SOFTBANK America, Inc. 10.34* Common Stock Issuance Agreement dated October 22, 1999 by and between BUY.COM INC. and PGA TOUR, Inc. 10.35* Sponsorship Letter Agreement dated October 22, 1999 by and between BUY.COM INC. and PGA TOUR, Inc. 21.1* Subsidiaries of BUY.COM. 23.1* Consent of Brobeck, Phleger & Harrison LLP (Included in Exhibit 5.1 hereto). 23.2 Consent of Arthur Andersen LLP. 24.1 Power of Attorney (Included on signature pages hereto). 27.1 Financial Data Schedule.
- -------- * To be filed by amendment. (b) Financial Statement Schedules Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. Item 17. Undertakings The Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Purchase 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 BUY.COM pursuant to the foregoing provisions, or otherwise, BUY.COM has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by BUY.COM of expenses incurred or paid by a director, officer or controlling person of BUY.COM 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, BUY.COM 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 Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus as filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by BUY.COM pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and this offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, BUY.COM has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Aliso Viejo, State of California, on the 27th day of October 1999. BUY.COM INC. /s/ Gregory J. Hawkins By: _________________________________ Gregory J. Hawkins, Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitute and appoint Greg Hawkins and Murray H. Williams, and each of them, his true and lawful attorney-in-fact and agent, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, or any related registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys- in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form S-1 has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Gregory J. Hawkins Chief Executive Officer and October 24, 1999 ____________________________________ Director (principal executive Gregory J. Hawkins officer) /s/ Murray H. Williams Vice President, Finance October 24, 1999 ____________________________________ (principal financial officer) Murray H. Williams /s/ William L. Burnham Director October 25, 1999 ____________________________________ William L. Burnham /s/ David B. Ingram Director October 20, 1999 ____________________________________ David B. Ingram /s/ Donald M. Kendall Director October 20, 1999 ____________________________________ Donald M. Kendall /s/ Charles W. Richion Director October 21, 1999 ____________________________________ Charles W. Richion /s/ James B. Roszak Director October 21, 1999 ____________________________________ James B. Roszak
II-7
Signature Title Date --------- ----- ---- /s/ Edward S. Russell Director October 24, 1999 ____________________________________ Edward S. Russell /s/ John Sculley Director October 21, 1999 ____________________________________ John Sculley /s/ Wayne T. Thorson Director October 22, 1999 ____________________________________ Wayne T. Thorson
II-8 EXHIBIT INDEX
Exhibit Number Description -------------- ----------- 1.1* Form of Purchase Agreement. 2.1 Agreement and Plan of Merger and Reorganization dated October 26, 1998 by and among BUY.COM, Speedserve.com Inc., Ingram Entertainment Inc., David C. Mason and Michael G. Mason. 2.2 Agreement and Plan of Merger and Reorganization dated October 25, 1999 by and among BUY.COM INC., BGLF Acquisition Corporation, BuyGolf.com, Inc. and all of the stockholders listed therein. 3.1 Amended and Restated Certificate of Incorporation of BUY.COM. 3.2* Proposed Amended and Restated Certificate of Incorporation of BUY.COM. 3.3 Bylaws of BUY.COM INC. 3.4* Proposed Bylaws of BUY.COM. 4.1* See Exhibit 3.1, 3.2, 3.3 and 3.4 for provisions of the BUY.COM's Certificate of Incorporation and Bylaws defining the rights of holders of BUY.COM's common stock. 4.2* Specimen common stock certificates. 5.1* Opinion of Brobeck, Phleger and Harrison LLP. 9.1* Voting Trust Agreement dated June 7, 1999 by and between Scott Blum, The Scott A. Blum Separate Property Trust, BUY.COM and certain of BUY.COM's outside directors. 9.2* Amended and Restated Voting Trust Agreement dated October , 1999 by and between Scott Blum, The Scott A. Blum Separate Property Trust, BUY.COM and certain of BUY.COM's outside directors. 10.1 Third Amended and Restated Investors' Rights Agreement dated September 2, 1999 by and among BUY.COM and the parties named therein. 10.2 Voting Agreement dated December 3, 1998 by and among BUY.COM and the Stockholders named therein. 10.3* Supply Agreement dated December 3, 1998 by and between Ingram Entertainment Inc. and BUY.COM's wholly-owned subsidiary. 10.4* Order Fulfillment Agreement dated February 1, 1999 by and between BUY.COM and i.FILL, a division of Valley Media, Inc. 10.5* Merchandising and Supply Agreement dated April 19, 1999 by and between BUY.COM and Nashville Computer Liquidators, L.P. 10.6* Fulfillment Services Agreement dated March 11, 1999 by and between BUY.COM and National Fulfillment Incorporated. 10.7* Master Service Agreement dated October 1, 1998 by and between BUY.COM and SOFTBANK Services Group. 10.8* Resale Agreement dated March 10, 1999 by and between BUY.COM and Ingram Micro, Inc.; Amendment dated August 11, 1999.
Exhibit Number Description -------------- ----------- 10.10* Employment Agreement dated March 1, 1999 by and between BUY.COM and Gregory Hawkins; Amendment No. 1 to the Employment Agreement dated July , 1999. 10.11 1998 Stock Option/Stock Issuance Plan. 10.12* 1999 Stock Incentive Plan. 10.13* 1999 Employee Stock Purchase Plan. 10.14 Deed of Trust dated December 23, 1998 by and between BUY.COM and the Bank of Yorba Linda for the property located at 21 Brookline, Aliso Viejo, California 92656. 10.15 Loan Agreement and related documents dated December 23, 1998 by and between BUY.COM and the Bank of Yorba Linda. 10.16 Industrial Lease dated May 12, 1999 by and between BUY.COM and The Scott A. Blum Separate Property Trust u/d/t 8/2/95. 10.17 Summit Lease dated June 1999 by and between BUY.COM and AEW/Parker II, LLC. 10.18 Operating Agreement of BUYTRAVEL.COM LLC dated July 19, 1999. 10.19 Marketing and Services Agreement dated July 19, 1999 by and between BUY.COM and United Air Lines, Inc. 10.20 Common Stock Purchase Warrant dated July 19, 1999 by and between BUY.COM and United Air Lines, Inc. 10.21 Credit Agreement dated July 20, 1999 by and between BUY.COM and certain commercial lending institutions and The Bank of Nova Scotia. 10.22 Promissory Note dated July 20, 1999 by and between BUY.COM and The Bank of Nova Scotia. 10.23 Common Stock Purchase Warrant dated July 20, 1999 by and between BUY.COM and The Bank of Nova Scotia. 10.24* Series A Convertible Participating Preferred Stock Agreement dated August 14, 1998 by and between BUY.COM and certain investors. 10.25 Promissory Note dated May 26, 1999 by and between BUY.COM and The Scott A. Blum Separate Property Trust u/d/t 8/2/95. 10.26 Agreement dated May 26, 1999 by and between BUY.COM and The Scott A. Blum Separate Property Trust u/d/t 8/2/95, Waiver of Certain Rights, dated August 5, 1999. 10.27 Form of Option Agreement pursuant to 1998 Stock Option/Stock Issuance Plan. 10.28 Non-Competition Agreement dated December 3, 1998 by and between BUY.COM, BUY.COM's wholly-owned subsidiary, Ingram Entertainment, Inc. and David Ingram. 10.29 Promissory Note dated August 16, 1999 by and between the Scott A. Blum Separate Property Trust u/d/t 8/2/95. 10.30 Series B Convertible Participating Preferred Stock Purchase Agreement dated September 2, 1999 by and between BUY.COM and certain investors. 10.31 Common Stock Purchase Warrant dated October 8, 1999 by and between BUY.COM and Harpeth Holdings Inc. 10.32 Non-Competition Agreement dated October 25, 1999 by and between BUY.COM INC., BuyGolf.com, Inc. and Bradford W. Allen.
Exhibit Number Description -------------- ----------- 10.33* Letter of Intent dated September 2, 1999 by and between BUY.COM INC. and SOFTBANK America, Inc. 10.34* Common Stock Issuance Agreement dated October 22, 1999 by and between BUY.COM INC. and PGA Tour, Inc. 10.35* Sponsorship Letter Agreement dated October 22, 1999 by and between BUY.COM INC. and PGA Tour, Inc. 21.1* Subsidiaries of BUY.COM. 23.1* Consent of Brobeck, Phleger & Harrison LLP (Included in Exhibit 5.1 hereto). 23.2 Consent of Arthur Andersen LLP. 24.1 Power of Attorney (Included on signature pages hereto). 27.1 Financial Data Schedule.
- -------- *To be filed by amendment. EX-2.1 2 AGREEMENT AND PLAN OF MERGER DATED OCTOBER 1998 EXHIBIT 2.1 AGREEMENT AND PLAN OF MERGER AND REORGANIZATION by and among BUY CORP., SPEEDSERVE.COM INC. and SPEEDSERVE INC. TABLE OF CONTENTS -----------------
Page ARTICLE I THE MERGER.........................................................1 1.1 The Merger.......................................................1 1.2 Closing; Effective Time..........................................1 1.3 Effect of the Merger.............................................2 1.4 Certificate of Incorporation; Bylaws.............................2 1.5 Directors and Officers............................. .............2 1.6 Effect on Capital Stock..........................................2 1.7 No Further Ownership Rights in Target Common Stock...............3 1.8 Taking of Necessary Action; Further Action.......................3 1.9 Surrender of Certificates........................................3 1.10 Consent to Merger; Waiver of Dissenters'Rights...................4 1.11 Lost, Stolen or Destroyed Certificates...........................4 1.12 Minute Books, Stock Ledger and Other Corporate Records...........4 1.13 Legends on BC Stock..............................................5 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLERS AND SI..............1 2.1 Corporate Existence, Good Standing and Authority.................5 2.2 Capitalization...................................................5 2.3 Subsidiaries.....................................................6 2.4 Financial Statements.............................................6 2.5 Absence of Certain Changes.......................................6 2.6 Properties.......................................................7 2.7 Inventories......................................................7 2.8 Accounts and Notes Receivable....................................7 2.9 Indebtedness.....................................................8 2.10 Litigation.......................................................8 2.11 Taxes............................................................8 2.12 No Breach........................................................8 2.13 Employees........................................................9 2.14 Insurance........................................................9 2.15 Contracts and Permits............................................9 2.16 Powers of Attorney; Bank Accounts................ ...............11 2.17 Compliance with Law; Governmental Consents.......................11 2.18 Intentionally Omitted............................................11 2.19 Intentionally Omitted............................................11 2.20 Intellectual Property Rights.....................................11 2.21 Year 2000 Compliance.............................................12 2.22 Purchase for Investment..........................................12 2.23 BC Stock Not Registered..........................................12 2.24 Economic Risk....................................................12 2.25 Access to Information............................................12 2.26 No Undisclosed Liabilities.......................................12 ARTICLE III REPRESENTATIONS AND WARRANTIES OF BC AND MERGER SUB..............................................................13 3.1 Incorporation....................................................13
Table of Contents (continued) -----------------------------
Page ---- 3.2 Capitalization...................................................13 3.3 BC Stock Fully Paid and Non-Assessable...........................13 3.4 Corporate Power and Authority....................................13 3.5 Intentionally Omitted............................................13 3.6 Financial Statements.............................................13 3.7 Properties.......................................................14 3.8 Litigation.......................................................14 3.9 No Breach........................................................14 3.10 Compliance with Law; Governmental Consents.......................15 3.11 No Undisclosed Liabilities.......................................15 3.12 Taxes............................................................15 3.13 Year 2000 Compliance.............................................16 3.14 Intellectual Property Rights.....................................16 3.15 Absence of Certain Changes.......................................17 ARTICLE IV COVENANTS OF THE SELLERS AND SI...................................18 4.1 Maintenance of Business..........................................18 4.2 Conduct of Business..............................................18 4.3 Necessary Consents...............................................20 4.4 Access to Information............................................20 4.5 Certain Defaults; Litigation.....................................20 4.6 Other Negotiations...............................................20 4.7 Capital Infusion.................................................21 4.8 Best Efforts.....................................................21 4.9 Market Stand-Off.................................................21 ARTICLE V COVENANTS OF BC AND MERGER SUB.....................................21 5.1 Necessary Consents....................... .......................21 5.2 BC Board of Directors............................................21 5.3 Best Efforts.....................................................22 5.4 Indemnification..................................................22 5.5 Maintenance of Business..........................................22 5.6 Access to Information............................................22 5.7 Certain Defaults; Litigation.....................................23 5.8 Other Negotiations...............................................23 5.9 Conduct of Business..............................................23 ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF BC AND MERGER SUB.......................................................24 6.1 Certificates for Shares..........................................24 6.2 Representations and Warranties True..............................24 6.3 Covenants Performed..............................................24 6.4 Certificate......................................................24 6.5 No Violations; No Actions........................................24 6.6 Proceedings and Documents........................................24 6.7 Delivery of Documents............................................24 6.8 Required Consents................................................24
ii Table of Contents (continued) -----------------------------
Page ---- 6.9 Repayment of IE Indebtedness.....................................25 ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLERS...............25 7.1 Representations and Warranties True..............................25 7.2 Covenants Performed..............................................25 7.3 Certificate......................................................25 7.4 No Violations; No Actions........................................25 7.5 Proceedings and Documents........................................25 7.6 Delivery of Documents............................................25 7.7 Required Consents................................................26 7.8 Closing of Purchase of Shares by Softbank........................26 7.9 Repayment of IE Indebtedness.....................................26 ARTICLE VIII CLOSING.........................................................26 8.1 Time and Place...................................................26 8.2 Deliveries of the Sellers........................................26 8.3 Deliveries of BC.................................................27 8.4 Certificate of Merger, Articles of Merger and Plan of Merger.....28 8.5 Tax Opinion of Bass, Berry & Sims PLC............................29 ARTICLE IX OBLIGATIONS OF THE SELLERS AND BC AFTER CLOSING...................29 9.1 Indemnification by the Sellers...........................29 9.2 Indemnification by BC, Merger Sub and Surviving Corporation......29 9.3 Indemnification Procedure for Claims.............................30 9.4 Defense by Indemnifying Party....................................30 9.5 Arbitration......................................................31 9.6 Limitations on Indemnification...................................32 9.7 Indemnification for Genesys Partners Letter Agreement............ ARTICLE X TERMINATION........................................................32 10.1 Termination by Mutual Consent....................................32 10.2 Termination by Default...........................................32 10.3 Effectiveness of Termination.....................................32 10.4 Effect of Termination............................................32 ARTICLE XI GENERAL PROVISIONS................................................33 11.1 Survival.........................................................33 11.2 Intentionally Omitted............................................33 11.3 No Broker or Finder..............................................33 11.4 Transaction Costs................................................33 11.5 Headings.........................................................33 11.6 Entire Agreement; Wa.............................................33 11.7 Third Parties....................................................33 11.8 Successors and Assigns...........................................34 11.9 Notices..........................................................34 11.10 Attorneys' Fees..................................................34 11.11 Governing Law....................................................35
iii Table of Contents (continued) -----------------------------
Page ---- 11.12 Counterparts.....................................................35 11.13 Severability.....................................................35 11.14 Publicity........................................................35 11.15 Schedules........................................................35
iv EXHIBITS -------- Exhibit A - Certificate of Merger Exhibit B-1 - Articles of Merger Exhibit B-2 - Plan of Merger Exhibit C - Non-Competition Agreement Exhibit D - Amended and Restated Investors' Rights Agreement Exhibit E - Amended and Restated Stockholders' Agreement Exhibit F - Voting Agreement Exhibit G - Employment Agreements Exhibit H - Non-Disclosure Agreement Exhibit I - System Use Agreement Exhibit J - Intercompany Service Agreement Exhibit K - Supply Agreement Exhibit L - Sublease Exhibit M - Master Database License Agreement Exhibit N - Form of Bass, Berry & Sims PLC Legal Opinion Exhibit O - Form of Brobeck, Phleger & Harrison LLP Legal Opinion v AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ----------------------------------------------- THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (the "Agreement") --------- is entered into as of October 26, 1998, by and among Buy Corp., a Delaware corporation ("BC"), Speedserve.com Inc., a Delaware corporation and wholly owned -- subsidiary of BC ("Merger Sub"), SpeedServe Inc., a Tennessee corporation ---------- ("SI"), Ingram Entertainment Inc., a Tennessee corporation ("IE"), David C. -- -- Mason ("DMason"), and Michael G. Mason ("MMason", together with IE and DMason, ------ ------ the "Sellers"). ------- RECITALS A. The Boards of Directors of BC and SI believe it is in the best interests of their respective companies and the stockholders of their respective companies that SI and Merger Sub combine into a single company through the statutory merger of SI with and into Merger Sub (the "Merger") and, in ------ furtherance thereof, have approved the Merger. B. Pursuant to the Merger, among other things, the outstanding shares of SI Common Stock, no par value ("SI Common Stock"), shall be converted into --------------- shares of BC Common Stock, $.0001 par value ("BC Stock"), at the rate set forth -------- herein. C. SI, BC and Merger Sub desire to make certain representations and warranties and other agreements in connection with the Merger. D. The parties intend, by executing this Agreement, to adopt a plan of reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"), and to cause the Merger to qualify as a ---- reorganization under the provisions of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code. NOW, THEREFORE, in consideration of the covenants and representations set forth herein, and for other good and valuable consideration, the parties agree as follows: ARTICLE I THE MERGER ---------- 1.1 The Merger. At the Effective Time (as defined in Section 1.2) and subject to and upon the terms and conditions of this Agreement, SI shall be merged with and into Merger Sub, the separate corporate existence of SI shall cease and Merger Sub shall continue as the surviving corporation. Merger Sub as the surviving corporation after the Merger is hereinafter sometimes referred to as the "Surviving Corporation." --------------------- 1.2 Closing; Effective Time. The closing of the transactions ----------------------- contemplated hereby (the "Closing") shall take place as soon as practicable ------- after the satisfaction or waiver of each of the conditions set forth in Article VI hereof or at such other time as the parties hereto agree (the "Closing ------- Date"). The Closing shall take place at the offices of Brobeck, Phleger & - ---- Harrison LLP, 38 Technology Drive, Irvine, California 92618, or at such other location as the parties hereto agree. In connection with the Closing, the parties hereto shall cause the Merger to be consummated by properly executing and filing the Certificate of Merger in the form attached 1 hereto as Exhibit A (the "Certificate of Merger") with the Delaware Secretary of --------- --------------------- State in accordance with the applicable provisions of the Delaware General Corporation Law (the "Delaware Law") and Articles of Merger and a Plan of ------------ Merger, in the forms attached hereto as Exhibits B-1 and B-2, respectively (the ------------ --- "Articles of Merger and Plan of Merger"), with the Tennessee Secretary of State ------------------------------------- in accordance with the provisions of the Tennessee Business Corporation Act (the "Tennessee Law"). The Merger shall become effective upon the filing of the ------------- Certificate of Merger with the Delaware Secretary of State and the Articles of Merger and Plan of Merger with the Tennessee Secretary of State (the time of such filings being the "Effective Time"). -------------- 1.3 Effect of the Merger. At the Effective Time, the effect of the -------------------- Merger shall be as provided in this Agreement, the Certificate of Merger, the Articles of Merger and Plan of Merger and the applicable provisions of Delaware and Tennessee Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, powers and franchises of SI and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of SI and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation. 1.4 Certificate of Incorporation; Bylaws. ------------------------------------ (a) At the Effective Time, the Certificate of Incorporation of Merger Sub, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation until thereafter amended as provided by Delaware Law and such Certificate of Incorporation. (b) The Bylaws of Merger Sub, as in effect immediately prior to the Effective Time, shall be the Bylaws of the Surviving Corporation until thereafter amended. 1.5 Directors and Officers. At the Effective Time, the directors and ---------------------- officers of the Merger Sub shall become the directors and officers of the Surviving Corporation, until their respective successors are duly elected or appointed and qualified. 1.6 Effect on Capital Stock. By virtue of the Merger and without any ----------------------- action on the part of Merger Sub, SI or the holders of any of the following securities: (a) Conversion of Target Common Stock. At the Effective Time, --------------------------------- each share of SI Common Stock issued and outstanding immediately prior to the Effective Time (other than any shares of SI Common Stock to be canceled pursuant to Section 1.6(b)) will be canceled and extinguished and be converted automatically into the right to receive 58.9819 validly issued, fully paid and non-assessable shares of BC Stock (the "Exchange Ratio"). -------------- (b) Cancellation of Target Common Stock Owned by SI. At the ----------------------------------------------- Effective Time, all shares of SI Common Stock that are owned by SI as treasury stock and or any direct or indirect wholly owned subsidiary of SI immediately prior to the Effective Time shall be canceled and extinguished without any conversion thereof. (c) Capital Stock of Merger Sub. At the Effective Time, each share of Common Stock, $.0001 par value, of Merger Sub ("Merger Sub Common ----------------- Stock") issued and - ----- 2 outstanding immediately prior to the Effective Time shall remain issued and outstanding. Each stock certificate of Merger Sub evidencing ownership of any such shares shall continue to evidence ownership of such shares of capital stock of the Surviving Corporation. (d) Adjustments to Exchange Ratio. The Exchange Ratio shall be ----------------------------- adjusted to reflect fully the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into BC Stock or SI Common Stock), reorganization, recapitalization or other like change with respect to BC Stock or SI Common Stock occurring after the date hereof and prior to the Effective Time. (e) Fractional Shares. No fraction of a share of BC Stock will be ----------------- issued in the Merger and the number of shares of BC Stock issuable to a Seller hereunder shall be rounded upward to the nearest whole share of BC Stock. 1.7 No Further Ownership Rights in Target Common Stock. All shares of BC -------------------------------------------------- Stock issued upon the surrender for exchange of shares of SI Common Stock in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of SI Common Stock, and there shall be no further registration of transfers on the records of the Surviving Corporation of shares of SI Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article I. 1.8 Taking of Necessary Action; Further Action. If, at any time after the ------------------------------------------ Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of SI and Merger Sub, the officers and directors of SI and Merger Sub are fully authorized in the name of their respective corporations or otherwise to take, and will take, all such lawful and necessary action, so long as such action is not inconsistent with this Agreement. 1.9 Surrender of Certificates. ------------------------- (a) Exchange Procedures. Promptly after the Effective Time, each holder of record of a certificate or certificates ("Certificates") which ------------ immediately prior to the Effective Time represented outstanding shares of SI Common Stock, whose shares were converted into the right to receive shares of BC Stock (and cash in lieu of fractional shares) shall surrender such Certificates (duly endorsed in favor of BC or accompanied by stock powers duly executed in favor of and in a form reasonably acceptable to BC and its counsel, free from any charge, lien, encumbrance or adverse claim of any kind whatsoever) in exchange for certificates representing shares of BC Stock (and cash in lieu of fractional shares). Upon surrender of a Certificate for cancellation to BC, the holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing the number of whole shares of BC Stock and payment in lieu of fractional shares which such holder has the right to receive pursuant to Section 1.6 of this Agreement, and the Certificate so surrendered shall forthwith be canceled. Until so surrendered, each outstanding Certificate that, prior to the Effective Time, represented shares of SI Common Stock will be deemed from and after the Effective Time, for all corporate 3 purposes, other than the payment of dividends, to evidence the ownership of the number of full shares of BC Stock into which such shares of Target Common Stock shall have been so converted in accordance with Article I hereof. (b) Distributions With Respect to Unexchanged Shares. No ------------------------------------------------ dividends or other distributions with respect to BC Stock with a record date after the Effective Time will be paid to the holder of any unsurrendered Certificate with respect to the shares of BC Stock represented thereby until the holder of record of such Certificate shall surrender such Certificate. Subject to applicable law, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole shares of BC Stock issued in exchange therefor, without interest, at the time of such surrender, the amount of any such dividends or other distributions with a record date after the Effective Time theretofore payable (but for the provisions of this Section 1.9(b)) with respect to such shares of BC Stock. (c) Transfers of Ownership. If any certificate for shares of BC ---------------------- Stock is to be issued in a name other than that in which the Certificate surrendered in exchange therefor is registered, it will be a condition of the issuance thereof that the Certificate so surrendered will be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange will have paid to BC or any agent designated by it any transfer or other taxes required by reason of the issuance of a certificate for shares of BC Stock in any name other than that of the registered holder of the Certificate surrendered, or established to the satisfaction of BC or any agent designated by it that such tax has been paid or is not payable. (d) No Liability. Notwithstanding anything to the contrary in ------------ this Section 1.9, neither the Surviving Corporation nor any party hereto shall be liable to any person for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar law. 1.10 Consent to Merger; Waiver of Dissenters' Rights. By their ----------------------------------------------- execution of this Agreement, each Seller (a) consents to the Merger and to the taking of shareholder action to approve the Merger without a meeting; (b) acknowledges that he or it is aware of his or its right to dissent to the Merger and demand payment for shares of SI Common Stock in accordance with Tennessee Law; and (c) waives such rights to dissent and demand payment with respect to the Merger. 1.11 Lost, Stolen or Destroyed Certificates. In the event any -------------------------------------- Certificates shall have been lost, stolen or destroyed, BC shall issue in exchange for such lost, stolen or destroyed Certificates, upon the making of an affidavit of that fact by the holder thereof, such shares of BC Stock as may be required pursuant to Section 1.6; provided, however, that BC may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against BC or the Surviving Corporation or with respect to the Certificates alleged to have been lost, stolen or destroyed. 1.12 Minute Books, Stock Ledger and Other Corporate Records. At the ------------------------------------------------------ Closing, SI shall deliver to BC, in addition to those items set forth in Section 8.2, the minute books, stock ledger and other corporate records of SI. 4 1.13 Legends on BC Stock. In addition to any other legend that may be ------------------- required by federal or state securities laws, each certificate for BC Stock that is issued hereunder shall bear a legend in substantially the following form: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES, OR DELIVERY OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER OF SUCH SECURITIES THAT SUCH OFFER, SALE, TRANSFER, PLEDGE OR HYPOTHECATION IS IN FULL COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, OR UNLESS SOLD IN COMPLIANCE WITH RULE 144 UNDER SUCH ACT." ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLERS AND SI ---------------------------------------------------- Each of the Sellers and SI agrees with and represents and warrants to BC and Merger Sub as follows: 2.1 Corporate Existence, Good Standing and Authority. SI is a ------------------------------------------------ corporation duly incorporated, validly existing and in good standing under the laws of the State of Tennessee. SI has full corporate power and corporate authority to carry on its business as now being conducted and to own, lease or operate the property and assets now owned, leased or operated by it. SI is qualified to do business, is in good standing and has all required and appropriate licenses in each jurisdiction in which its failure to obtain or maintain such qualification, good standing or licensing would, individually or in the aggregate, have a material adverse effect on the assets, liabilities, business, financial condition or results of operations of SI (a "Material -------- Adverse Effect"). SI and each Seller have all requisite power and authority to - -------------- enter into this Agreement and all agreements and other documents to be entered into in connection herewith and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Sellers and SI, has been authorized by all necessary corporate and other action of SI and the Sellers and constitutes a legal, valid and binding obligation of each of the Sellers and SI, enforceable against each such party in accordance with its terms, except as enforcement may be limited by equitable principles or bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally. 2.2 Capitalization. Except as set forth in Schedule 2.2, the -------------- authorized capital stock of SI consists of Ten Thousand (10,000) shares of common stock, no par value, of which Ten Thousand (10,000) shares are issued and outstanding (the "Shares"). All of the Shares are owned, beneficially and of ------ record by the Sellers, and immediately prior to the Closing, all of the Shares will be owned, beneficially and of record, by the Sellers. The Shares are free from any 5 charge, lien, encumbrance, restriction or adverse claim of any kind whatsoever, other than restrictions imposed by applicable securities laws. All of the Shares have been duly authorized and validly issued and are fully paid and nonassessable. There are no options, warrants, conversion rights, rights of exchange, or other rights, plans, agreements or commitments of any nature whatsoever (including, without limitation, conversion or preemptive rights) providing for the purchase, issuance or sale of any shares of capital stock of SI or any securities convertible into or exchangeable for any shares of capital stock of SI. 2.3 Subsidiaries. SI does not presently own, directly or indirectly, ------------ any interest in any other corporation, association, joint venture or other business entity. On the Closing Date, SI will not own, directly or indirectly, any interest in any foreign sales corporation. 2.4 Financial Statements. The unaudited balance sheet and related -------------------- statements of income and cash flows of SI at and for its fiscal year ended December 31, 1997 and the unaudited balance sheet and related statement of income and cash flow of SI for the period from January 1, 1998 through August 28, 1998 (collectively the "SI Financial Statements") have been delivered to BC. ----------------------- The internal books and records of SI from which the SI Financial Statements were prepared are complete and correct in all material respects and have been maintained in accordance with sound business practices. The SI Financial Statements (i) were prepared in accordance with such books and records; (ii) were prepared in accordance with the accounting policies and principles of SI, and are in accordance with generally accepted accounting principles ("GAAP"), ---- applied on a consistent basis throughout the periods presented; and (iii) present fairly the financial position and results of operations of SI at the dates and for the periods reflected therein. 2.5 Absence of Certain Changes. Except as set forth in Schedule 2.5, -------------------------- since August 28, 1998, there has not been: (a) Any Material Adverse Effect; (b) Any increase in the compensation paid or payable by SI, other than in the ordinary course of business, to any of its officers, directors, employees, agents or shareholders; (c) Any declaration, setting aside or payment of dividends, or any direct or indirect redemption, purchase or other acquisition of any capital stock or any agreement to do any of the foregoing; (d) Any indebtedness incurred by SI in excess of Fifty Thousand Dollars ($50,000), other than indebtedness permitted pursuant to Section 4.2(a)(i) hereof and indebtedness incurred in the ordinary course of business consistent with SI's past practices; (e) Any loan made by SI other than travel loans or advances made to its employees in the ordinary course of business consistent with SI's past practices, nor has SI become liable or agreed to become liable as a guarantor with respect to any loan; (f) Any waiver or compromise by SI of any right or rights of material value, or any payment, direct or indirect, of any material debt, liability or other obligation; 6 (g) Any change in the accounting methods, practices or policies followed by SI since its inception, other than as disclosed in the Notes to the SI Financial Statements; (h) Any sale, assignment, or transfer of any patents, trademarks, copyrights, trade secrets or other proprietary rights of material value other than in the ordinary course of business consistent with SI's past practices; (i) Any purchase or other acquisition of, or any sale, disposition of, or subjection to any lien or encumbrance on, any material property or asset, tangible or intangible, of SI other than in the ordinary course of business consistent with SI's past practices; (j) Any actual or threatened amendment, termination or loss of (i) any material contract, lease, license or other agreement to which SI was or is a party; (ii) any certificate, license or other authorization required for the continued operation by SI of any material portion of any of its business; or (iii) any material customer or other revenue source; (k) Any resignation or termination of employment of any key officer or employee of SI, and the Sellers and SI do not know of the impending resignation or termination of employment of any such officer or employee; or (l) Any agreement or commitment by SI, or the Sellers on behalf of SI, to do any of the things described in this Section 2.5. 2.6 Properties. SI does not own or hold title to any real property. ---------- With respect to the property and assets it leases, SI is in compliance in all material respects with such leases and holds a valid leasehold interest in such property and assets free of any liens or encumbrances of any kind whatsoever, except those for taxes not yet due and payable or such liens or other imperfections of title, if any, as do not materially detract from the value of or interfere with the present use of the property, or assets affected thereby. There is set forth in Schedule 2.6 hereto: (i) a list of all leases or rental contracts under which SI is a lessee, lessor, sublessee or sublessor and (ii) a list of all equipment used by SI in the operation of its business which is owned or leased by SI and which had an original cost of Fifty Thousand Dollars ($50,000) or more. All real and tangible personal property currently used by SI in, and necessary for the conduct of, the operation of its business is, and at the time of Closing will be, in good operating condition and repair, ordinary wear and tear excepted, and is adequate and suitable for the purposes for which it is presently being used. All improvements on leased property used by SI in the operation of its business and their present use comply in all material respects with all applicable laws and the agreements under which such improvements are leased. 2.7 Inventories. Any inventory of SI consists, and at the time of ----------- Closing will consist, solely of inventory of the kind and quality regularly and currently used in its business, subject to normal allowances for excess and obsolete inventory in accordance with standard business practices. 2.8 Accounts and Notes Receivable. The Sellers have delivered (i) a ----------------------------- complete and accurate list of the accounts payable, accrued liabilities and accounts and notes receivable of SI as of October 2, 1998, and (ii) a complete and accurate schedule showing the aging of such 7 accounts and notes receivable. Such accounts payable, accrued liabilities and accounts receivable and notes receivable arose in bona-fide arms length transactions in the normal course of business. The accounts receivable are and will be at the Closing valid and binding obligations of the account debtors without counterclaims, set-offs or other defenses thereto except in the ordinary course of business, and to the knowledge of the Sellers and SI, such accounts receivable are (except to the extent of the reserves thereon as set forth in the SI Financial Statements or in the accounting records of SI on the date of this Agreement) collectible in the ordinary course of business. The values at which accounts receivable are carried on the books and records of SI accounts payable, accrued liabilities and are consistent with SI's past practice and in accordance with GAAP, applied on a consistent basis. 2.9 Indebtedness. Schedule 2.9 hereto contains a complete list of each ------------ and every agreement or other instrument under or pursuant to which SI has outstanding indebtedness for borrowed money. SI (and the Sellers to the extent responsible for the payment of the obligations thereunder) are not in default in any material respect under any such agreement or instrument. Existing defaults, if any, do not trigger acceleration of such indebtedness. 2.10 Litigation. No litigation, arbitration or other proceeding is ---------- pending or, to the knowledge of the Sellers and SI, threatened by or against SI, its properties or assets, or the Shares before any court or any governmental agency and, to the knowledge of the Sellers and SI, no facts exist which might form the basis for any such litigation, arbitration or proceeding. To the knowledge of the Sellers and SI, SI is not the subject of any investigation for violation of any laws, regulations or administrative orders applicable to its business. There is no judgment, writ, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or arbitrator outstanding against SI, its properties or assets or the Shares. 2.11 Taxes. SI has (i) timely filed or caused to be filed all federal, ----- state and local tax returns required to be filed by SI prior to the date of this Agreement which relate to SI or with respect to which SI is liable or otherwise in any way subject, and all such tax returns (A) are complete, accurate and in all material respects in accordance with all legal requirements applicable thereto and (B) as of the time of filing, correctly reflected the facts regarding the income, business assets, operations, activities, status or other matters of SI required to be shown thereon, (ii) paid, when due, all taxes shown to be due and payable on such returns, or pursuant to any assessment or otherwise, or is contesting in good faith the payment thereof and (iii) properly accrued, charged or established adequate reserves for all taxes assessed or assessable against SI (including amounts being contested in good faith) relating to the business, assets or employees or independent contractors of SI arising in respect of any fiscal year of SI or portion thereof ended prior to the Closing. No tax liabilities, disallowances or assessments relating to the business, assets or employees or independent contractors of SI have been assessed against SI or are such to the knowledge of the Sellers and SI proposed as of the date hereof, and to the knowledge of the Sellers and SI there is no basis for any such liabilities, disallowances or assessments. SI is not a party to or bound by (nor will SI become a party to or bound by prior to the Closing) any tax indemnity, tax sharing or tax allocation agreement. 2.12 No Breach. Except as set forth on Schedule 2.12 hereto, the --------- consummation of the transactions contemplated by this Agreement will not result in or constitute any of the following: (i) a conflict, violation or default with or an event that, with notice or lapse 8 of time or both, would be a default, breach, or violation of the Charter or Bylaws of SI, any License (as hereinafter defined) or any material contract or other material agreement, instrument or arrangement to which SI is a party or by which SI or its assets or the Shares are bound; (ii) an event that would permit any party to terminate any material agreement to which SI is a party or by which SI or its assets or the Shares are bound or to accelerate the maturity of or permit the subordination of any material indebtedness or other material obligation of SI; (iii) the creation or imposition of any material lien, charge, or encumbrance on the assets of SI or the Shares; or (iv) conflict with or result in the violation or breach of any law, rule or regulation of any governmental authority, or any judgment, order, injunction or decree applicable to SI, its assets or the Shares. 2.13 Employees. Schedule 2.13 contains a listing of (i) each --------- collective bargaining agreement and other labor agreement to which SI is a party or by which it is bound; (ii) each employment, consulting, severance, deferred compensation, bonus, and any other employee benefit plan, contract, agreement, or other arrangement (whether or not in writing) providing for compensation or other benefits to employees (including officers), or independent contractors, individually or as a group, to which SI is a party or by which it is bound; (iii) each "employee pension benefit plan" as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974 ("ERISA") and not exempted under ----- Section 4(b) or 201 of ERISA maintained by SI or to which SI is required to contribute including any multi-employer pension plan; and (iv) each "employee welfare benefit plan" as defined in Section 3(1) of ERISA maintained by SI or to which SI contributes or is required to contribute, including any multi-employer welfare plan, and each other plan under which "fringe benefits" (including, without limitation, vacation plans or programs, severance benefits, sick leave plans or programs, dental or medical plans or programs, and related or similar benefits) are afforded to employees of, or otherwise required to be provided by, SI. SI has complied in all material respects with all applicable laws, rules and regulations relating to employment, including those relating to wages, hours, collective bargaining and the payment and withholding of taxes and other sums as required by appropriate governmental authorities. 2.14 Insurance. SI, or the Sellers on behalf of SI, maintains policies --------- of insurance covering SI's assets, properties and business in types and amounts that are consistent with SI's past practices. Neither SI nor, to the extent that the Sellers maintain policies on behalf of SI, the Sellers are in default under any of such policies, and neither SI or the Sellers have failed to give any notice or to present any claim under any such policy in a due and timely fashion. 2.15 Contracts and Permits. There is set forth in Schedule 2.15 hereto --------------------- a complete and accurate list of: (a) Each customer contract, whether written or oral, between SI and any party to whom SI provides products or services which involved payments to SI of more than Fifty Thousand Dollars ($50,000) during SI's last fiscal year or can reasonably be expected to involve payments to SI of more than Fifty Thousand Dollars ($50,000) during SI's next fiscal year ; 9 (b) Each contract (except for leases or rental contracts, evidence of indebtedness and insurance contracts), whether written or oral, between SI and any party to whom SI is obligated, or can reasonably be expected to pay more than Fifty Thousand Dollars ($50,000) for any twelve (12)-month period commencing on or after the Closing Date; and (c) Each material permit, license, franchise, certificate or authorization issued to SI by any governmental or other authority having jurisdiction in any area where SI provides products or services (individually, a "License" and collectively, the "Licenses"). ------- -------- The contracts and agreements which are required to be identified in Schedule 2.6 or in Schedule 2.15 pursuant to subsections (a) and (b) above are hereinafter referred to as the "Contracts." Except as set forth in Schedules --------- 2.6 or 2.15: (i) Each of the Contracts is a valid, binding and enforceable agreement of SI and, to the knowledge of the Sellers and SI, the other parties thereto, and to their knowledge will continue to be a valid, binding and enforceable agreement of Merger Sub after the Closing Date; (ii) As of the date hereof, the Sellers and SI have no reason to believe that SI will not be able to fulfill all of its obligations under the Contracts which remain to be performed after the date hereof to the extent BC's operation of the business of SI after the Closing Date is consistent with SI's past practices, and neither the Sellers nor SI has been notified by any governmental or other party that such parties intend to cancel, terminate or modify any of such Contracts or the basis upon which SI is paid thereunder, and neither the Sellers nor SI knows of any valid grounds for any such cancellation, termination or modification; (iii) There has not occurred any material default (or event which upon the provision of notice or lapse of time or both would become a material default) by SI under any of the Contracts; (iv) To the knowledge of the Sellers and SI, the Licenses are the only permits, licenses, franchises, certificates and authorizations that may be issued by any governmental or other authority having jurisdiction in any area where SI provides products or services that are required for and are material to the operation of the business of SI as such business is conducted; (v) The Licenses are, and as of the Closing will be, in full force and effect and the continuing validity and effectiveness of such Licenses will not be affected by the Merger as herein contemplated; and (vi) The Sellers and SI are and have been in compliance in all material respects with all material conditions or requirements of the Licenses, and neither the Sellers nor SI has been notified by any governmental or licensing authority that such parties intend to cancel, terminate or modify any of such Licenses, and neither the Sellers nor SI knows of any valid grounds for any such cancellation, termination or modification. 10 2.16 Powers of Attorney; Bank Accounts. Schedule 2.16 hereto --------------------------------- lists (i) the names and addresses of all persons holding a power of attorney on behalf of SI; and (ii) the names and addresses of all banks or other financial institutions in which SI has an account, deposit, or safe-deposit box, with the number and a description of the account and the names of all persons authorized to draw on such accounts or deposits or to have access to such boxes. 2.17 Compliance with Law; Governmental Consents. The business and ------------------------------------------ operations of SI have been and are being conducted in material compliance with all laws, rules, regulations and licensing requirements applicable thereto, including, without limitation, federal, state and local laws and regulations affecting the protection of the environment, the health and safety of employees and equal employment opportunities. The Sellers and SI are unaware of any facts which might form the basis for a claim that any material violation by SI of such laws exists. Except for (i) the filing of a pre-merger notification and termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (ii) the ------- filing of the Certificate of Merger and (iii) the filing of the Articles of Merger and Plan of Merger, no consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of SI or the Sellers is required in connection with the execution, delivery and performance by the Sellers and SI of this Agreement, the consummation of the transactions contemplated hereby or BC's operation of the business of SI following the Closing Date in a manner that is consistent with SI's past practices. 2.18 Intentionally Omitted. --------------------- 2.19 Intentionally Omitted. --------------------- 2.20 Intellectual Property Rights. ---------------------------- (a) Except as set forth in Schedule 2.20, SI has sufficient title and ownership of all patents, trademarks, service marks, trade names, Internet domain names, copyrights, trade secrets, customer lists, information, proprietary rights and processes, registrations and applications therefor (collectively, "Intellectual Property") necessary for and material to its --------------------- business as now conducted and as proposed to be conducted, including all Intellectual Property used in connection with or contained in any SI site on the world wide web, without any conflict with or infringement of the rights of others. Neither the Sellers nor SI has received any communications nor is either of the Sellers or SI aware of any entity alleging that SI or any SI employee has violated or, by conducting its business in a manner that is consistent with SI's past practices, would violate any Intellectual Property of any other person or entity. Neither the Sellers nor SI is aware that any of SI's employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his or her best efforts to promote the interests of SI or that would conflict with the operation of SI's business consistent with SI's past practices. SI does not believe it is or will be necessary in connection with its business to utilize any inventions of any of its employees (or persons it currently intends to hire) made prior to their employment by SI. To the knowledge of the Sellers and SI, all of the Intellectual Property is vested in (or, if applicable, leased or licensed by) SI free and clear of any equities, claims, liens, encumbrances or restrictions of any kind 11 whatsoever. Schedule 2.20 sets forth all patents, patent applications, copyright registrations, copyright applications, trademarks and trade names (registered or unregistered), Internet domain names and any other Intellectual Property owned or licensed by SI or in which SI has any material interest. (b) Except as set forth in Schedule 2.20, SI does not currently use nor, to the knowledge of the Sellers and SI, does it propose to use any Intellectual Property, invention or confidential information in which any of the Sellers and other employees of SI claims a proprietary interest. (c) Except as set forth in Schedule 2.20, to the knowledge of the Sellers and SI, SI is not making use of any Intellectual Property, invention or any confidential information in which any of its present or past employees has claimed a proprietary interest; and the Sellers and SI are not actually aware of any facts that would give rise to such a claim. 2.21 Year 2000 Compliance. SI has reviewed the areas within its -------------------- business and operations which could be adversely affected by Year 2000 issues and evaluated the costs associated with modifying and testing its systems for the Year 2000. To the knowledge of SI, the cost of Year 2000 compliance for its internal information systems will not have a Material Adverse Effect on SI. 2.22 Purchase for Investment. Each Seller acknowledges that he or it ----------------------- is acquiring the BC Stock in the Merger for his or its own account and not with a view to, or present intention of, distribution thereof in violation of the Securities Act of 1933, as amended (the "1933 Act") or any state securities -------- laws, and the BC Stock will not be disposed of in contravention of the 1933 Act or state securities laws. 2.23 BC Stock Not Registered. Each Seller acknowledges that the BC ----------------------- Stock has not been registered under the 1933 Act or any state securities laws and, therefore, cannot be sold, and must be held indefinitely, unless subsequently registered under the 1933 Act and state securities laws or unless an exemption from such registration is available. 2.24 Economic Risk. Each Seller acknowledges that his or its ------------- investment in the BC Stock involves a high degree of risk and represents that he or it is able to bear the economic risk of his or its investment in the BC Stock for an indefinite period of time. 2.25 Access to Information. Each Seller acknowledges that he or it has --------------------- made such investigations and inquiries as he or it has deemed necessary for the purpose of informing himself or itself about BC or its businesses prior to entering into this Agreement. 2.26 No Undisclosed Liabilities. To the knowledge of the Sellers and -------------------------- SI, SI does not have, or as of the Closing Date will not have, any material liabilities, obligations or commitments (absolute, accrued, contingent or otherwise) matured or unmatured ("Liabilities") except (i) Liabilities which are ----------- adequately reflected or fully reserved against in the SI Financial Statements; (ii) Liabilities incurred after the date of the SI Financial Statements that were incurred in the ordinary course of SI's business and are consistent with past practices; (iii) Liabilities disclosed in the Schedules hereto and (iv) Liabilities permitted under Section 4.2(a)(i) hereof. 12 ARTICLE III REPRESENTATIONS AND WARRANTIES OF BC AND MERGER SUB --------------------------------------------------- BC and Merger Sub, jointly and severally, represent and warrant to each of the Sellers that: 3.1 Incorporation. Each of BC and Merger Sub has been duly ------------- incorporated and is validly existing and in good standing under the laws of the State of Delaware. Prior to the date hereof, Merger Sub has not engaged in any activity other than the transactions contemplated by this Agreement. Each of BC and Merger Sub has full corporate power and corporate authority to carry on its business as now being conducted and to own, lease or operate the property and assets now owned, leased or operated by it. Each of BC and Merger Sub is qualified to do business, is in good standing and has all required and appropriate licenses in each jurisdiction in which its failure to obtain or maintain such qualification, good standing or licensing (i) would, individually or in the aggregate, have or reasonably could be expected to have a material adverse effect on the assets, liabilities, business, financial condition, results of operations, or prospects of BC and its subsidiaries (including Merger Sub) taken together, or (ii) would result in a material breach of any of the other representations, warranties or covenants of BC set forth in this Agreement. 3.2 Capitalization. Immediately prior to the Closing, the authorized -------------- capital stock of BC will consist of 12,666,542 shares of Common Stock, $.0001 par value, of which 8,675,315 shares are issued and outstanding, and 1,298,742 shares of Series A Preferred Stock, $.0001 par value, all of which are issued and outstanding. The authorized capital of Merger Sub consists of 1,000 shares of Common Stock, $.001 par value, all of which are issued and outstanding and held by BC. All outstanding shares of BC and Merger Sub capital stock have been duly authorized and validly issued and are fully paid and nonassessable. Except as set forth on Schedule 3.2 hereof and as of the date of this Agreement, BC does not own, directly or indirectly, or have any obligation to acquire, any interest or investment in any corporation, partnership, joint venture, business trust, limited liability company or other entity. Schedule 3.2 sets forth the aggregate number of all options, warrants, conversion rights, rights of exchange, or other rights, plans, agreements or commitments of any nature whatsoever (including, without limitation, conversion or preemptive rights) providing for the purchase, issuance, or sale of any capital stock of BC or any securities convertible or exchangeable for any shares of capital stock of BC. 3.3 BC Stock Fully Paid and Non-Assessable. The BC Stock deliverable -------------------------------------- pursuant to Section 1.6, when issued and delivered as herein provided, will be duly authorized, validly issued and outstanding shares of Common Stock of BC, fully paid and non-assessable, free and clear of all liens, encumbrances, restrictions and claims of every kind. 3.4 Corporate Power and Authority. Each of BC and Merger Sub has full ----------------------------- corporate power and authority to enter into, deliver, perform its obligations under and carry out this Agreement and all agreements and documents contemplated hereby. This Agreement constitutes, and all agreements and documents contemplated hereby when executed and delivered pursuant hereto will constitute, the valid and legally binding obligations of BC and Merger Sub enforceable in accordance with their terms, subject as to enforcement to bankruptcy, 13 insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. 3.5 Intentionally Omitted. --------------------- 3.6 Financial Statements. The unaudited balance sheet and related -------------------- statements of income and cash flows of BC at and for its fiscal year ended December 31, 1997 and the unaudited balance sheet and related statement of income and cash flow of SI for the period from January 1, 1998 through July 31, 1998 (collectively the "BC Financial Statements") have been delivered to ----------------------- Sellers. The internal books and records of BC from which the BC Financial Statements were prepared are complete and correct in all material respects and have been maintained in accordance with sound business practice. The BC Financial Statements (i) were prepared in accordance with such books and records; (ii) were prepared in accordance with the accounting policies and principles of BC, and are in accordance with GAAP, applied on a consistent basis throughout the periods presented; and (iii) present fairly the financial position and results of operations of BC at the dates and for the periods reflected therein. 3.7 Properties. Neither BC nor Merger Sub owns or holds title to any ---------- real property. With respect to the property and assets it leases, each of BC and Merger Sub is in compliance in all material respects with such leases and holds a valid leasehold interest in such property and assets free of any liens or encumbrances of any kind whatsoever, except those for taxes not yet due and payable or such liens or other imperfections of title, if any, as do not materially detract from the value of or interfere with the present use of the property, or assets affected thereby. All real and tangible personal property currently used by each of BC and Merger Sub in, and necessary for the conduct of, the operation of their respective businesses is, and at the time of Closing will be, in good operating condition and repair, ordinary wear and tear excepted, and is adequate and suitable for the purposes for which it is presently being used. All improvements on leased property used by each of BC and Merger Sub in the operation of their respective businesses and the present use comply in all material respects with all applicable laws and the agreements under which such improvements are leased. 3.8 Litigation. No litigation, arbitration or other proceeding is ---------- pending or, to the knowledge of BC or Merger Sub, threatened by or against BC or Merger Sub, their respective properties or assets before any court or any governmental agency, and, to the knowledge of BC or Merger Sub, no facts exist which might form the basis for any such litigation, arbitration or proceeding. To the knowledge of BC or Merger Sub, neither BC nor Merger Sub is the subject of any investigation for violation of any laws, regulations or administrative orders applicable to their respective businesses. There is no judgment, writ, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or arbitrator outstanding against either BC or Merger Sub, their respective properties or assets. 3.9 No Breach. The consummation of the transactions contemplated by --------- this Agreement will not result in or constitute any of the following: (i) a conflict, violation or default with or an event that, with notice or lapse of time or both, would be a default, breach, or violation of the Certificate of Incorporation or Bylaws of BC or Merger Sub, or any material contract or other material agreement, instrument or arrangement to which BC or Merger Sub is a party or by which BC or Merger Sub or their respective assets are bound; (ii) an event that would 14 permit any party to terminate any material agreement to which BC or Merger Sub is a party or by which BC of Merger Sub or their respective assets are bound or to accelerate the maturity of or permit the subordination of any material indebtedness or other material obligation of BC or Merger Sub; (iii) the creation or imposition of any lien, charge, or encumbrance on the assets of BC or Merger Sub, except for such item that would not have a BC Material Adverse Effect; or (iv) conflict with or result in the violation or breach of any law, rule or regulation of any governmental authority, or any judgment, order, injunction or decree applicable to BC or Merger Sub or their respective assets. 3.10 Compliance with Law; Governmental Consents. The business and ------------------------------------------ operations of BC and Merger Sub have been and are being conducted in material compliance with all laws, rules, regulations and licensing requirements applicable thereto, including, without limitation, federal, state and local laws and regulations affecting the protection of the environment, the health and safety of employees and equal employment opportunities. Neither BC nor Merger Sub is aware of any facts which might form the basis for a claim that any material violation by BC or Merger Sub of such laws exists. Except for (i) the filing of a pre-merger notification and termination or expiration of the waiting period under the HSR Act, (ii) the filing of the Certificate of Merger and (iii) the filing of the Articles of Merger and Plan of Merger, no consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of BC or the Merger Sub is required in connection with the execution, delivery and performance by BC and the Merger Sub of this Agreement or the consummation of the transactions contemplated hereby. 3.11 No Undisclosed Liabilities. Except as set forth on Schedule 3.11 -------------------------- hereof, to the knowledge of BC and Merger Sub, neither BC nor Merger Sub has, or as of the Closing Date will have, any material liabilities, obligations or commitments (absolute, accrued, contingent or otherwise) matured or unmatured ("BC Liabilities") except (i) BC Liabilities which are adequately reflected or -------------- fully reserved against in the BC Financial Statements; (ii) BC Liabilities incurred after the date of the BC Financial Statements that were incurred in the ordinary course of BC's business and are consistent with past practices; and (iii) BC Liabilities disclosed in the Schedules hereto. 3.12 Taxes. BC has (i) timely filed or caused to be filed all federal, ----- state and local tax returns required to be filed by BC prior to the date of this Agreement which relate to BC or with respect to which BC is liable or otherwise in any way subject, and all such tax returns (A) are complete, accurate and in all material respects in accordance with all legal requirements applicable thereto and (B) as of the time of filing, correctly reflected the facts regarding the income, business assets, operations, activities, status or other matters of BC required to be shown thereon, (ii) paid, when due, all taxes shown to be due and payable on such returns, or pursuant to any assessment or otherwise, or is contesting in good faith the payment thereof and (iii) properly accrued, charged or established adequate reserves for all taxes assessed or assessable against BC (including amounts being contested in good faith) relating to the business, assets or employees or independent contractors of BC arising in respect of any fiscal year of BC or portion thereof ended prior to the Closing. No tax liabilities, disallowances or assessments relating to the business, assets or employees or independent contractors of BC have been assessed against BC or are such to the knowledge of BC proposed as of the date hereof, and to the knowledge of 15 BC there is no basis for any such liabilities, disallowances or assessments. BC is not a party to or bound by (nor will BC become a party to or bound by prior to the Closing) any tax indemnity, tax sharing or tax allocation agreement. 3.13 Year 2000 Compliance. BC has reviewed the areas within its business -------------------- and operations which could be adversely affected by Year 2000 issues and evaluated the costs associated with modifying and testing its systems for the Year 2000. To the knowledge of BC, the cost of Year 2000 compliance for its internal information systems will not have a Material Adverse Effect on BC. 3.14 Intellectual Property Rights. ---------------------------- (a) Except as set forth in Schedule 3.14, each of BC and Merger Sub has sufficient title and ownership of all patents, trademarks, service marks, trade names, Internet domain names, copyrights, trade secrets, customer lists, information, proprietary rights and processes, registrations and applications therefor (collectively, "Intellectual Property") necessary for and material to --------------------- its business as now conducted and as proposed to be conducted, including all Intellectual Property used in connection with or contained in any BC site on the world wide web, without any conflict with or infringement of the rights of others. BC has not received any communications nor is BC aware of any entity alleging that BC, Merger Sub or any BC employee has violated or, by conducting its business in a manner that is consistent with BC's past practices, would violate any Intellectual Property of any other person or entity. BC is not aware that any of BC's or Merger Sub's employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his or her best efforts to promote the interests of BC or that would conflict with the operation of BC's business consistent with BC's past practices. BC does not believe it is or will be necessary in connection with its business to utilize any inventions of any of its employees (or persons it currently intends to hire) made prior to their employment by BC. To the knowledge of BC, all of the Intellectual Property is vested in (or, if applicable, leased or licensed by) BC or Merger Sub free and clear of any equities, claims, liens, encumbrances or restrictions of any kind whatsoever. Schedule 3.14 sets forth all patents, patent applications, copyright registrations, copyright applications, trademarks and trade names (registered or unregistered), Internet domain names and any other Intellectual Property owned or licensed by BC or Merger Sub or in which BC or Merger Sub has any material interest. (b) Except as set forth in Schedule 3.14, neither BC nor Merger Sub currently uses nor, to the knowledge of BC, does either BC or Merger Sub propose to use any Intellectual Property, invention or confidential information in which any employees of BC or Merger Sub claims a proprietary interest. (c) Except as set forth in Schedule 3.14, to the knowledge of BC, neither BC nor Merger Sub is making use of any Intellectual Property, invention or any confidential information in which any of its present or past employees has claimed a proprietary interest; and BC is not actually aware of any facts that would give rise to such a claim. 16 3.15 Absence of Certain Changes. Except as set forth in Schedule 3.15, -------------------------- since August 28, 1998, there has been: (a) Any Material Adverse Effect; (b) Any increase in the compensation paid or payable by BC or Merger Sub, other than in the ordinary course of business, to any of their respective officers, directors, employees, agents or shareholders; (c) Any declaration, setting aside or payment of dividends, or any direct or indirect redemption, purchase or other acquisition of any capital stock of BC or Merger Sub or any agreement to do any of the foregoing; (d) Any indebtedness incurred by BC or Merger Sub in excess of Fifty Thousand Dollars ($50,000), other than indebtedness incurred in the ordinary course of business consistent with BC's or Merger Sub's past practices; (e) Any loan made by BC or Merger Sub other than travel loans or advances made to its employees in the ordinary course of business consistent with BC's or Merger Sub's past practices, nor has BC or Merger Sub become liable or agreed to become liable as a guarantor with respect to any loan; (f) Any waiver or compromise by BC or Merger Sub of any right or rights of material value, or any payment, direct or indirect, of any material debt, liability or other obligation; (g) Any change in the accounting methods, practices or policies followed by BC since its inception, other than as disclosed in the Notes to the BC Financial Statements; (h) Any sale, assignment, or transfer of any patents, trademarks, copyrights, trade secrets or other proprietary rights of material value other than in the ordinary course of business consistent with BC's past practices; (i) Any purchase or other acquisition of, or any sale, disposition of, or subjection to any lien or encumbrance on, any material property or asset, tangible or intangible, of BC or Merger Sub other than in the ordinary course of business consistent with BC's or Merger Sub's past practices; (j) Any actual or threatened amendment, termination or loss of (i) any material contract, lease, license or other agreement to which BC or Merger Sub was or is a party; (ii) any certificate, license or other authorization required for the continued operation by BC or Merger Sub of any material portion of any of its business; or (iii) any material customer or other revenue source; (k) Any resignation or termination of employment of any key officer or employee of BC or Merger Sub, and BC does not know of the impending resignation or termination of employment of any such officer or employee; or 17 (l) Any agreement or commitment by BC or Merger Sub to do any of the things described in this Section 3.15. ARTICLE IV COVENANTS OF THE SELLERS AND SI ------------------------------- 4.1 Maintenance of Business. From the date hereof until the Closing, ----------------------- each of the Sellers and SI shall use its diligent, good faith efforts, to cause SI to carry on and preserve the business, goodwill and the relationships of SI with suppliers, employees, agents and others in substantially the same manner as they have been prior to the date hereof. 4.2 Conduct of Business. ------------------- (a) From the date hereof until the Closing, except as expressly permitted hereby, SI shall not, and the Sellers shall not permit SI to, without BC's prior express written consent: (i) incur any additional indebtedness, or guarantee any indebtedness or obligation of any other party, except (A) in the ordinary course of business or (B) for indebtedness to IE in an amount not to exceed $1,000,000 in the aggregate, which amount: (1) shall only be advanced by IE to SI in incremental amounts necessary, in the good faith judgment of the Sellers, to comply with Section 4.1 hereof; (2) will bear interest at a rate not to exceed the prime lending rate as reported in the Wall Street Journal from time to time; and (3) SI agrees to repay by wire transfer of immediately available funds immediately prior to the Closing; (ii) except in connection with the capital contribution contemplated by Section 4.7, issue, redeem, pledge, sell or repurchase any capital stock of SI or securities convertible into its capital stock or grant or issue any options, warrants or rights to subscribe for its capital stock or securities convertible into its capital stock or commit to do any of the foregoing; (iii) enter into or terminate any material agreement or arrangement; (iv) increase the compensation or bonuses payable or to become payable to any officers, employees or agents of SI, or adopt or amend any employee benefit plan or arrangement; (v) enter into any employment contract or agreement with any existing or prospective employee which is not terminable at will; (vi) pay any obligation or liability, fixed or contingent, other than current liabilities or except as such payment becomes due; (vii) cancel, without full payment, any note, loan or other obligation owing to SI, or waive any rights of material value; 18 (viii) acquire or dispose of any properties, assets or business except in the ordinary course of its business; (ix) create or suffer to be imposed any lien, mortgage, security interest or other charge on or against the properties or assets of SI, other than in the ordinary course of business consistent with SI's past practices, or the Shares; (x) engage in any activities or transactions outside the ordinary course of SI's e-commerce business as conducted at the date hereof; (xi) make or adopt any change in the Charter or Bylaws of SI as in force and effect on the date hereof; (xii) declare or pay any dividends on or make any other distributions in respect of any shares of its capital stock; or (xiii) pay, agree to pay or make any accrual or arrangement for payment of any pension, retirement allowance or other employee benefit pursuant to any plan, agreement or arrangement to any officer, director or employee. (b) From the date hereof until the Closing, except as expressly permitted hereby, SI shall, and the Sellers shall cause SI to, unless otherwise expressly consented to in writing by BC : (i) maintain the existing insurance policies of SI, unless comparable insurance is substituted therefor, and shall not take any action to terminate or modify those insurance policies ; (ii) maintain the books and records of SI consistent with past practices and policies and in accordance with GAAP ; (iii) maintain in good working condition, ordinary wear and tear excepted, and in compliance in all material respects with all applicable laws and regulations, all fixed assets owned, leased or operated, as the case may be, by SI ; (iv) observe and perform, and remain in compliance with, all obligations of SI in agreements and contracts the breach or violation of which would have, individually or in the aggregate, a Material Adverse Effect and not enter into any agreements or contracts which would require payments by SI of more than Fifty Thousand Dollars ($50,000) over any period of twelve (12) months, except for inventory purchased in the ordinary course of business disclosed in advance to BC and customer contracts and purchase orders entered in the ordinary course of business consistent with SI's past practices; and (v) maintain compliance with the terms and conditions of all Licenses held by SI or under which it operates or conducts its business and use best efforts to maintain all such Licenses in full force and effect. 19 4.3 Necessary Consents. Prior to the Closing, the Sellers and SI ------------------ will obtain such written consents and take such other actions as may be necessary or appropriate to allow the consummation of the transactions contemplated hereby and to allow the continuation of the business of SI by BC and Merger Sub after the Closing as conducted at the date hereof in all material respects. 4.4 Access to Information. The Sellers shall cause SI to give BC --------------------- and its accountants, legal counsel and other representatives reasonable access, during normal business hours throughout the period prior to the Closing, to all of the properties, books, contracts, commitments and records relating to the business, assets and liabilities of SI, and will furnish BC, its accountants, legal counsel and other representatives during such period all such information concerning its affairs as BC may reasonably request; provided that any furnishing of such information pursuant hereto or any investigation by BC shall not affect BC's right to rely on the representations, warranties and covenants made by the Sellers and SI in this Agreement except to the extent BC had, as of the Closing Date, actual knowledge (based upon its investigation of written information) of any misrepresentation, breach or alleged breach thereof on or prior to the Closing Date. BC and its accountants, legal counsel and other representatives (as "Representatives" of Buycomp LLC under the Confidentiality --------------- Agreement, dated as August 28, 1998, as amended September 16, 1998, between BuyComp LLC and SI (the "Confidentiality Agreement")) shall keep all such ------------------------- information confidential accordance with the terms of the Confidentiality Agreement. 4.5 Certain Defaults; Litigation. The Sellers and SI will give prompt ---------------------------- notice to BC of: (a) any notice of default or other notice received by the Sellers or SI subsequent to the date of this Agreement and prior to the Closing under any instrument or agreement to which SI is a party or by which its assets are bound or otherwise, which default could, if not remedied, result in a Material Adverse Effect or which would render incorrect any representation made herein, and (b) any suit, action, proceeding or investigation instituted or threatened against or affecting SI subsequent to the date of this Agreement and prior to the Closing which could result in a Material Adverse Effect or which would render incorrect any representation made herein. 4.6 Other Negotiations. Prior to the Closing, or such earlier date on ------------------ which this Agreement is terminated in accordance with its terms, the Sellers will not, and the Sellers will cause SI and the officers, directors, employees, agents and representatives of SI not to, directly or indirectly, initiate discussions or negotiate, or authorize any person or entity to discuss or negotiate on behalf of the Sellers or SI, with any other party, or entertain or consider any inquiries or proposals received from any other party, concerning the possible disposition of SI, its business, assets or capital stock, in whole or in part. The Sellers and SI will not furnish any information concerning SI to any person other than BC for the purpose of, or with the intent of, permitting such person or entity to evaluate a possible acquisition of SI, its business, assets or capital stock, in whole or in part. 20 4.7 Capital Infusion. Immediately prior to the Closing, IE shall make ---------------- a capital contribution to SI in the amount of $1,000,000, payable by wire transfer in immediately available funds . 4.8 Best Efforts. The Sellers and SI will each use their best efforts ------------ to perform and fulfill all obligations on their respective parts to be performed and fulfilled under this Agreement, and to cause all the conditions precedent to the consummation of the transactions to be timely satisfied, to the end that the transactions contemplated by this Agreement shall be effected substantially in accordance with its terms, including the "tax-free" reorganization status of the transactions. The Sellers and SI shall each cooperate with BC in such actions and in securing requisite approvals and shall deliver such further documents as BC may reasonably request as necessary to evidence such transactions. 4.9 Market Stand-Off. Each Seller hereby agrees that, during the one ---------------- hundred twenty (120) period following the effective date of a registration statement of BC filed under the 1933 Act (the "Market Stand-Off Period"), he or ----------------------- it shall not, to the extent requested by BC and/or the managing underwriter, sell or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of BC held by him or it at any time during such period except common stock included in such registration; provided, that officers and directors of BC (as determined by the managing underwriter) enter into similar agreements. Each of the Sellers agrees to increase the Market Stand-Off Period to 180 days at the request of the managing underwriter; provided, that officers and directors of BC (as determined by the managing underwriter) agree to the same increase. The Sellers agree that, as a condition to any transfer or disposition of the BC securities held by the Sellers, any transferee or assignee of the BC securities shall agree in writing to be bound by the terms of this Section 4.9. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the BC securities held by each Seller (and the shares or securities of every other person subject to the foregoing restriction) until the end of such one hundred twenty (120) day or longer period. ARTICLE V COVENANTS OF BC AND MERGER SUB ------------------------------ 5.1 Necessary Consents. Prior to the Closing, BC and Merger Sub will ------------------ obtain such consents and take such other actions as may be necessary or appropriate to allow the consummation of the transactions contemplated hereby. 5.2 BC Board of Directors. At the Closing, BC shall take such actions --------------------- as may be necessary to appoint David B. Ingram ("Ingram") to its Board of ------ Directors and, assuming acceptance of such position, to grant Ingram an option to purchase 10,000 shares of Common Stock of BC at a price per share equal to the fair market value of such stock as determined by BC's Board of Directors. So long as Ingram remains on BC's Board of Directors, BC agrees (i) to maintain Directors and Officer's liability insurance; (ii) engage outside auditors that are reasonably acceptable to Ingram; provided that any of the Big 5 public accounting firms shall be deemed acceptable by Ingram; and (iii) to compensate and reimburse Ingram to the same extent as other non-employee directors of BC. 21 5.3 Best Efforts. Each of BC and Merger Sub will use its best efforts ------------ to perform and fulfill all obligations on its part to be performed and fulfilled under this Agreement, and to cause all the conditions precedent to the consummation of the transactions to be timely satisfied, to the end that the transactions contemplated by this Agreement shall be effected substantially in accordance with its terms. Each of BC and Merger Sub shall cooperate with the Sellers and SI in such actions and in securing requisite approvals and shall deliver such further documents as the Sellers and SI may reasonably request as necessary to evidence such transactions. 5.4 Indemnification. After the Closing, BC shall cause the Surviving --------------- Corporation to, and the Surviving Corporation shall, indemnify and hold harmless each present and former employee, agent, director or officer of SI (the "Indemnified Parties") to the full extent required or permitted under (a) ------------------- Delaware Law, (b) as provided in the Surviving Corporation's Certificate of Incorporation and Bylaws, and (c) as otherwise provided for or permitted pursuant to any agreement or arrangement in effect at the date hereof (to the extent consistent with applicable law), which rights to be indemnified and held harmless shall survive the Closing and shall continue in full force and effect for a period of not less than six years from the Closing Date, provided, that, in the event any claim or claims (a "Claim or Claims") are asserted or made ----- ------ within such six-year period, all rights to indemnification in respect of any such Claim or Claims shall continue until disposition of any and all such Claim or Claims. Without limiting the foregoing, to the extent permitted by applicable law, BC shall cause the Surviving Corporation to, and the Surviving Corporation shall, periodically (no less than on a quarterly basis) advance expenses as incurred with respect to any Claim to the fullest extent permitted by applicable law, provided the person to whom the expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such person is not entitled to indemnification. 5.5 Maintenance of Business. From the date hereof until the Closing, ----------------------- BC shall use its diligent, good faith efforts, to carry on and preserve the business, goodwill and the relationships of BC with suppliers, employees, agents and others in substantially the same manner as they have been prior to the date hereof. 5.6 Access to Information. BC shall give the Sellers and their accountants, legal counsel and other representatives reasonable access, during normal business hours throughout the period prior to the Closing, to all of the properties, books, contracts, commitments and records relating to the business, assets and liabilities of BC, and will furnish the Sellers, their accountants, legal counsel and other representatives during such period all such information concerning its affairs as the Sellers may reasonably request; provided that any furnishing of such information pursuant hereto or any investigation by the Sellers shall not affect the Sellers' right to rely on the representations, warranties and covenants made by BC in this Agreement except to the extent SI or the Sellers had, as of the Closing Date, actual knowledge (based upon their investigation of written information) of any misrepresentation, breach or alleged breach thereof on or prior to the Closing Date. The Sellers, SI and their accountants, legal counsel and other representatives (as "Representatives" --------------- of SI under the Confidentiality Agreement) shall keep all such information confidential in accordance with the terms of the Confidentiality Agreement. 22 5.7 Certain Defaults; Litigation. BC will give prompt notice to the ---------------------------- Sellers of: (a) any notice of default or other notice received by BC subsequent to the date of this Agreement and prior to the Closing under any instrument or agreement to which BC is a party or by which its assets are bound or otherwise, which default could, if not remedied, result in a material adverse effect on the assets, liabilities, business, financial condition or results of operations of BC (a "BC Material Adverse Effect") or which would render -------------------------- incorrect any representation made herein, and (b) any suit, action, proceeding or investigation instituted or threatened against or affecting BC subsequent to the date of this Agreement and prior to the Closing which could result in a BC Material Adverse Effect or which would render incorrect any representation made herein. 5.8 Other Negotiations. Prior to the Closing, or such earlier date on ------------------ which this Agreement is terminated in accordance with its terms, BC will not, and BC will cause the officers, directors, employees, agents and representatives of BC not to, directly or indirectly, initiate discussions or negotiate, or authorize any person or entity to discuss or negotiate on behalf of BC, with any other party, or entertain or consider any inquiries or proposals received from any other party, concerning the possible acquisition by BC (including, without limitation, any reorganization, merger or sale of assets) of any business that is competitive with the business of SI. 5.9 Conduct of Business. From the date hereof until the Closing, ------------------- except as expressly permitted hereby, BC shall not, without SI's prior express written consent: (a) incur any additional indebtedness, or guarantee any indebtedness or obligation of any other party, except in the ordinary course of business; (b) dispose of any properties, assets or business except in the ordinary course of its business ; (c) make or adopt any change in the Certificate of Incorporation or Bylaws of BC as in force and effect on the date hereof; provided, however, that BC may amend its Certificate of Incorporation to (i) change its name; (ii) reduce the number of options that may be issued by BC which do not result in an adjustment to the conversion price of Series A Preferred Stock (Section 6E of the Certificate of Incorporation); (iii) increase the authorized capital stock of BC to accommodate a stock split or stock dividend by BC and (iv) increase the authorized capital stock of BC to accommodate the sale and issuance of shares of BC capital stock to John Ingram; or (d) issue additional shares of capital stock without first offering IE the opportunity to purchase up to five percent (5%) of any such additional shares proposed to be issued by BC; provided that, IE shall have five days from the receipt of notice delivered pursuant to Section 11.9 hereof of a proposed issuance to elect to purchase shares under this subsection (d); and provided further that, the right of first offer provided to IE under this subsection (d) shall not apply to any stock split or stock dividend effected by BC. 23 ARTICLE VI CONDITIONS PRECEDENT TO ----------------------- OBLIGATIONS OF BC AND MERGER SUB -------------------------------- The obligation of each of BC and Merger Sub to consummate the transactions contemplated by this Agreement is subject to the satisfaction, at or before the Closing, of all the following conditions, unless waived in writing by BC: 6.1 Certificates for Shares. BC shall have received for cancellation ----------------------- in the Merger certificates for the Shares, which shall constitute all of the issued and outstanding capital stock of SI. 6.2 Representations and Warranties True. All representations and ----------------------------------- warranties of the Sellers and SI in this Agreement or the Schedules and Exhibits hereto, or in any written statement or certificate that shall be delivered to BC by the Sellers or SI under this Agreement, shall be true and correct on and as of the date made and as of the Closing Date as if made on the date thereof (except to the extent such representation or warranty relates to an earlier date). 6.3 Covenants Performed. The Sellers and SI shall have performed, ------------------- satisfied, and complied in all material respects with all covenants, agreements, and conditions required by this Agreement to be performed or complied with by the Sellers and SI on or before the Closing Date. 6.4 Certificate. BC shall have received from the Sellers a ----------- certificate, dated the Closing Date, certifying that the conditions specified in this Article VI have been satisfied. 6.5 No Violations; No Actions. Consummation of the transactions ------------------------- contemplated by this Agreement shall not violate any order, decree or judgment of any court or governmental body having competent jurisdiction and no action or proceeding shall have been instituted or threatened by any person, entity or governmental agency which, in any such case, in the sole judgment of BC, has a reasonable probability of resulting in (i) the obtaining of material damages from BC or SI; (ii) an order, judgment or decree restraining, prohibiting or rendering unlawful the consummation of the transactions contemplated by this Agreement; or (iii) other relief in connection therewith. 6.6 Proceedings and Documents. All corporate and other proceedings in ------------------------- connection with the transactions contemplated hereby and all documents and instruments incident to such transactions shall be in form and substance reasonably satisfactory to BC and its counsel, and BC shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request. 6.7 Delivery of Documents. BC shall have received all documents and --------------------- other items to be delivered by the Sellers under Section 8.2. 6.8 Required Consents. All consents, approvals and waivers from third ----------------- parties and governmental authorities necessary to the transactions as contemplated hereby, including, without limitation, the expiration or termination of applicable waiting periods under the HSR 24 Act, and to the continued validity and effectiveness of the Licenses shall have been obtained without the imposition on BC or SI of any burdensome conditions, restrictions, or obligations. 6.9 Repayment of IE Indebtedness. SI shall have repaid in full, by ---------------------------- wire transfer of immediately available funds, any amounts owed to IE that have been incurred prior to the date hereof or otherwise in accordance with Section 4.2(a)(i) of this Agreement. ARTICLE VII CONDITIONS PRECEDENT TO ----------------------- OBLIGATIONS OF THE SELLERS -------------------------- The obligation of the Sellers to consummate the transactions contemplated by this Agreement is subject to the satisfaction, at or before the Closing, of all the following conditions, unless waived in writing by a majority in interest of the Sellers: 7.1 Representations and Warranties True. All representations and ----------------------------------- warranties by BC and Merger Sub in this Agreement or the Schedules and Exhibits hereto, or in any written statement or certificate that shall be delivered to the Sellers by BC under this Agreement, shall be true and correct on and as of the date made and as of the Closing Date as if made on the date thereof (except to the extent such representation or warranty relates to an earlier date). 7.2 Covenants Performed. BC and Merger Sub shall have performed, ------------------- satisfied, and complied in all material respects with all covenants, agreements, and conditions required by this Agreement to be performed or complied with by BC and Merger Sub in all material respects on or before the Closing Date. 7.3 Certificate. The Sellers shall have received from BC a certificate ----------- signed by the Chief Financial Officer of BC, dated the Closing Date, certifying that the conditions specified in this Article VII have been satisfied. 7.4 No Violations; No Actions. Consummation of the transactions ------------------------- contemplated by this Agreement shall not violate any order, decree or judgment of any court or governmental body having competent jurisdiction and no action or proceeding shall have been instituted or threatened by any person, entity or governmental agency which, in any such case, in the sole judgment of the Sellers, has a reasonable probability of resulting in (i) the obtaining of material damages from the Sellers or BC, (ii) an order, judgment or decree restraining, prohibiting or rendering unlawful the consummation of the transactions contemplated by this Agreement, or (iii) other relief in connection therewith. 7.5 Proceedings and Documents. All corporate and other proceedings in ------------------------- connection with the transactions contemplated hereby and all documents and instruments incident to such transactions shall be in form and substance reasonably satisfactory to the Sellers and their counsel, and the Sellers shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request. 7.6 Delivery of Documents. The Sellers shall have received (a) all --------------------- documents and other items to be delivered by BC under Section 8.3 and (b) the tax opinion of Bass, Berry & Sims PLC to be delivered under Section 8.5. 25 7.7 Required Consents. All consents, approvals and waivers from third ----------------- parties and governmental authorities necessary to the transactions as contemplated hereby shall have been obtained, including, without limitation, the expiration or termination of applicable waiting periods under the HSR Act. 7.8 Closing of Purchase of Shares by Softbank. The sale of shares of ----------------------------------------- BC Stock by The Scott A. Blum Separate Property Trust u/d/t 8/2/95 to Softbank Holdings Inc. pursuant to a certain Stock Purchase Agreement dated as of September 30, 1998 shall have been consummated. 7.9 Repayment of IE Indebtedness. SI shall have replied in full, by ---------------------------- wire transfer of immediately available funds, any amounts owed to IE that have been incurred prior to the date hereof or otherwise in accordance with Section 4.2(a)(i) of this Agreement. ARTICLE VIII CLOSING ------- 8.1 Time and Place. The Closing shall occur at the time and place -------------- specified in Section 1.2 of this Agreement. 8.2 Deliveries of the Sellers. At the Closing, the Sellers will ------------------------- execute and deliver or cause to be executed and delivered to BC: (a) Stock Certificates. Certificates representing the Shares, ------------------ presented to BC for conversion into BC Stock ; (b) Corporate Documents. The Charter of SI, certified by the Secretary ------------------- of State of Tennessee as of a recent date and the Bylaws of SI, certified by the Secretary of SI as in effect at the Closing; (c) Certificates of Good Standing. Certificates of Good Standing, ----------------------------- dated as of a recent date, with respect to SI, issued by the Secretary of State of each of the States listed in Schedule 8.2(c); (d) Books and Records. All of the minute books, stock ledgers and ----------------- similar corporate records of SI; (e) The Sellers' Certificate. A certificate from the Sellers, dated ------------------------ the Closing Date, containing the information required pursuant to Section 6.4; (f) Non-Competition Agreements. Non-Competition Agreements dated the -------------------------- Closing Date between BC and Merger Sub, on the one hand, and each of DMason, MMason, IE and Ingram, on the other hand, substantially in form of Exhibit C attached hereto (the "Non-Competition Agreements"); (g) Amended and Restated Investors' Rights Agreement. An Amended and ------------------------------------------------ Restated Investors' Rights Agreement dated the Closing Date among BC, the 26 Sellers and other BC stockholders named therein substantially in the form of Exhibit D attached hereto (the "Amended and Restated Investors' Rights -------------------------------------- Agreement"); - --------- (h) Amended and Restated Stockholders' Agreement. An Amended and -------------------------------------------- Restated Stockholders' Agreement dated the Closing Date among BC, the Sellers and other BC stockholders named therein substantially in the form of Exhibit E attached hereto (the "Amended and Restated Stockholders' Agreement"); (i) Voting Agreement. A voting agreement dated the Closing Date among ---------------- BC, the Sellers and other BC stockholders named therein substantially in the form of Exhibit F attached hereto (the "Voting Agreement"); ---------------- (j) Employment Agreements. Employment Agreements between Merger Sub --------------------- and each of DMason and MMason, substantially in the form of Exhibit G attached hereto (the "Employment Agreements"); --------------------- (k) Intercompany Agreements. IE and SI (or Merger Sub, if more ----------------------- appropriate) shall enter into the System Use Agreement in the form attached hereto as Exhibit I, the Intercompany Services Agreement in the form attached hereto as Exhibit J, the Supply Agreement in the form attached hereto as Exhibit K, the Sublease in the form attached hereto as Exhibit L, and the Master Database License Agreement in the form attached hereto as Exhibit M (the "Intercompany Agreements"). ----------------------- (l) Non-Disclosure Agreements. Non-disclosure agreements between ------------------------- Merger Sub, on the one hand, and the persons listed on Schedule 8.2 who accept employment with Merger Sub as of the Closing on the other hand, substantially in the form of Exhibit H attached hereto ; (m) Resolutions. A copy of the resolutions of the Board of Directors ----------- of SI, certified by the Secretary thereof as having been duly and validly adopted and being in full force and effect, and a copy of shareholder resolutions or consents authorizing execution and delivery of this Agreement and performance of the transactions contemplated hereby by SI; (n) Legal Opinion. A legal opinion of Bass, Berry & Sims PLC ------------- substantially in the form of Exhibit N attached hereto; and (o) Other Documents. Such other documents and instruments as BC or --------------- its counsel reasonably shall deem necessary to consummate the transactions contemplated hereby. All documents delivered to BC shall be in form and substance reasonably satisfactory to BC and its counsel. 8.3 Deliveries of BC. At the Closing, BC and/or Merger Sub will execute and ---------------- deliver or cause to be executed and delivered to the Sellers simultaneously with delivery of the items referred to in Section 8.2 above: 27 (a) BC Stock. Certificates representing the BC Stock issuable in -------- accordance with Article I hereof; (b) Resolutions. A copy of the resolutions of the Board of Directors ----------- of each of BC and Merger Sub, certified by the Secretary thereof as having been duly and validly adopted and being in full force and effect, and a copy of stockholder consents for Merger Sub authorizing execution and delivery of this Agreement and performance of the transactions contemplated hereby by BC; (c) Corporate Documents. The Amended and Restated Certificate of ------------------- Incorporation of BC and the Certificate of Incorporation of Merger Sub, certified by the Secretary of State of Delaware as of a recent date and the Bylaws of BC and Merger Sub, certified by the secretaries of BC and Merger Sub, respectively, as in effect at the Closing; (d) Officer's Certificate. A certificate dated the Closing Date --------------------- containing the information required pursuant to Section 7.3; (e) Non-Competition Agreements. The Non-Competition Agreements; -------------------------- (f) Amended and Restated Investors' Rights Agreement. The Amended and ------------------------------------------------ Restated Investors' Rights Agreement; (g) Amended and Restated Stockholders' Agreement. The Amended and -------------------------------------------- Restated Stockholders' Agreement ; (h) Voting Agreement. The Voting Agreement; ---------------- (i) Employment Agreements. The Employment Agreements; --------------------- (j) Intercompany Agreements. The Intercompany Agreements; ----------------------- (k) Legal Opinion. A legal opinion of Brobeck, Phleger & Harrison LLP ------------- substantially in the form of Exhibit O attached hereto; and (l) Other Documents. Such other documents and instruments as the Sellers or their counsel reasonably shall deem necessary to consummate the transactions contemplated hereby. All documents delivered to the Sellers shall be in form and substance reasonably satisfactory to the Sellers and their counsel. 8.4 Certificate of Merger, Articles of Merger and Plan of Merger. At the Closing, the parties hereto shall cause to filed the Certificate of Merger with the Delaware Secretary of State in accordance with the Delaware Law and the Articles of Merger and Plan of Merger with the Tennessee Secretary of State in accordance with the Tennessee Law. 28 8.5 Tax Opinion of Bass, Berry & Sims PLC. A tax opinion of Bass, ------------------------------------- Berry & Sims PLC to the effect that the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code. ARTICLE IX OBLIGATIONS OF THE SELLERS AND BC AFTER CLOSING ----------------------------------------------- 9.1 Indemnification by the Sellers. The Sellers shall severally ------------------------------ indemnify and hold harmless BC, Merger Sub and the Surviving Corporation and their respective officers, directors, employees, successors and assigns in respect of any and all claims, actions, suits or other proceedings and any and all losses, costs, expenses, liabilities, fines, penalties, interest, and damages, whether or not arising out of any claim, action, suit or other proceeding (and including reasonable counsel and accountants' fees and expenses and all other reasonable costs and expenses of investigation, defense or settlement of claims and amounts paid in settlement) incurred by, imposed on or borne by BC, Merger Sub, the Surviving Corporation or such other parties (collectively "Damages") resulting from: ------- (a) The breach of any of the representations or warranties made by the Sellers or SI in this Agreement; and (b) The payment of any taxes (including interest and penalties) of any kind or nature imposed, whether before or after the Closing, by any governmental agency upon SI or its business, assets or employees or independent contractors of SI, or otherwise resulting from or relating to the business or operations of SI prior to the Closing or upon any of its properties or assets as they existed as of or any time prior to the Closing Date, or as a result of the transactions contemplated by this Agreement. Damages shall exclude any amount with respect to which BC or SI as the case may be shall have received under any insurance policy which provides coverage for the liability to which such amount relates. 9.2 Indemnification by BC, Merger Sub and Surviving Corporation. Each ----------------------------------------------------------- of BC, Merger Sub and the Surviving Corporation, jointly and severally, shall indemnify and hold harmless the Sellers, in respect of any and all claims, actions, suits or other proceedings and any and all losses, costs, expenses, liabilities, fines, penalties, interest, and damages, whether or not arising out of any claim, action, suit or other proceeding (and including reasonable counsel and accountants' fees and expenses and all other reasonable costs and expenses of investigation, defense or settlement of claims and amounts paid in settlement) incurred by, imposed on or borne by the Sellers resulting from the breach of any of the representations, warranties or agreements made by BC and Merger Sub in this Agreement. 9.3 Indemnification Procedure for Claims. Whenever any claim shall ------------------------------------ arise for indemnification hereunder, the party entitled to indemnification (the "indemnified party") shall promptly notify in writing the other party or parties ----------------- (the "indemnifying party") of the claim and, when known, the facts constituting ------------------ the basis for such claim; provided, that the indemnified party's failure to give such written notice shall not affect any rights or remedies of an indemnified party hereunder with respect to indemnification for damages except to the extent 29 that the indemnifying party is materially prejudiced thereby. In the event of any claim for indemnification hereunder resulting from or in connection with any claim or legal proceedings by a third party, the written notice to the indemnifying party shall specify, if known, the amount or an estimate of the amount of the liability arising therefrom. The indemnified party shall not settle or compromise any claim by a third party for which it is entitled to indemnification hereunder, without the prior written consent of the indemnifying party (which shall not be unreasonably withheld), unless suit shall have been instituted against it and the indemnifying party shall not have taken control of and conducted in a diligent manner the defense of such suit after notification thereof as provided in Section 9.4 of this Agreement. 9.4 Defense by Indemnifying Party. In connection with any claim giving ----------------------------- rise to indemnity hereunder or resulting from or arising out of any claim or legal proceeding by a person who is not a party to this Agreement, the indemnifying party at its sole cost and expense may, upon written notice to the indemnified party, assume the defense of any such claim or legal proceeding if it acknowledges to the indemnified party in writing its obligations to indemnify the indemnified party with respect to all elements of such claim, and thereafter diligently conducts the defense thereof with counsel reasonably acceptable to the indemnified party. If the indemnifying party acknowledges in writing as specified above that it shall assume the defense of any such action, then the indemnifying party shall keep the indemnified party informed with respect to the defense of such action and the indemnified party shall be entitled to participate in (but not control) the defense of such action, with its counsel and at its own expense. If (A) the indemnifying party does not acknowledge in writing as specified above that it shall assume or fails to conduct in a diligent manner the defense of any such claim or litigation resulting therefrom, or (B) the indemnified party shall have reasonably concluded that there may be one or more legal defenses available to it which are different from, or, additional to those available to the indemnifying party or other indemnified parties with respect to such claim or litigation, then, (i) the indemnified party may defend against such claim or litigation, in such manner as it may deem appropriate, including, without limitation, settling such claim or litigation, after giving notice of the same to the indemnifying party, on such terms as the indemnified party may deem appropriate, and (ii) the indemnifying party shall be entitled to participate in (but not control) the defense of such action, with its counsel and at its own expense. If the indemnifying party thereafter seeks to question the manner in which the indemnified party defended such third party claim or the amount or nature of any such settlement, the indemnifying party shall have the burden to prove by a preponderance of the evidence that the indemnified party did not defend or settle such third party claim in a reasonably prudent manner. Each party agrees to cooperate fully with the other, such cooperation to include, without limitation, attendance at depositions and the provision of relevant documents as may be reasonably requested by the indemnifying party; provided, that the indemnifying party will hold the indemnified party harmless from all of its expenses, including reasonable attorneys' fees, incurred in connection with such cooperation by the indemnified party . 9.5 Arbitration. The rights of the indemnified party to ----------- indemnification and the estimated amount thereof, as set forth in the notice, shall be deemed objected to by the indemnifying party unless the indemnifying party notified the indemnified party in writing as specified in Section 9.4 above that the indemnifying party accepts and agrees with the right of the indemnified party to indemnification or that the indemnifying party elects to defend such claim. If the claim to indemnification is deemed objected to, the parties shall attempt to settle 30 and compromise the same, or if unable to do so within sixty (60) days of receipt of the notice of the claim, such dispute shall be submitted to and resolved by prompt binding arbitration in a mutually agreed location or, absent agreement in New York, New York, and any rights of indemnification established by reason of such settlement, compromise or arbitration shall promptly thereafter be paid and satisfied by the indemnifying party. Arbitration shall be final and binding according to the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator(s) may be entered in any state or federal court in Orange County, California. 9.6 Limitations on Indemnification. ------------------------------ (a) Notwithstanding any provision of this Agreement to the contrary, (i) the Sellers shall have no obligation to indemnify any person entitled to indemnity under Section 9.1 unless the persons so entitled to indemnity thereunder have suffered Damages in an aggregate amount in excess of One Hundred Thousand Dollars ($100,000) (the "Deductible") and then only to the extent of such excess; ---------- (ii) each of MMason's and DMason's liability under Section 9.1 shall in no event exceed the lesser of (A) the fair market value on the Closing Date of the BC Stock received by each under Section 1.6 or (B) the fair market value of BC Stock received by each under Section 1.6 on the date DMason, MMason or both are required to satisfy any obligation under this Article IX; and (iii) IE's liability under Section 9.1 shall in no event exceed the fair market value on the Closing Date of the BC Stock received by IE under Section 1.6. Notwithstanding the foregoing, there shall be no Deductible applied against indemnification for any of the matters set forth in subsection 9.1(c) or any breach of the representations of the Sellers and SI in Section 2.2. Each of DMason and MMason shall satisfy any obligation to BC under this Article IX only by return to BC of BC Stock with a fair market value equal to the amount of such obligation. IE shall have the right to satisfy any obligation to BC under this Article IX by return to BC of BC Stock with a fair market value equal to the amount of such obligation; provided, however, that if the fair market value of such BC Stock is less than IE's liability under this Article IX, IE shall pay any difference to BC by wire transfer in immediately available funds. (b) Notwithstanding any provision of this Agreement to the contrary, BC shall have no obligation to indemnify any person entitled to indemnity under Section 9.2, (i) unless the persons so entitled to indemnity thereunder have suffered Damages in an aggregate amount in excess of One Hundred Thousand Dollars ($100,000) and then only to the extent of such excess and (ii) BC's liability under Section 9.2 shall in no event exceed the fair market value on the Closing Date of the BC Stock to be delivered by BC under Section 1.2. (c) No party to this Agreement shall have any right to indemnification under this Article IX or otherwise for damages relating to any untruth or inaccuracy in any representation or warranty herein in the event and to the extent such party had actual knowledge 31 (based upon its investigation of written materials) of such untruth or inaccuracy prior to the Closing Date. 9.7 Indemnification for Genesys Partners Letter Agreement. The ----------------------------------------------------- Sellers shall, jointly and severally, indemnify and hold harmless BC, Merger Sub and the Surviving Corporation and their respective officers, directors, employees, successors and assigns in respect of any and all claims, actions, suits or other proceedings and any and all losses, costs, expenses, liabilities, fines, penalties, interest, and damages, whether or not arising out of any claim, action, suit or other proceeding (and including reasonable counsel and accountants' fees and expenses and all other reasonable costs and expenses of investigation, defense or settlement of claims and amounts paid in settlement) incurred by, imposed on or borne by BC, Merger Sub, the Surviving Corporation or such other parties resulting from that certain Letter Agreement dated August 17, 1998 between SI and Genesys Partners, Inc. The obligations of the Sellers under this Section 9.7 shall be in addition to any other liability or obligation of the Sellers under this Article IX. ARTICLE X TERMINATION ----------- 10.1 Termination by Mutual Consent. At any time prior to the Closing, ----------------------------- this Agreement may be terminated by written consent of BC and the Sellers. 10.2 Termination by Default. At the Closing this Agreement may be ---------------------- terminated and abandoned: (a) By BC if (i) any of SI or the Sellers has violated or breached in any material respect any of the agreements, representations or warranties contained in this Agreement which violation or breach has not been waived in writing and has not been cured within ten (10) business days following BC's written notice thereof; and (ii) any of the conditions precedent to BC's obligations set forth in Article VI above had not been fulfilled or waived at and as of the Closing; (b) By SI and/or the Sellers if (i) BC or Merger Sub has violated or breached in any material respect any of the agreements, representations or warranties contained in this Agreement which violation or breach has not been waived in writing and has not been cured within ten (10) business days following SI's written notice thereof; and (b) any of the conditions precedent to SI's and/or the Sellers' obligations set forth in Article VII above have not been fulfilled or waived at and as of the Closing; or (c) By either party in the event the Closing has not occurred on or before December 15, 1998. 10.3 Effectiveness of Termination. Any termination of this Agreement ---------------------------- under this Article X will be effective upon the delivery of notice by the terminating party to the other parties hereto. 10.4 Effect of Termination. In the event of termination as provided --------------------- above, this Agreement shall forthwith become of no further force or effect and all parties hereto shall bear their own costs associated with this Agreement and all transactions mentioned herein; provided, 32 that such termination shall not relieve any person of liability for breach of or interference with this Agreement. ARTICLE XI GENERAL PROVISIONS ------------------ 11.1 Survival. All representations and warranties made by the parties -------- herein or in any instrument or document furnished in connection herewith shall survive until the first year anniversary of the Closing Date. No claim or action for indemnity pursuant to Sections 9.1 or 9.2 hereof shall be asserted or maintained by any party hereto after the first year anniversary of the Closing Date except for claims made in writing prior to such date and actions (whether instituted before or after such date) based on any claim made in writing prior to such date. No claim or action for indemnity pursuant to Section 9.7 hereof shall be asserted or maintained by any party hereto after the statute of limitations applicable to any claim under Section 9.7 has run except for claims made in writing prior to such date and actions (whether instituted before or after such date) based on any claim made in writing prior to such date. 11.2 Intentionally Omitted. --------------------- 11.3 No Broker or Finder. Each of the parties represents and warrants ------------------- that, except as set forth on Schedule 11.3, it has dealt with no broker or finder in connection with any of the transactions contemplated by this Agreement, and, insofar as it knows, no broker or other person is entitled to any conversion or finder's fee, in connection with these transactions. 11.4 Transaction Costs. BC shall pay all costs and expenses incurred ----------------- or to be incurred by it in negotiating and preparing this Agreement and carrying out the transactions contemplated by this Agreement. The Sellers and SI shall pay their respective costs and expenses incurred or to be incurred by SI or the Sellers in negotiating and preparing this Agreement and carrying out the transactions contemplated by this Agreement. 11.5 Headings. The subject headings of the Articles and Sections of -------- this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. 11.6 Entire Agreement; Waivers. This Agreement, the Exhibits and ------------------------- Schedules hereto and the Confidentiality Agreement constitute the entire agreement between the parties pertaining to the contemporaneous agreements, representations, and understandings of the parties. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver. 11.7 Third Parties. Except as set forth in Article IX, nothing in ------------- this Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any persons other than the parties to it and their respective successors and assigns, nor is anything in this Agreement intended to relieve or discharge the obligation or liability of any third person to any party to this Agreement, nor shall any provision give any third persons any right of subrogation or action over against any party to this Agreement. 33 11.8 Successors and Assigns. This Agreement shall be binding on, and ---------------------- shall inure to the benefit of, the parties to it and their respective heirs, legal representatives, successors, and assigns. 11.9 Notices. All notices, requests, demands, and other ------- communications under this Agreement shall be in writing and shall be delivered during normal business hours by hand, by Federal Express, Express Mail, United Parcel Service or other reputable overnight delivery service, by telecopy (confirmation of receipt received) or by first class mail, certified, postage prepaid, and shall be deemed delivered when so delivered by hand, overnight delivery or telecopy, or if mailed, five (5) days after the date of mailing, properly addressed as follows: To the Sellers at: Ingram Entertainment Inc. Attn: President Two Ingram Blvd. La Vergne, TN 37089 Facsimile (615) 287-4985 With a copy to: Ingram Entertainment Inc. Attn: General Counsel Two Ingram Blvd. La Vergne, TN 37089 Facsimile (615) 287-4465 To SI at: SpeedServe Inc. Attn: President Two Ingram Blvd. La Vergne, TN 37089 Facsimile (615) 793-2225 To BC or Merger Sub at: Buy Corp. Attn: Chief Financial Officer 21 Brookline Aliso Viejo, CA 92656 Facsimile (949) 425-5300 Any party may change its address for purposes of this paragraph by giving notice of the new address to each of the other parties in the manner set forth above. Rejection or other refusal to accept, or the inability to deliver because of a changed address of which no notice was given, shall not affect the date of such notice sent in accordance with the foregoing provisions. 11.10 Attorneys' Fees. If any party to this Agreement shall bring any --------------- action, suit, counterclaim or appeal for any relief against the other, declaratory or otherwise, to enforce the terms hereof or to declare rights hereunder (collectively, an "Action"), the Prevailing Party (as defined herein) ------ shall be entitled to recover as part of any such Action its reasonable attorneys' fees and costs, including any fees and costs incurred in bringing and prosecuting such Action and/or enforcing any order, judgment, ruling or award granted as part of such Action. "Prevailing Party" within the meaning of this Section 11.10 includes the party whose prayer for 34 relief is granted by the tribunal, or which obtains a judgment or equitable relief, and includes, without limitation, a party who agrees to dismiss an Action upon the other party's payment of all or a portion of the sums allegedly due or performance of the covenants allegedly breached, or a party which obtains substantially the relief sought by the party. 11.11 Governing Law. The terms of this Agreement shall be governed by ------------- and construed in accordance with the laws of the State of Delaware without reference to the choice of law principles thereof. 11.12 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 11.13 Severability. All provisions contained herein are severable and ------------ in the event that any of them shall be held to be to any extent invalid or otherwise unenforceable by any court of competent jurisdiction, such provision shall be construed as if it were written so as to effectuate to the greatest possible extent the parties' expressed intent; and in every case the remainder of this Agreement shall not be affected thereby and shall remain valid and enforceable, as if such affected provision were not contained herein. 11.14 Publicity. None of the parties shall issue or make, or cause to --------- have issued or made, any press release or announcement concerning, or otherwise disclose to any third person, the terms of the transactions contemplated hereby (including the existence of the Merger and the transactions contemplated hereby) without the advance approval in writing of the form and substance thereof by the other parties, unless otherwise required by applicable law, it being understood that the parties will use their best efforts not to disclose the terms or existence of the transaction prior to the Closing. Further, prior to and following the Closing none of the parties shall disclose the material terms of this Agreement or the Merger to any third party other than a third party which must have such information in rendering financial, business, or tax advice to such party, as required by law, or with the written consent (not, following the Closing, to be unreasonably withheld) of each other party hereto. 11.15 Schedules. All schedules, exhibits, appendices and documents --------- referred to in or attached to this Agreement are integral parts of this Agreement as if fully set forth herein, and all statements appearing therein shall be deemed disclosed for all purposes and not only in connection with the specific representation to which they are explicitly referenced. [Signature Page to Follow] 35 IN WITNESS WHEREOF, the parties hereto have executed this Agreement and Plan of Merger and Reorganization as of the date first above written. THE SELLERS INGRAM ENTERTAINMENT INC. By: ______________________________________ John J. Fletcher Vice President and General Counsel __________________________________________ David C. Mason __________________________________________ Michael G. Mason SPEEDSERVE INC. By: ______________________________________ John J. Fletcher Vice President and General Counsel BUY CORP. By: ______________________________________ Scott A. Blum President/CEO SPEEDSERVE.COM INC. By: ______________________________________ Murray Williams Chief Financial Officer Signature Page For Agreement And Plan Of Merger And Reorganization EX-2.2 3 AGREEMENT AND PLAN OF MERGER DATED OCTOBER 1999 EXHIBIT 2.2 AGREEMENT AND PLAN OF MERGER AND REORGANIZATION by and among BUY.COM INC., BGLF Acquisition Corporation and BUYGOLF.COM INC.
TABLE OF CONTENTS ----------------- Page ---- ARTICLE I THE MERGER............................................... 2 1.1 The Merger............................................. 2 1.2 Closing; Effective Time................................ 2 1.3 Effect of the Merger................................... 2 1.4 Certificate of Incorporation; Bylaws................... 2 1.5 Directors and Officers................................. 2 1.6 Effect on Capital Stock................................ 2 1.7 No Further Ownership Rights in BuyGolf Common Stock.... 3 1.8 Options to Purchase BuyGolf Common Stock............... 3 1.9 Taking of Necessary Action; Further Action............. 4 1.10 Surrender of Certificates.............................. 4 1.11 Consent to Merger; Waiver of Dissenters'Rights......... 5 1.12 Lost, Stolen or Destroyed Certificates................. 5 1.13 Minute Books, Stock Ledger and Other Corporate Records. 5 1.14 Legends on BC Stock.................................... 5 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS...... 6 2.1 Organization, Good Standing and Qualification.......... 6 2.2 Capitalization; Voting Rights.......................... 6 2.3 Authority; No Violation................................ 7 2.4 Consents and Approvals................................. 8 2.5 Financial Statements................................... 8 2.6 Absence of Undisclosed Liabilities..................... 9 2.7 Agreements; Action..................................... 9 2.8 Obligations to Related Parties......................... 9 2.9 Title to Properties and Assets; Liens, Etc............. 10 2.10 Patents and Trademarks................................. 10 2.11 Compliance with Other Instruments...................... 10 2.12 Litigation............................................. 11 2.13 Tax Returns and Payments............................... 11 2.14 Employees.............................................. 11 2.15 Nondisclosure and Developments Agreements.............. 12 2.16 Registration Rights.................................... 12 2.17 Compliance with Laws; Permits.......................... 12 2.18 Absence of Breaches or Defaults........................ 12 2.19 Brokers................................................ 12 2.20 No Misstatements....................................... 13 2.21 Environmental and Safety Laws.......................... 13 2.22 Year 2000 Compliance................................... 13 2.23 Securities Law Exemption............................... 13 ARTICLE III REPRESENTATIONS AND WARRANTIES OF BC AND MERGER SUB.................................................... 14
3.1 Organization, Good Standing and Qualification.......... 14 3.2 Capitalization; Voting Rights.......................... 15 3.3 Authority; No Violation................................ 15 3.4 Consents and Approvals................................. 16 3.5 Financial Statements................................... 16 3.6 Absence of Undisclosed Liabilities..................... 16 3.7 Agreements; Action..................................... 16 3.8 Obligations to Related Parties......................... 17 3.9 Title to Properties and Assets; Liens, Etc............. 17 3.10 Patents and Trademarks................................. 18 3.11 Compliance with Other Instruments...................... 18 3.12 Litigation............................................. 18 3.13 Tax Returns and Payments............................... 19 3.14 Employees.............................................. 19 3.15 Nondisclosure and Developments Agreements.............. 19 3.16 Registration Rights.................................... 19 3.17 Compliance with Laws; Permits.......................... 20 3.18 Absence of Breaches or Defaults........................ 20 3.19 Brokers................................................ 20 3.20 No Misstatements....................................... 20 3.21 Environmental and Safety Laws.......................... 20 3.22 Year 2000 Compliance................................... 21 3.23 Tax-Free Organization.................................. 21 ARTICLE IV ADDITIONAL AGREEMENTS................................... 21 4.1 Information Statement; Restricted Securities........... 21 4.2 Stockholder Approval................................... 22 4.3 Access to Information.................................. 22 4.4 Expenses............................................... 23 4.5 Public Disclosure...................................... 23 4.6 Approvals.............................................. 23 4.7 Notification of Certain Matters........................ 23 4.8 Additional Documents and Further Assurances............ 23 4.9 Maintenance of Business................................ 24 4.10 Conduct of Business.................................... 24 4.11 Confidentiality........................................ 25 4.12 "Market Stand-Off"Agreement............................ 26 4.13 BuyGolf's 1998 Stock Option Plan....................... 26 4.14 Necessary Filings...................................... 27 ARTICLE V CONDITIONS PRECEDENT TO OBLIGATIONS OF BC AND MERGER SUB.............................................. 27 5.1 Certificates for BuyGolf Common Stock.................. 27 5.2 Representations and Warranties True.................... 27 5.3 Covenants Performed.................................... 27 5.4 Certificate............................................ 27 5.5 No Violations; No Actions.............................. 27
ii 5.6 Proceedings and Documents.............................. 27 5.7 Delivery of Documents.................................. 28 5.8 Required Consents...................................... 28 5.9 Private Placement...................................... 28 5.10 Tax-Free Reorganization................................ 28 5.11 Limitation on Dissent.................................. 28 ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYGOLF AND THE STOCKHOLDERS........................................... 28 6.1 Representations and Warranties True.................... 28 6.2 Covenants Performed.................................... 28 6.3 Certificate............................................ 28 6.4 No Violations; No Actions.............................. 28 6.5 Proceedings and Documents.............................. 29 6.6 Delivery of Documents.................................. 29 6.7 Required Consents...................................... 29 ARTICLE VII CLOSING................................................ 29 7.1 Time and Place......................................... 29 7.2 Deliveries of the Stockholders......................... 29 7.3 Deliveries of BC....................................... 31 7.4 Certificate of Merger.................................. 32 ARTICLE VIII INDEMNIFICATION....................................... 32 8.1 Indemnification by the Stockholders.................... 32 8.2 Indemnification by BC, Merger Sub and Surviving Corporation............................................ 32 8.3 Indemnification Procedure for Claims................... 33 8.4 Defense by Indemnifying Party.......................... 33 8.5 Arbitration............................................ 34 8.6 Limits on Indemnification.............................. 34 ARTICLE IX GENERAL PROVISIONS...................................... 34 9.1 Survival of Representations, Warranties and Agreements. 34 9.2 Notices................................................ 35 9.3 Governing Law.......................................... 35 9.4 Severability........................................... 36 9.5 Assignment; Binding Effect; Benefit.................... 36 9.6 Headings............................................... 36 9.7 Entire Agreement....................................... 36 9.8 Counterparts........................................... 37 9.9 Waivers................................................ 37 9.10 Third Parties.......................................... 37 9.11 Publicity.............................................. 37 9.12 Schedules.............................................. 37
iii AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ----------------------------------------------- THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (the "Agreement") --------- is entered into as of October 25, 1999, by and among BUY.COM INC., a Delaware corporation ("BC"), BGLF Acquisition Corporation a Delaware corporation and -- wholly owned subsidiary of BC ("Merger Sub"), BuyGolf.com Inc., a Delaware ---------- corporation ("BuyGolf"), and each of BuyGolf's current stockholders listed on ------- Schedule A hereto (individually, a "Stockholder," collectively, the - ---------- ----------- "Stockholders"). ------------ RECITALS A. The Boards of Directors of BC and BuyGolf believe it is in the best interest of their respective companies and the stockholders of their respective companies that BuyGolf and Merger Sub combine into a single company through the statutory merger of Merger Sub with and into BuyGolf (the "Merger") ------ and, in furtherance thereof, have approved the Merger. B. BuyGolf is a duly incorporated Delaware corporation; its authorized capital stock consists of: (i) 10,000,000 shares of common stock, $0.0001 par value, 8,367,166 of which are issued and outstanding; and (ii) 5,000,000 shares of preferred stock, $0.0001 par value, none of which are issued and outstanding (collectively, the outstanding shares of Common Stock shall be referred to as the "BuyGolf Common Stock"). -------------------- C. Pursuant to the Merger, among other things, all BuyGolf Common Stock owned by the Stockholders, as set forth on Schedule A hereto, shall be ---------- converted into the right to receive shares of BC Common Stock, $.0001 par value ("BC Stock"), at the rate set forth herein. -------- D. There are currently outstanding options to purchase 449,000 shares of Common Stock of BuyGolf (the "Outstanding Options"), and all of the Outstanding Options are owned by the optionholders as set forth on Schedule B ---------- attached hereto. E. BC shall assume the Outstanding Options to purchase shares of BuyGolf Common Stock. F. BuyGolf, BC and Merger Sub desire to make certain representations and warranties and other agreements in connection with the Merger. G. BC, Merger Sub and BuyGolf intend that the Merger shall constitute a reorganization within the meaning of Section 368(a) of the Internal Revenue Code, and in furtherance thereof intend that this Agreement shall be a "Plan of Reorganization" within the meaning of Sections 354(a) and 361(a) of the Internal Revenue Code. NOW, THEREFORE, in consideration of the covenants and representations set forth herein, and for other good and valuable consideration, the parties agree as follows: 1 ARTICLE I THE MERGER ---------- 1.1 The Merger. At the Effective Time (as defined in Section 1.2) ---------- and subject to and upon the terms and conditions of this Agreement, Merger Sub shall be merged with and into BuyGolf, the separate corporate existence of Merger Sub shall cease and BuyGolf shall continue as the surviving corporation. BuyGolf as the surviving corporation after the Merger is hereinafter sometimes referred to as the "Surviving Corporation." --------------------- 1.2 Closing; Effective Time. The closing of the transactions ----------------------- contemplated hereby (the "Closing") shall take place as soon as practicable ------- after the satisfaction or waiver of each of the conditions set forth in Articles V and VI hereof or at such other time as the parties hereto agree (the "Closing Date"). The Closing shall take place at the offices of Brobeck, ------------ Phleger & Harrison LLP, 38 Technology Drive, Irvine, California 92618, or at such other location as the parties hereto agree. In connection with the Closing, the parties hereto shall cause the Merger to be consummated by properly executing and filing the Certificate of Merger in the form attached hereto as Exhibit A (the "Certificate of Merger") with the Delaware Secretary of State in - --------- --------------------- accordance with the applicable provisions of the Delaware General Corporation Law (the "Delaware Law"). The Merger shall become effective upon the filing of ------------ the Certificate of Merger with the Delaware Secretary of State (the time of such filing being the "Effective Time"). -------------- 1.3 Effect of the Merger. At the Effective Time, the effect of the -------------------- Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of Delaware Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, powers and franchises of BuyGolf and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of BuyGolf and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation. 1.4 Certificate of Incorporation; Bylaws. ------------------------------------ (a) At the Effective Time, the Certificate of Incorporation of Merger Sub, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation until thereafter amended as provided by Delaware Law and such Certificate of Incorporation. (b) The Bylaws of Merger Sub, as in effect immediately prior to the Effective Time, shall be the Bylaws of the Surviving Corporation until thereafter amended. 1.5 Directors and Officers. At the Effective Time, the directors and ---------------------- officers of the Merger Sub shall become the directors and officers of the Surviving Corporation, until their respective successors are duly elected or appointed and qualified. 1.6 Effect on Capital Stock. By virtue of the Merger and without any ----------------------- action on the part of Merger Sub, BuyGolf or the holders of any of the following securities: (a) Conversion of BuyGolf Common Stock. At the Effective Time, ---------------------------------- each share of BuyGolf Common Stock issued and outstanding immediately prior to the Effective Time (other than the Outstanding Options) will be canceled and extinguished and will be 2 converted automatically into the right to receive 0.520 validly issued, fully paid and non-assessable shares of BC Stock (the "Exchange Ratio"). -------------- (b) Assumption of Outstanding Options. At the Effective Time, --------------------------------- BuyGolf's 1998 Stock Option Plan (the "BuyGolf Stock Option Plan") and all Outstanding Options to purchase BuyGolf Common Stock then outstanding under the BuyGolf Stock Option Plan shall be assumed by BC in accordance with Sections 1.8 and 4.13 of this Agreement. Pursuant to this assumption of the Outstanding Options, each optionholder of the Company shall after the Closing hold an option to purchase the number of shares of the BC's Common Stock set forth opposite such optionholder's name on Schedule B. Each optionholder shall enter into an ---------- Option Assumption Agreement which shall govern the assumption of options by BC. (c) Cancellation of BC-Owned and BuyGolf-Owned Stock. Each ------------------------------------------------ share of BuyGolf Common Stock owned by BC or BuyGolf or any subsidiary of BC or BuyGolf immediately prior to the Effective Time shall be automatically canceled and extinguished without any conversion thereof and without any further action on the part of BC, Merger Sub or BuyGolf. (d) Capital Stock of Merger Sub. At the Effective Time, each --------------------------- share of Common Stock, $.0001 par value, of Merger Sub ("Merger Sub Common Stock") issued and outstanding immediately prior to the ----------------------- Effective Time shall be converted into and exchanged for one validly issued, fully paid and nonassessable share of Common Stock of the Surviving Corporation. Each stock certificate of Merger Sub evidencing ownership of any such shares shall evidence ownership of such shares of capital stock of the Surviving Corporation. (e) Adjustments to Exchange Ratio. The Exchange Ratio shall be ----------------------------- adjusted to reflect fully the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into BC Stock or BuyGolf Common Stock), reorganization, recapitalization or other like change with respect to BC Stock or BuyGolf Common Stock occurring after the date hereof and prior to the Effective Time. (f) Fractional Shares. No fraction of a share of BC Stock will ----------------- be issued in the Merger and the number of shares of BC Stock issuable to a Stockholder hereunder shall be rounded upward to the nearest whole share of BC Stock. 1.7 No Further Ownership Rights in BuyGolf Common Stock. All shares --------------------------------------------------- of BC Stock issued upon the surrender for exchange of shares of BuyGolf Common Stock in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of BuyGolf Common Stock, and there shall be no further registration of transfers on the records of the Surviving Corporation of shares of BuyGolf Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates (as defined below) are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article I. 1.8 Options to Purchase BuyGolf Common Stock. At the Effective Time, ---------------------------------------- each option granted by BuyGolf to purchase shares of BuyGolf Common Stock (each, a "BuyGolf Stock Option") which is outstanding and unexercised immediately prior -------------------- to the Effective Time shall be assumed by BC and converted into an option to purchase shares of BC 3 Stock in such number and at such exercise price as provided below and otherwise having the same terms and conditions as in effect immediately prior to the Effective Time (except to the extent that such terms, conditions and restrictions may be altered in accordance with their terms as a result of the Merger): (a) the number of shares of BC Stock to be subject to the new option shall be equal to the product of (i) the number of shares of BuyGolf Common Stock subject to the original option and (ii) the Exchange Ratio; (b) the exercise price per share of BC Stock under the new option shall be equal to the quotient of (i) the exercise price per share of BuyGolf Common Stock under the original option divided by (ii) the Exchange Ratio; and (c) upon each exercise of options by a holder thereof, the aggregate number of shares of BC Stock deliverable upon such exercise shall be rounded down, if necessary, to the nearest whole share and the aggregate exercise price shall be rounded up, if necessary, to the nearest cent. The adjustments provided herein with respect to any options which are "incentive --------- stock options" (as defined in Section 422 of the Code) shall be effected in a - ------------- manner consistent with the requirements of Section 424(a) of the Code. 1.9 Taking of Necessary Action; Further Action. If, at any time after ------------------------------------------ the Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of BuyGolf and Merger Sub, the officers and directors of BuyGolf and Merger Sub are fully authorized in the name of their respective corporations or otherwise to take, and will take, all such lawful and necessary action, so long as such action is not inconsistent with this Agreement. 1.10 Surrender of Certificates. ------------------------- (a) Exchange Procedures. Promptly after the Effective Time, each ------------------- holder of record of a certificate or certificates ("Certificates") which ------------ immediately prior to the Effective Time represented outstanding shares of BuyGolf Common Stock, whose shares were converted into the right to receive shares of BC Stock, shall surrender such Certificates (duly endorsed in favor of BC or accompanied by stock powers duly executed in favor of and in a form reasonably acceptable to BC and its counsel, free from any charge, lien, encumbrance or adverse claim of any kind whatsoever) in exchange for certificates representing shares of BC Stock (and cash in lieu of fractional shares). Upon surrender of a Certificate for cancellation to BC, the holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing the number of whole shares of BC Stock which such holder has the right to receive pursuant to Section 1.6 of this Agreement, and the Certificate so surrendered shall forthwith be canceled. Until so surrendered, each outstanding Certificate that, prior to the Effective Time, represented shares of BuyGolf Common Stock will be deemed from and after the Effective Time, for all corporate purposes, other than the payment of dividends, to evidence the ownership of the number of full shares of BC Stock into which such shares of BuyGolf Common Stock shall have been so converted in accordance with Article I hereof. 4 (b) Distributions With Respect to Unexchanged Shares. No ------------------------------------------------ dividends or other distributions with respect to BC Stock with a record date after the Effective Time will be paid to the holder of any unsurrendered Certificate with respect to the shares of BC Stock represented thereby until the holder of record of such Certificate shall surrender such Certificate. Subject to applicable law, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole shares of BC Stock issued in exchange therefor, without interest, at the time of such surrender, the amount of any such dividends or other distributions with a record date after the Effective Time theretofore payable (but for the provisions of this Section 1.10(b)) with respect to such shares of BC Stock. (c) Transfers of Ownership. If any certificate for shares of BC ---------------------- Stock is to be issued in a name other than that in which the Certificate surrendered in exchange therefor is registered, it will be a condition of the issuance thereof that the Certificate so surrendered will be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange will have paid to BC or any agent designated by it any transfer or other taxes required by reason of the issuance of a certificate for shares of BC Stock in any name other than that of the registered holder of the Certificate surrendered, or established to the satisfaction of BC or any agent designated by it that such tax has been paid or is not payable. (d) No Liability. Notwithstanding anything to the contrary in ------------ this Section 1.10, neither the Surviving Corporation nor any party hereto shall be liable to any person for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar law. 1.11 Consent to Merger; Waiver of Dissenters' Rights. By their ----------------------------------------------- execution of this Agreement, each Stockholder (a) consents to the Merger and to the taking of stockholder action to approve the Merger without a meeting; (b) acknowledges that he or it is aware of his or its right to dissent to the Merger and demand payment for shares of BuyGolf Common Stock in accordance with Delaware Law; and (c) waives such rights to dissent and demand payment with respect to the Merger. 1.12 Lost, Stolen or Destroyed Certificates. In the event any -------------------------------------- Certificates shall have been lost, stolen or destroyed, BC shall issue in exchange for such lost, stolen or destroyed Certificates, upon the making of an affidavit of that fact by the holder thereof, such shares of BC Stock as may be required pursuant to Section 1.6; provided, however, that BC may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against BC or the Surviving Corporation or with respect to the Certificates alleged to have been lost, stolen or destroyed. 1.13 Minute Books, Stock Ledger and Other Corporate Records. At the ------------------------------------------------------ Closing, BuyGolf shall deliver to BC, in addition to those items set forth in Section 7.2, the minute books, stock ledger and other corporate records of BuyGolf. 1.14 Legends on BC Stock. In addition to any other legend that may be ------------------- required by federal or state securities laws, each certificate for BC Stock that is issued hereunder shall bear a legend in substantially the following form: 5 "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES, OR DELIVERY OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER OF SUCH SECURITIES THAT SUCH OFFER, SALE, TRANSFER, PLEDGE OR HYPOTHECATION IS IN FULL COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, OR UNLESS SOLD IN COMPLIANCE WITH RULE 144 UNDER SUCH ACT." ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS -------------------------------------------------- Except as set forth on the Disclosure Schedule delivered to BC, which has been executed by an officer of BuyGolf on behalf of the Stockholders (the "BuyGolf Disclosure Schedule"), each of the Stockholders jointly and severally --------------------------- represent and warrant to BC as follows: 2.1 Organization, Good Standing and Qualification. BuyGolf is a --------------------------------------------- corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. BuyGolf has all requisite corporate power and authority to own and operate its properties and assets, to execute and deliver this Agreement and to carry out the provisions of this Agreement, and to carry on its business as presently conducted and as presently proposed to be conducted. BuyGolf is duly qualified and is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) make such qualifications necessary, except for those jurisdictions in which failure to do so would not have a material adverse effect on BuyGolf or its business. BuyGolf owns no equity securities of any other corporation, limited partnership or similar entity. BuyGolf is not a participant in any joint venture, partnership or similar arrangement. BuyGolf has made available to BC true, correct and complete copies of BuyGolf's Certificate of Incorporation and Bylaws, each as amended to date and presently in effect. 2.2 Capitalization; Voting Rights. ----------------------------- (a) The authorized capital stock of BuyGolf, immediately prior to the Closing, will consist of (a) 10,000,000 shares of Common Stock, 8,367,166 of which are issued and outstanding, 499,000 shares of which are currently reserved for issuance pursuant to outstanding option agreements, and 401,000 of which will be reserved in the future for issuance to key employees, consultants and others affiliated with BuyGolf pursuant to stock grant, stock purchase and/or option plans or any other stock incentive program, arrangement or agreement approved by BuyGolf's Board of Directors and (b) 5,000,000 shares of Preferred Stock (the "Preferred Stock"), none of which are issued and --------------- outstanding. All issued and outstanding shares of BuyGolf's Common Stock (i) have been duly authorized and validly issued, (ii) are fully paid 6 and nonassessable, (iii) are free of liens and encumbrances created by BuyGolf and (iv) were issued in compliance with all applicable state and federal laws concerning the issuance of securities. The rights, preferences, privileges and restrictions of the BuyGolf Common Stock are as stated in BuyGolf's Certificate of Incorporation. Except for BuyGolf's Outstanding Options, there are no outstanding options, warrants, puts, calls, rights (including conversion or preemptive rights and rights of first refusal), or agreements of any kind for the purchase or acquisition from BuyGolf of any of its securities or other restrictions on the incidents of ownership or transfer created by statute, the charter documents of BuyGolf or any agreement to which BuyGolf is a party or by which it is bound. There are no amounts owed to any person by BuyGolf as a result of any repurchase or redemption by BuyGolf of its Common Stock. (b) Stockholders own all the BuyGolf Common Stock free and clear of all liens, encumbrances, rights, charges and assessments of every nature and no shares of BuyGolf Common Stock are subject to any restriction on transferability. Stockholders have not granted any option, warrant or right to purchase or acquire any of the BuyGolf Common Stock nor have Stockholders entered into any contract, agreement, commitment, understanding or arrangement relating to the BuyGolf Common Stock, or by which Stockholders are or may be bound or obligated to transfer or dispose of any of the BuyGolf Common Stock. No Stockholder has been married since formation of BuyGolf except to the persons signing Spousal Consents to this Agreement, a form of which is attached hereto as Exhibit B. --------- (c) Stockholders shall transfer to BC hereunder good and marketable legal and beneficial title to the BuyGolf Common Stock, free and clear of all liens, encumbrances, rights, charges and assessments of any nature whatsoever. (d) There are no outstanding proxies, stockholders' agreements, voting trusts or other agreements of any kind whatsoever restricting, controlling, directing or otherwise affecting the voting of the BuyGolf Common Stock. 2.3 Authority; No Violation. ----------------------- (a) BuyGolf has full corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of BuyGolf. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by stockholders representing one hundred percent of the outstanding shares of BuyGolf's capital stock. No other corporate proceeding on the part of BuyGolf is necessary to approve this Agreement and to consummate the transactions contemplated hereby. This Agreement and all other agreements and documents to be entered into in connection herewith have been duly and validly executed and delivered by BuyGolf and each of the Stockholders and (assuming due authorization, execution and delivery by BC) constitute valid and binding obligations of BuyGolf and each of the Stockholders, enforceable against BuyGolf and each of the Stockholders in accordance with their respective terms, except as enforcement may be limited by general principles of equity whether applied in a court of law or a court of equity and by bankruptcy, insolvency and similar laws affecting creditors' rights and remedies generally. 7 (b) Stockholders have the power and authority to enter into this Agreement and to perform their obligations hereunder and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Stockholders and constitutes a legal, valid and binding obligation of the Stockholders, enforceable against the Stockholders in accordance with the terms hereof. (c) Neither the execution and delivery of this Agreement by BuyGolf and each of the Stockholders, nor the consummation by BuyGolf and each of the Stockholders of the transactions contemplated hereby, nor compliance by BuyGolf and each of the Stockholders with any of the terms or provisions hereof, will (i) violate any provision of the Certificate of Incorporation or Bylaws of BuyGolf, or (ii) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to BuyGolf or any of the Stockholders or any of their respective properties or assets, or (iii) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any lien, pledge, security interest, charge or other encumbrance upon any of the properties or assets of BuyGolf or any of the Stockholders under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which BuyGolf or any of the Stockholders is a party, or by which BuyGolf or any of the Stockholders or any of their respective properties or assets may be bound or affected. 2.4 Consents and Approvals. No consents or approvals, orders or ---------------------- authorizations of or filings or registrations with any court, administrative agency or commission or other governmental authority or instrumentality (each a "Governmental Entity") or with any third party are necessary with respect to ------------------- BuyGolf or any of the Stockholders in connection with (1) the execution and delivery of this Agreement and (2) the consummation of the Merger and the other transactions contemplated hereby. 2.5 Financial Statements. BuyGolf has delivered true and correct -------------------- copies of its audited balance sheet as of December 31, 1998 and audited statements of operations, stockholders equity and cash flows for the one month period from inception and ended December 31, 1998 and the unaudited balance sheet ("Balance Sheet") as of June 30, 1999 (the "Balance Sheet Date") and the ------------- ------------------ unaudited statements of operations, stockholders' equity and cash flows for the six-month period ended June 30, 1999 (collectively, the "Financial Statements"). -------------------- Such Financial Statements have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout ---- the periods indicated and with each other (in the case of Financial Statements, subject to normal year-end adjustments and the absence of footnote disclosures). The Financial Statements (a) are complete and correct in all material respects, (b) are in accordance with BuyGolf's books and records, and (c) fairly present the financial condition and operating results of BuyGolf as of the dates, and for the periods indicated therein. Since the Balance Sheet Date, there has not been any material adverse change in the business, operations or financial condition of BuyGolf. Except as disclosed in the Financial Statements, BuyGolf is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. The books and records of BuyGolf have been, and are being, maintained in accordance with GAAP and any other applicable legal and accounting requirements. 8 2.6 Absence of Undisclosed Liabilities. BuyGolf has no material ---------------------------------- obligations or liabilities of any nature (matured or unmatured, fixed or contingent) other than (i) those set forth or adequately provided for in the Balance Sheet, (ii) those incurred in the ordinary course of business and not required to be set forth in the Balance Sheet under GAAP, (iii) those incurred in the ordinary course of business since the Balance Sheet Date and consistent with past practice, and (iv) those incurred in connection with the execution of this Agreement. 2.7 Agreements; Action. ------------------ (a) Except for agreements explicitly contemplated hereby, there are no agreements, understandings or proposed transactions between BuyGolf and any of its officers, directors, affiliates or any affiliate thereof. (b) There are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which BuyGolf is a party or to its knowledge by which it is bound which may involve (i) obligations (contingent or otherwise) of, or payments to, BuyGolf (other than obligations of, or payments to, BuyGolf arising in the ordinary course of business), or (ii) the license of any patent, copyright, trade secret or other proprietary right to or from BuyGolf (other than licenses arising from the purchase of "off the shelf" or other standard products), or (iii) provisions restricting or affecting the development, manufacture or distribution of BuyGolf's products or services, or (iv) indemnification by BuyGolf with respect to infringements of proprietary rights. (c) BuyGolf has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or any other liabilities (other than with respect to dividend obligations, distributions, indebtedness and other obligations incurred in the ordinary course of business or as disclosed in the Financial Statements), (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business, (v) entered into any material contract, other than in the ordinary course of business and as provided to BC, and there has not occurred any amendment, termination or default under any material contract to which BuyGolf is a party or by which it is bound, (vi) made any change in its accounting practices or made any revaluation of its assets, (vii) made any purchase or other acquisition of, sale, lease, disposition, or other transfer of, or mortgage, pledge or subjection to any material encumbrance or lien on any material asset, tangible or intangible, of BuyGolf, other than in the ordinary course of business, or (viii) made any sale, assignment, or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets, other than in the ordinary course of business. 2.8 Obligations to Related Parties. There are no obligations of ------------------------------ BuyGolf to officers, directors, stockholders, or employees of BuyGolf other than (a) for payment of salary for services rendered, (b) reimbursement for reasonable expenses incurred on behalf of BuyGolf and (c) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any stock option plan approved by the Board of Directors of BuyGolf). No officer, director or, to the best of BuyGolf's and the Stockholders knowledge, stockholder, or any member of their immediate families, are indebted to BuyGolf or have any direct or indirect ownership interest in any firm or corporation with 9 which BuyGolf is affiliated or with which BuyGolf has a business relationship, or any firm or corporation which competes with BuyGolf, except that officers, directors and/or stockholders of BuyGolf may own stock in publicly traded companies which may compete with BuyGolf. No such officer, director or stockholder, or any member of their immediate families is, directly or indirectly, interested in any material contract with BuyGolf (other than such contracts related to any such person's ownership of capital stock or other securities of BuyGolf). 2.9 Title to Properties and Assets; Liens, Etc. BuyGolf has good and ------------------------------ marketable title to its properties and assets, and good title to its leasehold estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (i) those resulting from taxes which have not yet become delinquent, (ii) minor liens and encumbrances which do not materially detract from the value of the property subject thereto or materially impair the operations of BuyGolf and (iii) those that have otherwise arisen in the ordinary course of business. All facilities, machinery, equipment, fixtures, vehicles and other properties owned, leased or used by BuyGolf are in good operating condition and repair and are reasonably fit and usable for the purposes for which they are being used. BuyGolf is in compliance with all material terms of each lease to which it is a party or is otherwise bound. 2.10 Patents and Trademarks. BuyGolf owns or possesses sufficient ---------------------- legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, information and other proprietary rights and processes necessary for its business as now conducted and as proposed to be conducted, without any known infringement of the rights of others. There are no outstanding options, licenses or agreements of any kind relating to the foregoing, nor is BuyGolf bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes of any other person or entity other than such licenses or agreements arising from the purchase of "off the shelf" or standard products. BuyGolf has not received any communications alleging that BuyGolf has violated or, by conducting its business as proposed, would violate any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity. BuyGolf is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments or any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with their duties to BuyGolf's business by the employees of BuyGolf, nor the conduct of BuyGolf's business as proposed, will, to BuyGolf's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any employee is now obligated. BuyGolf does not believe it is or will be necessary to utilize any inventions, trade secrets or proprietary information of any of its employees made prior to their employment by BuyGolf, except for inventions, trade secrets or proprietary information that have been assigned to BuyGolf. 2.11 Compliance with Other Instruments. BuyGolf is not in violation --------------------------------- or default of any term of its Certificate of Incorporation or Bylaws, or of any provision of any mortgage, indenture, contract, agreement, instrument or contract to which it is party or by which it is bound or of any judgment, decree, order, writ or, to its knowledge, any statute, rule or regulation applicable to BuyGolf which, individually or in the aggregate, would materially and adversely affect the business, assets, liabilities, financial condition, operations or prospects of BuyGolf. The execution, delivery, and performance of and compliance with this Agreement and the related 10 agreements, and the Merger pursuant hereto, will not, with or without the passage of time or giving of notice, result in any such material violation, or be in conflict with or constitute a default under any such term, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of BuyGolf or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to BuyGolf, its business or operations or any of its assets or properties. 2.12 Litigation. There is no action, suit, proceeding or ---------- investigation pending or to BuyGolf's knowledge currently threatened against BuyGolf that questions the validity of this Agreement, or the right of BuyGolf to enter into such agreement, or to consummate the transactions contemplated hereby, or which might result, either individually or in the aggregate, in any material adverse change in the assets, condition, affairs or prospects of BuyGolf, financially or otherwise, or any change in the current equity ownership of BuyGolf, nor is BuyGolf aware that there is any basis for the foregoing. The foregoing includes, without limitation, actions pending or threatened (or any basis therefor known to BuyGolf) involving the prior employment of any of BuyGolf's employees, their use in connection with BuyGolf's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. BuyGolf is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by BuyGolf currently pending or which BuyGolf intends to initiate. 2.13 Tax Returns and Payments. BuyGolf has timely filed all tax ------------------------ returns (federal, state and local) required to be filed by it. All taxes shown to be due and payable on such returns, any assessments imposed, and to BuyGolf's knowledge all other taxes due and payable by BuyGolf on or before the Closing have been paid or will be paid prior to the time they become delinquent. BuyGolf has not been advised (i) that any of its returns, federal, state or other, have been or are being audited as of the date hereof, or (ii) of any deficiency in assessment or proposed judgment to its federal, state or other taxes. BuyGolf has no knowledge of any liability of any tax to be imposed upon its properties or assets as of the date of this Agreement that is not adequately provided for. 2.14 Employees. BuyGolf has no collective bargaining agreements with --------- any of its employees. There is no labor union organizing activity pending or, to BuyGolf's knowledge, threatened with respect to BuyGolf. No employee has any agreement or contract, written or verbal, regarding his employment. To BuyGolf's knowledge, no employee of BuyGolf, nor any consultant with whom BuyGolf has contracted, is in violation of any term of any employment contract, proprietary information agreement or any other agreement relating to the right of any such individual to be employed by, or to contract with, BuyGolf because of the nature of the business to be conducted by BuyGolf; and to BuyGolf's knowledge the continued employment by BuyGolf of its present employees, and the performance of BuyGolf's contracts with its independent contractors, will not result in any such violation. BuyGolf has not received any notice alleging that any such violation has occurred. No employee of BuyGolf has been granted the right to continued employment by BuyGolf or to any material compensation following termination of employment with BuyGolf. BuyGolf is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with BuyGolf, nor does BuyGolf have a present intention to terminate the employment of any officer, key employee or group of key employees. 11 2.15 Nondisclosure and Developments Agreements. Each current employee ----------------------------------------- and officer of BuyGolf has executed, or will execute prior to or at Closing, a Proprietary Information and Inventions Agreement in the form attached hereto as Exhibit C. To BuyGolf's knowledge, no current employee, officer or consultant of BuyGolf has excluded works or inventions made prior to his or her employment with BuyGolf from his or her assignment of inventions pursuant to such employee, officer or consultant's agreement. BuyGolf, after reasonable investigation, is not aware that any of its employees, officers or consultants is in violation thereof and BuyGolf will use its best efforts to prevent any such violation. 2.16 Registration Rights. BuyGolf is presently not under any ------------------- obligation, and has not granted any rights, to register any of BuyGolf's presently outstanding securities or any of its securities that may hereafter be issued. 2.17 Compliance with Laws; Permits. BuyGolf is not in violation of ----------------------------- any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties which violation would materially and adversely affect the business, assets, liabilities, financial condition, operations or prospects of BuyGolf. No governmental orders, permissions, consents, approvals or authorizations are required to be obtained and no registrations or declarations are required to be filed in connection with the execution and delivery of this Agreement and the sale and delivery of the BuyGolf Common Stock, or the other transactions to be consummated at the Closing, as contemplated in this Agreement. BuyGolf has all franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which, individually or in the aggregate, could materially and adversely affect the business, properties, prospects or financial condition of BuyGolf and believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. 2.18 Absence of Breaches or Defaults. BuyGolf is not and, to the ------------------------------- knowledge of BuyGolf, no other party is, in default under, or in breach or violation of, any material contract and, to the knowledge of the Stockholders, no event has occurred which, with the giving of notice or passage of time or both would constitute a default under any such material contract. Other than contracts which have terminated or expired in accordance with their terms, each of BuyGolf's material contracts is valid, binding and enforceable in accordance with its terms (subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered on a proceeding in equity or at law) and an implied covenant of good faith and fair dealing) and is in full force and effect, and assuming all consents required by the terms thereof or applicable law have been obtained, such contracts will continue to be valid, binding and enforceable in accordance with their respective terms and in full force and effect immediately following the consummation of the transactions contemplated hereby. No event has occurred which either entitles, or would, on notice or lapse of time or both, entitle the holder of any indebtedness for borrowed money affecting BuyGolf to accelerate, or which does accelerate, the maturity of any indebtedness affecting BuyGolf. 2.19 Brokers. Neither BuyGolf nor any of its officers or directors ------- has employed any broker or finder or incurred any liability for any broker's fees, commissions or finder's fees in connection with any of the transactions contemplated by this Agreement. 12 2.20 No Misstatements. Neither this Agreement, nor any other ---------------- document, certificate or written statement prepared by BuyGolf and/or the Stockholders and furnished to BC in connection herewith, contain any untrue statement of material fact or omits to state a material fact known to BuyGolf or any Stockholder necessary in order to make the statements contained herein and therein not misleading as of the date thereof or hereof. There is no fact known to any Stockholder, in a Stockholder's individual capacity or in a Stockholder's capacity as an officer and/or director of BuyGolf, which adversely affects the business or financial condition or operations of BuyGolf, which has not been set forth in this Agreement. 2.21 Environmental and Safety Laws. BuyGolf is not in violation of ----------------------------- any applicable statute, law or regulation relating to the environment or occupational health and safety, and to its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 2.22 Year 2000 Compliance. BuyGolf has reviewed the areas within its -------------------- business and operations which could be adversely affected by Year 2000 issues and evaluated the costs associated with modifying and testing its systems for the Year 2000. BuyGolf does not believe that the cost of Year 2000 compliance for its internal information systems will be material to BuyGolf or that it will have a material adverse effect on BuyGolf's business, financial condition or results of operations. 2.23 Securities Law Exemption. Each Stockholder as to itself severally and not jointly hereby represents and warrants to BC that: (a) Purchase Entirely for Own Account. This Agreement is made with each Stockholder in reliance upon such Stockholder's representation to BC, which by such execution of this Agreement such Stockholder hereby confirms, that the BC Stock will be acquired for investment for its own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that such Stockholder has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, each Stockholder further represents that such Stockholder does not have any contract, undertaking, agreement or arrangement with any third party to sell, transfer or grant participations to such third party or to any third person, with respect to any of the BC Stock . (b) Reliance Upon Stockholders' Representations. Each ------------------------------------------- Stockholder understands that the BC Stock is not registered under the Securities Act of 1933 (the "Securities Act") on the ground that the sale provided for in this Agreement and the issuance of securities hereunder is exempt from registration under the Securities Act pursuant to section 4(2) thereof and Regulation D promulgated thereunder, and that BC's reliance on such exemption is predicated on the Stockholder's representations set forth herein. (c) Receipt of Information. Each Stockholder believes he/she has received all the information necessary or appropriate for deciding whether to acquire the BC Stock. Each Stockholder further represents that it has had an opportunity to ask questions and receive answers from BC regarding the terms and conditions of the acquisition of BuyGolf and the business, properties, prospects and financial condition of BC and to obtain additional information (to the extent BC possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to 13 it or to which it had access. (d) Investment Experience. Each Stockholder acknowledges that his or --------------------- her investment in BC Stock involves a high degree of risk. Further, each Stockholder represents that he/she is experienced in evaluating and investing in securities of companies in the development stage and acknowledges that he/she is able to fend for himself/herself, can bear the economic risk of his/her investment, and has such knowledge and experience in financial or business matters that he/she is capable of evaluating the merits and risks of the investment in the BC Stock. (e) Accredited Investor. Each Stockholder is an "accredited ------------------- investor" within the meaning of SEC Rule 501 of Regulation D, as presently in effect. (f) Restricted Securities. Each Stockholder understands that the BC --------------------- Stock may not be sold, transferred, or otherwise disposed of without registration under the Securities Act or an exemption therefrom, and that in the absence of an effective registration statement covering the BC Stock or an available exemption from registration under the Securities Act, the BC Stock must be held indefinitely. In particular, each Stockholder is aware that the BC Stock may not be sold pursuant to Rule 144 promulgated under the Securities Act unless all of the conditions of that Rule are met. Among the conditions for use of Rule 144 is the availability of current information to the public about BC. Such information is not now available. ARTICLE III REPRESENTATIONS AND WARRANTIES OF BC AND MERGER SUB --------------------------------------------------- Except as set forth on the BC Disclosure Schedule attached hereto (the "BC -- Disclosure Schedule") BC and Merger Sub, jointly and severally, represent and - ------------------- warrant to BuyGolf and the Stockholders as follows: 3.1 Organization, Good Standing and Qualification. Each of BC and Merger --------------------------------------------- Sub is a duly organized corporation, validly existing and in good standing under the laws of the State of Delaware. Prior to the date hereof, Merger Sub has not engaged in any activity other than the transactions contemplated by this Agreement. Each of BC and Merger Sub has all requisite corporate power and authority to own and operate its properties and assets, to execute and deliver this Agreement and to carry out the provisions of this Agreement, and to carry on its business as presently conducted and as presently proposed to be conducted. Each of BC and Merger Sub is duly qualified and is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) make such qualifications necessary, except for those jurisdictions in which failure to do so would not have a material adverse effect on BC, Merger Sub or their businesses. Neither BC nor Merger Sub owns equity securities of any other corporation, limited partnership or similar entity. Neither BC nor Merger Sub is a participant in any joint venture, partnership or similar arrangement. BC and Merger Sub have each made available to BuyGolf true, correct and complete copies of their Certificates of Incorporation and Bylaws, each as amended to date and presently in effect. 14 3.2 Capitalization; Voting Rights. The authorized capital stock of ----------------------------- BC, immediately prior to the Closing, will consist of (a) eight hundred fifty million (850,000,000) shares of Common Stock, one hundred forty-two million nine hundred twenty-two thousand eight hundred ten (142,922,810) shares of which are issued and outstanding, thirty million five hundred eighty-three thousand five hundred (30,583,500) shares of which are currently reserved for issuance pursuant to outstanding option agreements, and seven hundred eighty-eight thousand four hundred sixty (788,460) shares of which will be reserved in the future for issuance to key employees, consultants and others affiliated with BC pursuant to stock grant, stock purchase and/or option plans or any other stock incentive program, arrangement or agreement approved by BC's Board of Directors and (b) one hundred fifty million (150,000,000) shares of Preferred Stock (the "Preferred Stock") , 19,481,130 of which are designated Series A Convertible Participating Preferred Stock, all of which are issued and outstanding and 15,877,249 of which are designated Series B Convertible Participating Preferred Stock, all of which are issued and outstanding. The authorized capital stock of Merger Sub consists of one thousand (1,000) shares of common stock, $0.0001 par value, all of which are issued and outstanding and held by BC. All issued and outstanding shares of BC and Merger Sub capital stock (i) have been duly authorized and validly issued, (ii) are fully paid and nonassessable, (iii) are free of liens and encumbrances created by BC or Merger Sub and (iv) were issued in compliance with all applicable state and federal laws concerning the issuance of securities. Except as may be granted pursuant to this Agreement and except as set forth above, there are no outstanding options, warrants, puts, calls, rights (including conversion or preemptive rights and rights of first refusal), proxy or stockholder agreements, or agreements of any kind for the purchase or acquisition from BC or Merger Sub of any of their securities or other restrictions on the incidents of ownership or transfer created by statute, the charter documents of BC or Merger Sub or any agreement to which BC or Merger Sub is a party or by which they are bound. 3.3 Authority; No Violation. ----------------------- (a) Each of BC and Merger Sub has full corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of BC. No other corporate proceedings on the part of BC or Merger Sub are necessary to approve this Agreement or to consummate the transactions contemplated hereby. This Agreement and all other agreements and documents to be entered into in connection herewith have been duly and validly executed and delivered by BC and Merger Sub, and (assuming due authorization, execution and delivery by BuyGolf) constitute valid and binding obligations of BC and Merger Sub, enforceable against BC and Merger Sub in accordance with their respective terms, except as enforcement may be limited by general principles of equity whether applied in a court of law or a court of equity and by bankruptcy, insolvency and similar laws affecting creditors' rights and remedies generally. (b) Neither the execution and delivery of this Agreement by BC or Merger Sub, nor the consummation by BC or Merger Sub of the transactions contemplated hereby, nor compliance by BC or Merger Sub with any of the terms or provisions hereof, will (i) violate any provision of the Certificate of Incorporation or Bylaws of BC or Merger Sub, or (ii) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to BC or Merger Sub or any of its respective properties or assets, or 15 (iii) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any lien, pledge, security interest, charge or other encumbrance upon any of the properties or assets of BC or Merger Sub under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which BC or Merger Sub is a party, or by which BC or Merger Sub or any of their respective properties or assets may be bound or affected. 3.4 Consents and Approvals. No consents or approvals, orders or ---------------------- authorizations of or filings or registrations with any court, administrative agency or commission or other governmental authority or instrumentality or with any third party are necessary with respect to BC or Merger Sub in connection with (1) the execution and delivery of this Agreement and (2) the consummation of the Merger and the other transactions contemplated hereby. 3.5 Financial Statements. BC's unaudited balance sheet as of -------------------- December 31, 1998 and unaudited statements of operations and cash flows of BC for the 12-month period ended December 31, 1998 and BC's unaudited balance sheet as of June 30, 1999 (the Latest Balance Sheet") and unaudited statements of operations and cash flows of BC for the six-month period ending June 30, 1999 (the "BC Financial Statements") delivered to the Stockholders in connection with the investment contemplated hereby have been prepared in accordance with GAAP consistently applied (in the case of BC Financial Statements, subject to normal year-end adjustments and the absence of footnote disclosures) and fairly present in all material respects the financial position and the results of operations of BC for the periods covered thereby, and BC has no material liabilities or obligations of any nature (absolute, accrued, contingent or otherwise) that are not either reflected or fully reserved against on the Latest Balance Sheet or incurred in the ordinary course of the business of BC subsequent to the date thereof. Since the date of the Latest Balance Sheet, there has not been any material adverse change in the business, operations, financial condition or business of BC. 3.6 Absence of Undisclosed Liabilities. Neither BC nor Merger ---------------------------------- Sub has any material obligations or liabilities of any nature (matured or unmatured, fixed or contingent) other than (i) those set forth or adequately provided for in the Balance Sheet, (ii) those incurred in the ordinary course of business and not required to be set forth in the Balance Sheet under GAAP, (iii) those incurred in the ordinary course of business since the Balance Sheet Date and consistent with past practice, and (iv) those incurred in connection with the execution of this Agreement. 3.7 Agreements; Action. ------------------ (a) Except for agreements explicitly contemplated hereby, there are no agreements, understandings or proposed transactions between BC and any of its officers, directors, affiliates or any affiliate thereof. (b) There are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which BC or Merger Sub is a party or to its knowledge by which it is bound which may involve (i) obligations (contingent or otherwise) of, or payments to, BC or Merger Sub (other than obligations of, or payments to, BC 16 or Merger Sub arising in the ordinary course of business), or (ii) the license of any patent, copyright, trade secret or other proprietary right to or from BC or Merger Sub (other than licenses arising from the purchase of "off the shelf" or other standard products), or (iii) provisions restricting or affecting the development, manufacture or distribution of BC's or Merger Sub's products or services, or (iv) indemnification by BC or Merger Sub with respect to infringements of proprietary rights. (c) Neither BC nor Merger Sub has (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or any other liabilities (other than with respect to dividend obligations, distributions, indebtedness and other obligations incurred in the ordinary course of business or as disclosed in the BC Financial Statements), (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business, (v) entered into any material contract, other than in the ordinary course of business, and there has not occurred any amendment, termination or default under any material contract to which BC or Merger Sub is a party or by which it is bound, (vi) made any change in its accounting practices or made any revaluation of its assets, (vii) made any purchase or other acquisition of, sale, lease, disposition, or other transfer of, or mortgage, pledge or subjection to any material encumbrance or lien on any material asset, tangible or intangible, of BC or Merger Sub, other than in the ordinary course of business, or (viii) made any sale, assignment, or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets, other than in the ordinary course of business. 3.8 Obligations to Related Parties. There are no obligations of BC or ------------------------------ Merger Sub to its officers, directors, stockholders, or employees other than (a) for payment of salary for services rendered, (b) reimbursement for reasonable expenses incurred on behalf of BC or Merger Sub and (c) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any stock option plan approved by the Board of Directors of BC). No officer, director or, to the best of BC's or Merger Sub's knowledge, stockholder, or any member of their immediate families, are indebted to BC or Merger Sub or have any direct or indirect ownership interest in any firm or corporation with which BC or Merger Sub is affiliated or with which BC or Merger Sub has a business relationship, or any firm or corporation which competes with BC or Merger Sub, except that officers, directors and/or stockholders of BC and Merger Sub may own stock in publicly traded companies which may compete with BC or Merger Sub. No such officer, director or stockholder, or any member of their immediate families is, directly or indirectly, interested in any material contract with BC or Merger Sub (other than such contracts related to any such person's ownership of capital stock or other securities of BC). 3.9 Title to Properties and Assets; Liens, Etc. Each of BC and Merger ------------------------------------------ Sub has good and marketable title to its properties and assets, and good title to its leasehold estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (i) those resulting from taxes which have not yet become delinquent, (ii) minor liens and encumbrances which do not materially detract from the value of the property subject thereto or materially impair the operations of BC or Merger Sub and (iii) those that have otherwise arisen in the ordinary course of business. All facilities, machinery, equipment, fixtures, vehicles and other properties owned, leased or used by BC and Merger Sub are in good operating condition and 17 repair and are reasonably fit and usable for the purposes for which they are being used. BC and Merger Sub are in compliance with all material terms of each lease to which it is a party or is otherwise bound. 3.10 Patents and Trademarks. Each of BC and Merger Sub owns or ---------------------- possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, information and other proprietary rights and processes necessary for its business as now conducted and as proposed to be conducted, without any known infringement of the rights of others. There are no outstanding options, licenses or agreements of any kind relating to the foregoing, nor is BC or Merger Sub bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes of any other person or entity other than such licenses or agreements arising from the purchase of "off the shelf" or standard products. BC has not received any communications alleging that BC or Merger Sub has violated or, by conducting its business as proposed, would violate any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity. BC is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments or any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with their duties to BC's business by the employees of BC, nor the conduct of BC's business as proposed, will, to BC's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any employee is now obligated. BC does not believe it is or will be necessary to utilize any inventions, trade secrets or proprietary information of any of its employees made prior to their employment by BC, except for inventions, trade secrets or proprietary information that have been assigned to BC. 3.11 Compliance with Other Instruments. Neither BC nor Merger Sub is --------------------------------- in violation or default of any term of its Certificate of Incorporation or Bylaws, or of any provision of any mortgage, indenture, contract, agreement, instrument or contract to which it is party or by which it is bound or of any judgment, decree, order, writ or, to its knowledge, any statute, rule or regulation applicable to BC or Merger Sub which, individually or in the aggregate, would materially and adversely affect the business, assets, liabilities, financial condition, operations or prospects of BC or Merger Sub. The execution, delivery, and performance of and compliance with this Agreement and the related agreements, and the issuance of the BC Stock pursuant hereto, will not, with or without the passage of time or giving of notice, result in any such material violation, or be in conflict with or constitute a default under any such term, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of BC or Merger Sub or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to BC or Merger Sub, its business or operations or any of its assets or properties. 3.12 Litigation. There is no action, suit, proceeding or ---------- investigation pending or to BC's or Merger Sub's knowledge currently threatened against BC or Merger Sub that questions the validity of this Agreement or the right of BC or Merger Sub to enter into such agreement, or to consummate the transactions contemplated hereby, or which might result, either individually or in the aggregate, in any material adverse change in the assets, condition, affairs or prospects of BC or Merger Sub, financially or otherwise, or any change in the current equity 18 ownership of BC or Merger Sub, nor is BC or Merger Sub aware that there is any basis for the foregoing. The foregoing includes, without limitation, actions pending or threatened (or any basis therefor known to BC or Merger Sub) involving the prior employment of any of BC's employees, their use in connection with BC's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. Neither BC nor Merger Sub is a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by BC or Merger Sub currently pending or which BC or Merger Sub intends to initiate. 3.13 Tax Returns and Payments. BC has timely filed all tax returns ------------------------ (federal, state and local) required to be filed by it. All taxes shown to be due and payable on such returns, any assessments imposed, and to BC's knowledge all other taxes due and payable by BC on or before the Closing have been paid or will be paid prior to the time they become delinquent. BC has not been advised (i) that any of its returns, federal, state or other, have been or are being audited as of the date hereof, or (ii) of any deficiency in assessment or proposed judgment to its federal, state or other taxes. BC has no knowledge of any liability of any tax to be imposed upon its properties or assets as of the date of this Agreement that is not adequately provided for. 3.14 Employees. BC has no collective bargaining agreements with any --------- of its employees. There is no labor union organizing activity pending or, to BC's knowledge, threatened with respect to BC. No employee has any agreement or contract, written or verbal, regarding his employment. To BC's knowledge, no employee of BC, nor any consultant with whom BC has contracted, is in violation of any term of any employment contract, proprietary information agreement or any other agreement relating to the right of any such individual to be employed by, or to contract with, BC because of the nature of the business to be conducted by BC; and to BC's knowledge the continued employment by BC of its present employees, and the performance of BC's contracts with its independent contractors, will not result in any such violation. BC has not received any notice alleging that any such violation has occurred. No employee of BC has been granted the right to continued employment by BC or to any material compensation following termination of employment with BC. BC is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with BC, nor does BC have a present intention to terminate the employment of any officer, key employee or group of key employees. 3.15 Nondisclosure and Developments Agreements. Each current employee ----------------------------------------- and officer of BC has executed, or will execute prior to or at Closing, an Employee Nondisclosure and Developments Agreement in the form attached hereto as Exhibit D. To BC's knowledge, no current employee, officer or consultant of - --------- BC has excluded works or inventions made prior to his or her employment with BC from his or her assignment of inventions pursuant to such employee, officer or consultant's agreement. BC, after reasonable investigation, is not aware that any of its employees, officers or consultants is in violation thereof and BC will use its best efforts to prevent any such violation. 3.16 Registration Rights. BC is presently not under any obligation, ------------------- and has not granted any rights, to register any of BC's presently outstanding securities or any of its securities that may hereafter be issued. 19 3.17 Compliance with Laws; Permits. Neither BC nor Merger Sub is in ----------------------------- violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties which violation would materially and adversely affect its business, assets, liabilities, financial condition, operations or prospects. No governmental orders, permissions, consents, approvals or authorizations are required to be obtained and no registrations or declarations are required to be filed in connection with the execution and delivery of this Agreement and the offer, issuance, sale and delivery of the BC Stock, or the other transactions to be consummated at the Closing, as contemplated in this Agreement. BC and Merger Sub have all franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which, individually or in the aggregate, could materially and adversely affect the business, properties, prospects or financial condition of BC or Merger Sub and believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. 3.18 Absence of Breaches or Defaults. Neither BC nor Merger Sub is ------------------------------- and, to the knowledge of BC and Merger Sub, no other party is, in default under, or in breach or violation of, any material contract and no event has occurred which, with the giving of notice or passage of time or both would constitute a default under any such material contract. Other than contracts which have terminated or expired in accordance with their terms, each of BC's and Merger Sub's material contracts is valid, binding and enforceable in accordance with its terms (subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered on a proceeding in equity or at law) and an implied covenant of good faith and fair dealing) and is in full force and effect, and assuming all consents required by the terms thereof or applicable law have been obtained, such contracts will continue to be valid, binding and enforceable in accordance with their respective terms and in full force and effect immediately following the consummation of the transactions contemplated hereby. No event has occurred which either entitles, or would, on notice or lapse of time or both, entitle the holder of any indebtedness for borrowed money affecting BC or Merger Sub to accelerate, or which does accelerate, the maturity of any indebtedness affecting BC or Merger Sub. 3.19 Brokers. Neither BC nor any of its officers or directors has ------- employed any broker or finder or incurred any liability for any broker's fees, commissions or finder's fees in connection with any of the transactions contemplated by this Agreement. 3.20 No Misstatements. Neither this Agreement, nor any other ---------------- document, certificate or written statement prepared by BC or Merger Sub and furnished to BuyGolf in connection herewith, contain any untrue statement of material fact or omits to state a material fact known to BC necessary in order to make the statements contained herein and therein not misleading as of the date thereof or hereof. 3.21 Environmental and Safety Laws. BC is not in violation of any ----------------------------- applicable statute, law or regulation relating to the environment or occupational health and safety, and to its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 20 3.22 Year 2000 Compliance. BC has reviewed the areas within its -------------------- business and operations which could be adversely affected by Year 2000 issues and evaluated the costs associated with modifying and testing its systems for the Year 2000. BC does not believe that the cost of Year 2000 compliance for its internal information systems will be material to BC or that it will have a material adverse effect on BC's business, financial condition or results of operations. 3.23 Tax-Free Organization. --------------------- (a) Prior to the Closing, all of the shares of capital stock of the Merger Sub are owned by BC. (b) BC has no current plan or intention to (i) reacquire any of the BC Stock issued in connection with the transactions contemplated by this Agreement such as would result in the BuyGolf stockholders not to satisfy the continuity of interest requirements of Treasury Regulation Section 1.368-1 and 1.368-1T; (ii) liquidate the Surviving Corporation; (iii) merge the Surviving Corporation with or into another entity; (iv) sell a number of shares of BuyGolf Common Stock which would cause BC to no longer have control of the Surviving Corporation within the meaning of Section 368(c) of the Code; (v) sell or otherwise dispose of its assets following the Closing, except in the ordinary course of business; or (vi) cause the Surviving Corporation to issue any additional stock or securities in amounts which would cause BC to no longer have control of the Surviving Corporation within the meaning of Section 368(c) of the Code. (c) Other than the five percent (5%) ownership interest in BuyGolf held by BC immediately prior to the Closing, BC has never owned any BuyGolf Common Stock. Neither Parent nor Merger Sub is an investment company subject to regulation under the Investment Company Act of 1940. ARTICLE IV ADDITIONAL AGREEMENTS --------------------- 4.1 Information Statement; Restricted Securities. -------------------------------------------- (a) BC and BuyGolf shall distribute the Information Statement for the stockholders of BuyGolf to approve this Agreement and the transactions contemplated hereby and thereby (the "Information Statement"). The Information Statement shall constitute a disclosure document for the offer and issuance of the shares of BC Stock to be received by the holders of BuyGolf Common Stock in the Merger. BC and BuyGolf shall each use reasonable commercial efforts to cause the Information Statement to comply with applicable federal and state securities laws requirements. Each of BC and BuyGolf agrees to provide promptly to the other such information concerning its business and financial statements and affairs as, in the reasonable judgment of the providing party or its counsel, may be required or appropriate for inclusion in the Information Statement, or in any amendments or supplements thereto, and to cause its counsel and auditors to cooperate with the other's counsel and auditors in the preparation of the Information Statement. BuyGolf will promptly advise BC, and BC will promptly advise BuyGolf, in writing if at any time prior to the Effective Time either BuyGolf or BC shall obtain knowledge of any facts that might make it necessary or appropriate to amend or 21 supplement the Information Statement in order to make the statements contained or incorporated by reference therein not misleading or to comply with applicable law. Anything to the contrary contained herein notwithstanding, BuyGolf shall not include in the Information Statement any information with respect to BC or its affiliates or associates, the form and content of which information shall not have been approved by BC prior to such inclusion. 4.2 Stockholder Approval. BuyGolf shall promptly after the date -------------------- hereof take all action necessary in accordance with Delaware Law and its Certificate of Incorporation and Bylaws to secure the written consent of its stockholders approving this Agreement and the transactions and ancillary agreements contemplated herein within five (5) days following the date of this Agreement. BuyGolf shall use all commercially reasonable efforts required to obtain from stockholders of BuyGolf executed actions by written consent approving the Merger. Any materials submitted to the stockholders of BuyGolf in connection with the solicitation of their approval of the Merger shall have been subject to prior review and comment by BC and shall include information regarding BuyGolf, the terms of the Merger and this Agreement, the unanimous recommendation of the Board of Directors of BuyGolf in favor of the Merger, this Agreement and the transactions contemplated hereby and such other documents (including but not limited to the Stockholder Certificate) in order to satisfy the requirements of Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder in connection with the issuance and sale of BC Stock in the Merger. 4.3 Access to Information. Between the date of this Agreement and the --------------------- earlier of the Effective Time or the termination of this Agreement, upon reasonable notice, BuyGolf and BC shall, during normal business hours, (i) give each other and their respective officers, employees, accountants, counsel, financing sources and other agents and representatives full access to their buildings, offices, and other facilities and to all their books and records, whether located on their premises or at another location; (ii) permit the other party to make such inspections as they may require; (iii) cause its officers to furnish the other party such financial, operating, technical and product data and other information with respect to the business and assets and properties of BuyGolf as they from time to time may request, including financial statements and schedules; (iv) allow each other the opportunity to interview their employees and other personnel and Affiliates (as defined below) with their prior written consent, which consent shall not be unreasonably withheld or delayed; and (v) assist and cooperate with BC and Merger Sub in the development of integration plans for implementation by BC and the Surviving Corporation following the Effective Time; provided, however, that no investigation pursuant to this Section 4.3 shall affect or be deemed to modify any representation or warranty made by BuyGolf and BC herein. Materials furnished to BC and BuyGolf pursuant to this Section 4.3 may be used by each party for strategic and integration planning purposes relating to accomplishing the transactions contemplated hereby. For purposes of this Agreement, "Affiliate" means, as --------- applied to any person or entity, (a) any other person or entity directly or indirectly controlling, controlled by or under common control with, that person or entity, (b) any other person or entity that owns or controls (i) 10% or more of any class of equity securities of that person or entity or any of its Affiliates or (ii) 10% or more of any class of equity securities (including any equity securities issuable upon the exercise of any option or convertible security) of that person or entity or any of its Affiliates, or (c) any director, partner, officer, manager, agent, employee or relative of such person or entity. For the purposes of this definition, "control" (including with correlative meanings, the terms "controlling", "controlled by", and "under common control with") as applied to any person or entity, means the possession, directly 22 or indirectly, of the power to direct or cause the direction of the management and policies of that person or entity, whether through ownership of voting securities or by contract or otherwise. 4.4 Expenses. Whether or not the Merger is consummated, all fees and -------- expenses incurred in connection with the Merger including all legal, accounting, financial advisory, consulting and all other fees and expenses of third parties incurred by a party in connection with the negotiation and effectuation of the terms and conditions of this Agreement and the transactions contemplated hereby, shall be the obligation of the respective party incurring such fees and expenses; provided that if the Merger is consummated, BC shall be responsible for the reasonable fees and expenses of Rutan & Tucker, not to exceed $20,000, incurred by BuyGolf in the negotiation and preparation of this Agreement and the consummation of the Merger. 4.5 Public Disclosure. Unless otherwise required by law (including ----------------- federal and state securities laws) prior to the Effective Time (in which case BC and BuyGolf shall have a prior opportunity to review and comment on the proposed disclosure), no disclosure (whether or not in response to any inquiry) of the existence of any subject matter of, or the terms and conditions of, this Agreement shall be made by any party hereto unless approved by BC and BuyGolf prior to release; provided, however, that such approval shall not be unreasonably withheld or delayed. 4.6 Approvals. BuyGolf shall use all commercially reasonable efforts --------- required to obtain all approvals from governmental or regulatory authorities or under any of the contracts or other agreements as may be required in connection with the Merger (all of such approvals are set forth in the BuyGolf Disclosure Schedule) so as to preserve all rights of and benefits to BuyGolf thereunder and BC shall provide BuyGolf with such assistance and information as is reasonably required to obtain such approvals. 4.7 Notification of Certain Matters. BuyGolf shall give prompt notice ------------------------------- to BC, and BC shall give prompt notice to BuyGolf, of (i) the occurrence or non- occurrence of any event, the occurrence or non-occurrence of which is likely to cause any representation or warranty of BuyGolf, BC or Merger Sub, respectively, contained in this Agreement to be untrue or inaccurate in any material respect at or prior to the Closing Date and (ii) any failure of BuyGolf, BC or Merger Sub, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 4.7 shall not limit or otherwise affect any remedies available to the party receiving such notice. 4.8 Additional Documents and Further Assurances. Each party hereto, ------------------------------------------- at the request of the other party hereto, shall execute and deliver such other instruments and do and perform such other acts and things (including, but not limited to, all action reasonably necessary to seek and obtain any and all consents and approvals of any government or regulatory authority or person required in connection with the Merger; provided, however, that BC shall not be obligated to consent to any divestitures or operational limitations or activities in connection therewith and no party shall be obligated to make a payment of money as a condition to obtaining any such condition or approval) as may be necessary or desirable for effecting completely the consummation of this Agreement and the transactions contemplated hereby. 23 4.9 Maintenance of Business. From the date hereof until the Closing, ----------------------- each of the Stockholders and BuyGolf shall use its diligent, good faith efforts, to cause BuyGolf to carry on and preserve the business, goodwill and the relationships of BuyGolf with suppliers, employees, agents and others in substantially the same manner as they have been prior to the date hereof. In addition, from the date hereof until the Closing, BC shall use its diligent, good faith efforts to carry on and preserve the business, goodwill and the relationships of BC with suppliers, employees, agents and others in substantially the same manner as they have been prior to the date hereof. 4.10 Conduct of Business. ------------------- (a) From the date hereof until the Closing, except as expressly permitted hereby, BuyGolf shall not, and the Stockholders shall not permit BuyGolf to, without BC's prior express written consent: (i) incur any additional indebtedness, or guarantee any indebtedness or obligation of any other party, except in the ordinary course of business, and which amount BuyGolf agrees to repay immediately prior to the Closing; (ii) issue, redeem, pledge, sell or repurchase any capital stock of BuyGolf or securities convertible into its capital stock or grant or issue any options, warrants or rights to subscribe for its capital stock or securities convertible into its capital stock or commit to do any of the foregoing; (iii) enter into or terminate any material agreement or arrangement; (iv) increase the compensation or bonuses payable or to become payable to any officers, employees or agents of BuyGolf, or adopt or amend any employee benefit plan or arrangement; (v) enter into any employment contract or agreement with any existing or prospective employee which is not terminable at will; (vi) pay any obligation or liability, fixed or contingent, other than current liabilities or except as such payment becomes due; (vii) cancel, without full payment, any note, loan or other obligation owing to BuyGolf, or waive any rights of material value; (viii) acquire or dispose of any properties, assets or business except in the ordinary course of its business; (ix) create or suffer to be imposed any lien, mortgage, security interest or other charge on or against the properties or assets of BuyGolf, other than in the ordinary course of business consistent with BuyGolf's past practices, or the BuyGolf Common Stock; 24 (x) engage in any activities or transactions outside the ordinary course of BuyGolf's e-commerce business as conducted at the date hereof; (xi) make or adopt any change in the Charter or Bylaws of BuyGolf as in force and effect on the date hereof; (xii) declare or pay any dividends on or make any other distributions in respect of any shares of its capital stock; or (xiii) pay, agree to pay or make any accrual or arrangement for payment of any pension, retirement allowance or other employee benefit pursuant to any plan, agreement or arrangement to any officer, director or employee. (b) From the date hereof until the Closing, except as expressly permitted hereby, BuyGolf shall, and the Stockholders shall cause BuyGolf to, unless otherwise expressly consented to in writing by BC: (i) maintain the existing insurance policies of BuyGolf, unless comparable insurance is substituted therefor, and shall not take any action to terminate or modify those insurance policies; (ii) maintain the books and records of BuyGolf consistent with past practices and policies and in accordance with GAAP; (iii) maintain in good working condition, ordinary wear and tear excepted, and in compliance in all material respects with all applicable laws and regulations, all fixed assets owned, leased or operated, as the case may be, by BuyGolf; (iv) observe and perform, and remain in compliance with, all obligations of BuyGolf in agreements and contracts the breach or violation of which would have, individually or in the aggregate, a material adverse effect and not enter into any agreements or contracts which would require payments by BuyGolf of more than Fifty Thousand Dollars ($50,000) over any period of twelve (12) months, except for inventory purchased in the ordinary course of business and disclosed in advance to BC and customer contracts and purchase orders entered in the ordinary course of business consistent with BuyGolf's past practices; and (v) maintain compliance with the terms and conditions of all material contracts or licenses held by BuyGolf or under which it operates or conducts its business and use best efforts to maintain all such material contracts and licenses in full force and effect. 4.11 Confidentiality. Each party will cause its directors, affiliates, --------------- officers, employees or authorized representatives to hold in strict confidence, and not disclose to any third party, without prior written consent of the other party, all confidential information received by it in connection with the transactions contemplated hereby, except as may be required by applicable law or as otherwise contemplated herein. The parties acknowledge that BC and BuyGolf have previously executed a non-disclosure agreement dated August 2, 1999 (the 25 "Confidentiality Agreement"), which Confidentiality Agreement shall continue in full force and effect in accordance with its terms. 4.12 "Market Stand-Off" Agreement. Each Stockholder hereby --------------------------- agrees that, during the period of duration specified by BC and an underwriter of Common Stock or other securities of BC, it shall not, to the extent requested by BC and such underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of BC held by it at any time during such period except Common Stock included in such registration; provided, however, that: (a) such market stand-off time period shall not exceed 180 days; (b) all officers and directors of BC enter into similar agreements. In order to enforce the foregoing covenant, BC may impose stop- transfer instructions with respect to any securities of BC held by any Stockholder or his transferee until the end of such period. If requested to do so by BC, each Stockholder shall execute an underwriter's letter in the customary form prior to the registration of BC's initial public offering. 4.13 BuyGolf's 1998 Stock Option Plan. At the Effective Time, -------------------------------- the BuyGolf Stock Option Plan and each outstanding option to purchase shares of BuyGolf Common Stock under such plan, whether vested or unvested, will be assumed by BC and any outstanding repurchase rights shall be assigned to BC. Section 4.13 of the BuyGolf Disclosure Schedule sets forth a true and complete list as of the date hereof of all holders of outstanding options under the BuyGolf Stock Option Plan including the number of shares of BuyGolf Common Stock subject to each such option, the date of grant of each such option, the exercise or vesting schedule, the exercise price per share and the term of each such option. On the Closing Date, BuyGolf shall deliver to BC an updated Section 4.13 of the BuyGolf Disclosure Schedule current as of such date. Each such option so assumed by BC under this Agreement shall continue to have, and be subject to, the same terms and conditions set forth in the BuyGolf Stock Option Plan immediately prior to the Effective Time, except that (i) such option will be exercisable for that number of whole shares of BC Stock equal to the product of the number of shares of BuyGolf Common Stock that were issuable upon exercise of such option immediately prior to the Effective Time multiplied by the Exchange Ratio and rounded down to the nearest whole number of shares of BC Stock, and (ii) the per share exercise price for the shares of BC Stock issuable upon exercise of such assumed option will be equal to the quotient determined by dividing the exercise price per share of BuyGolf Common Stock at which such option was exercisable immediately prior to the Effective Time by the Exchange Ratio, rounded up to the nearest whole cent. Consistent with the terms of the BuyGolf Stock Option Plan and the documents governing the outstanding options under such plan, the Merger will not terminate any of the outstanding options under the BuyGolf Stock Option Plan or accelerate the exercisability or vesting of such options. It is the intention of the parties that the options so assumed by BC qualify following the Effective Time as incentive stock options as defined in Section 422 of the Code to the extent such options qualified as incentive stock options prior to the Effective Time. Within ten (10) business days after the Effective Time, BC will issue to each person who, immediately prior to the Effective Time was a holder of an outstanding option under the BuyGolf Stock Option Plan a 26 document in form and substance satisfactory to BuyGolf evidencing the foregoing assumption of such option by BC. 4.14 Necessary Filings. BC, Merger Sub, and each of the ----------------- Stockholders of BuyGolf shall use all commercially reasonable efforts to promptly make all necessary filings required by the Internal Revenue Code or otherwise and to take any reasonable actions to cause the Merger to be treated as a "tax-free" organization under the Internal Revenue Code. ARTICLE V CONDITIONS PRECEDENT TO ----------------------- OBLIGATIONS OF BC AND MERGER SUB -------------------------------- The obligation of each of BC and Merger Sub to consummate the transactions contemplated by this Agreement is subject to the satisfaction, at or before the Closing, of all the following conditions, unless waived in writing by BC: 5.1 Certificates for BuyGolf Common Stock. BC shall have ------------------------------------- received for cancellation in the Merger certificates for the BuyGolf Common Stock, which shall constitute all of the issued and outstanding capital stock of BuyGolf. 5.2 Representations and Warranties True. All representations and ----------------------------------- warranties of the Stockholders and BuyGolf in this Agreement or the Schedules and Exhibits hereto, or in any written statement or certificate that shall be delivered to BC by the Stockholders or BuyGolf under this Agreement, shall be true and correct on and as of the date made and as of the Closing Date as if made on the date thereof (except to the extent such representation or warranty relates to an earlier date). 5.3 Covenants Performed. The Stockholders and BuyGolf shall have ------------------- performed, satisfied, and complied in all material respects with all covenants, agreements, and conditions required by this Agreement to be performed or complied with by the Stockholders and BuyGolf on or before the Closing Date. 5.4 Certificate. BC shall have received from the Stockholders a ----------- certificate signed by the President of BuyGolf, dated the Closing Date, certifying that the conditions specified in this Article V have been satisfied. 5.5 No Violations; No Actions. Consummation of the transactions ------------------------- contemplated by this Agreement shall not violate any order, decree or judgment of any court or governmental body having competent jurisdiction and no action or proceeding shall have been instituted or threatened by any person, entity or governmental agency which, in any such case, in the sole judgment of BC, has a reasonable probability of resulting in (i) the obtaining of material damages from BC or BuyGolf; (ii) an order, judgment or decree restraining, prohibiting or rendering unlawful the consummation of the transactions contemplated by this Agreement; or (iii) other relief in connection therewith. 5.6 Proceedings and Documents. All corporate and other ------------------------- proceedings in connection with the transactions contemplated hereby and all documents and instruments incident to such transactions shall be in form and substance reasonably satisfactory to BC and its 27 counsel, and BC shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request. 5.7 Delivery of Documents. shall have received all documents --------------------- and other items to be delivered by the Stockholders under Section 7.2. 5.8 Required Consents. All consents, approvals and waivers from ----------------- third parties and governmental authorities necessary to the transactions as contemplated by this Agreement. 5.9 Private Placement. The parties shall be reasonably ----------------- satisfied that the shares of BC Stock to be issued in connection with the Merger pursuant to Section 1.6(a) are issuable without registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. 5.10 Tax-Free Reorganization. The Merger will constitute a tax- ----------------------- free reorganization within the meaning of Section 368(a) of the Internal Revenue Code 5.11 Limitation on D issent. No holders of the outstanding ---------------------- shares of BuyGolf Common Stock shall have exercised, nor shall they have any continued right to exercise, appraisal, dissenters' or similar rights under applicable law with respect to their shares by virtue of the Merger. ARTICLE VI CONDITIONS PRECEDENT TO ----------------------- OBLIGATIONS OF BUYGOLF AND THE STOCKHOLDERS ------------------------------------------- The obligation of the Stockholders to consummate the transactions contemplated by this Agreement is subject to BC's and/or Merger Sub's satisfaction, at or before the Closing, of all the following conditions, unless waived in writing by a majority in interest of the Stockholders: 6.1 Representations and Warranties True. All representations ----------------------------------- and warranties by BC and Merger Sub in this Agreement or the Schedules and Exhibits hereto, or in any written statement or certificate that shall be delivered to the Stockholders by BC under this Agreement, shall be true and correct on and as of the date made and as of the Closing Date as if made on the date thereof (except to the extent such representation or warranty relates to an earlier date). 6.2 Covenants Performed. BC and Merger Sub shall have ------------------- performed, satisfied, and complied in all material respects with all covenants, agreements, and conditions required by this Agreement to be performed or complied with by BC and Merger Sub in all material respects on or before the Closing Date. 6.3 Certificate. The Stockholders shall have received from BC a ----------- certificate signed by the Chief Executive Officer of BC, dated the Closing Date, certifying that the conditions specified in this Article VI have been satisfied. 6.4 No Violations; No Actions. Consummation of the transactions ------------------------- contemplated by this Agreement shall not violate any order, decree or judgment of any court or governmental body having competent jurisdiction and no action or proceeding shall have been 28 instituted or threatened by any person, entity or governmental agency which, in any such case, in the sole judgment of the Stockholders, has a reasonable probability of resulting in (i) the obtaining of material damages from the Stockholders or BC, (ii) an order, judgment or decree restraining, prohibiting or rendering unlawful the consummation of the transactions contemplated by this Agreement, or (iii) other relief in connection therewith. 6.5 Proceedings and Documents. All corporate and other ------------------------- proceedings in connection with the transactions contemplated hereby and all documents and instruments incident to such transactions shall be in form and substance reasonably satisfactory to the Stockholders and their counsel, and the Stockholders shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request. 6.6 Delivery of Documents. The Stockholders shall have received --------------------- all documents and other items to be delivered by BC under Section 7.3. 6.7 Required Consents. All consents, approvals and waivers from ----------------- third parties and governmental authorities necessary to consummate the transactions contemplated by this Agreement shall have been obtained. ARTICLE VII CLOSING ------- 7.1 Time and Place. The Closing shall occur at the time and -------------- place specified in Section 1.2 of this Agreement. 7.2 Deliveries of the Stockholders. At the Closing, the ------------------------------ Stockholders will execute and deliver or cause to be executed and delivered to BC: (a) Stock Certificates. Certificates representing the ------------------ BuyGolf Common Stock, presented to BC for conversion into BC Stock; (b) Corporate Documents. The Charter of BuyGolf, certified ------------------- by the Secretary of State of Delaware as of a recent date and the Bylaws of BuyGolf, certified by the Secretary of BuyGolf as in effect at the Closing; (c) Certificates of Good Standing. Certificates of Good ----------------------------- Standing, dated as of a recent date, with respect to BuyGolf, issued by the Secretary of State of California and Delaware; (d) The Stockholders' Certificate. A certificate from the ----------------------------- Stockholders, dated the Closing Date, containing the information required pursuant to Section 5.4; (e) Representations and Warranties; Performance. At the ------------------------------------------- Closing, Stockholders shall deliver to BC a certificate dated as of the Closing Date signed by the President of BuyGolf certifying (i) that each of the representations and warranties made by the Stockholders herein are true and correct in all material respects on the Closing Date with the same effect as though made on such date; (ii) that BuyGolf and the Stockholders have performed and complied with all agreements, covenants and conditions required by this Agreement to be performed and complied with by BuyGolf and the Stockholders prior to the Closing Date; and 29 (iii) that there has been no material adverse change since the Balance Sheet Date in the business, condition (financial or otherwise) or operations of BuyGolf or its assets; (f) Books and Records. At the Closing, the Stockholders ----------------- shall deliver to BC (i) the stock books, minute books, corporate seals and other corporate record-keeping documentation of BuyGolf; (ii) certificates representing all outstanding BuyGolf Common Stock, free of any restrictive legends, except for transfer restrictions which may be imposed by the Securities Act, all stock certificates to be duly endorsed and guaranteed for transfer to BC; (iii) such other instruments of transfer as in the opinion of BC's counsel shall be necessary or desirable to effectively vest in BC good and marketable title to the BuyGolf Common Stock; and (iv) all other opinions, instruments and documents contemplated by this Agreement; (g) Release of Claims. At the Closing, each Stockholder ----------------- and optionholder shall sign and deliver to BC a certificate of release ("Release") of all claims or rights of such Stockholder against BuyGolf, except ------- for claims or rights arising pursuant to the agreements and documents executed and delivered in connection with the transactions contemplated herein, in the form attached hereto as Exhibit E; --------- (h) Board and Stockholder Approval. At the Closing, ------------------------------ Stockholders shall deliver to BC evidence that this Agreement and the transactions contemplated hereby have been approved by BuyGolf's Board of Directors and, if such approval is required under applicable law, BuyGolf's Stockholders in form reasonably acceptable to BC's counsel; (i) Resignation of Directors and Officers. At the Closing, ------------------------------------- the directors and officers of BuyGolf in office immediately prior to the Closing shall resign as directors and officers of BuyGolf effective immediately following the Closing; (j) Termination of Employment Agreements. Prior to or at ------------------------------------ the Closing, BuyGolf shall have terminated the employment agreements and Stockholder agreements with John Gilles, Greg Van Ginkel, Arti Dua, Steve Jess, Bradley O'Hearne, Jack Souders, Lucy Wojskowicz, Miriam Price, Lori Stewart, Mark Brown, Jeffrey Allen, C. Keith Allen, Steve Davis, and Donald Harris; (k) Termination of Agreements with Ingram. Prior to or at ------------------------------------- the Closing, BuyGolf and Ingram Entertainment Holdings, Inc. shall have terminated that certain Common Stock Purchase Agreement, Voting Agreement and Registration Rights Agreement, each dated August 5, 1999. (l) Stock Restriction Agreement. A Stock Restriction --------------------------- Agreement, substantially in the form attached hereto as Exhibit F, shall have --------- been executed and delivered by the parties named therein; (m) Non-Competition Agreement. A Non-Competition Agreement, substantially in the form attached hereto as Exhibit G, shall have --------- been executed and delivered by the parties named therein; (n) Proceedings and Documents. All corporate and other ------------------------- proceedings in connection with the transactions contemplated at the Closing hereby, all documents and instruments incident to such transactions and all documents, instruments and proceedings related 30 to BuyGolf's business, technical and legal due diligence shall be reasonably satisfactory in substance and form to BC and its counsel, and BC and its counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request; (o) Consents, Permits and Waivers. BuyGolf shall have ----------------------------- obtained any and all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by the Agreement; (p) Non-Disclosure Agreements. Non-disclosure agreements ------------------------- between Merger Sub, on the one hand, and any person who accepts employment with the Surviving Corporation as of the Closing on the other hand, substantially in the form of Exhibit H attached hereto; --------- (q) Option Assumption Agreements. An Option Assumption ---------------------------- Agreement, substantially in the form attached hereto as Exhibit I, shall have --------- been executed and delivered by each optionholder listed on Schedule B hereto; ---------- (r) Optionholder Questionnaire. An Optionholder -------------------------- Questionnaire, substantially in the form attached hereto as Exhibit J shall have --------- been completed, executed and delivered by each optionholder listed on Schedule B ---------- hereto; and (s) Other Documents. Such other documents and instruments --------------- as BC or its counsel reasonably shall deem necessary to consummate the transactions contemplated hereby. All documents delivered to BC shall be in form and substance reasonably satisfactory to BC and its counsel. 7.3 Deliveries of BC. At the Closing, BC and/or Merger Sub will ---------------- execute and deliver or cause to be executed and delivered to the Stockholders simultaneously with delivery of the items referred to in Section 7.2 above: (a) BC Stock. Certificates representing the BC Stock to -------- each Stockholder as set forth on Schedule A, issuable in accordance with Article ---------- I hereof; (b) Representations and Warranties; Performance. At the ------------------------------ Closing, BC shall deliver to Stockholders a certificate dated as of the Closing Date signed by the Chief Executive Officer of BC certifying (i) that each of the representations and warranties made by BC herein are true and correct in all material respects on the Closing Date with the same effect as though made on such date; and (ii) that BC has performed and complied with all agreements, covenants and conditions required by this Agreements to be performed and complied with by BC prior to the Closing Date; (c) Board Approval. At the Closing, BC shall deliver to -------------- Stockholders evidence that this Agreement and the transactions contemplated hereby shall have been approved by the BC's Board of Directors; 31 (d) Consents, Permits and Waivers. BC shall have obtained ----------------------------- any and all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by the Agreement; (e) Corporate Documents. The Amended and Restated ------------------- Certificate of Incorporation of BC and the Certificate of Incorporation of Merger Sub, certified by the Secretary of State of Delaware as of a recent date and the Bylaws of BC and Merger Sub, certified by the secretaries of BC and Merger Sub, respectively, as in effect at the Closing; and (f) Officer's Certificate. A certificate dated the Closing --------------------- Date containing the information required pursuant to Section 6.3. All documents delivered to the Stockholders shall be in form and substance reasonably satisfactory to the Stockholders and their counsel. 7.4 Certificate of Merger. At the Closing, the parties hereto --------------------- shall cause to filed the Certificate of Merger with the Delaware Secretary of State in accordance with the Delaware Law. ARTICLE VIII INDEMNIFICATION --------------- 8.1 Indemnification by the Stockholders. The Stockholders shall ----------------------------------- jointly and severally indemnify and hold harmless BC, Merger Sub and the Surviving Corporation and their respective officers, directors, employees, successors and assigns in respect of any and all claims, actions, suits or other proceedings and any and all losses, costs, expenses, liabilities, fines, penalties, interest, and damages, whether or not arising out of any claim, action, suit or other proceeding (and including reasonable counsel and accountants' fees and expenses and all other reasonable costs and expenses of investigation, defense or settlement of claims and amounts paid in settlement) incurred by, imposed on or borne by BC, Merger Sub, the Surviving Corporation or such other parties (collectively "Damages") resulting from the breach of any of ------- the representations or warranties made by the Stockholders or BuyGolf in this Agreement. Notwithstanding the foregoing, each Stockholder's liability for Damages shall be determined by, and shall not exceed, each Stockholder's percentage ownership of BuyGolf held by the Stockholders immediately prior to the Closing. For example, in the event Damages totaled $10,000,000, a Stockholder that owns ten percent (10%) of BuyGolf prior to the Closing shall be liable for no more than $1,000,000 of the Damages. 8.2 Indemnification by BC, Merger Sub and Surviving ----------------------------------------------- Corporation. Each of BC, Merger Sub and the Surviving Corporation, jointly and - ----------- severally, shall indemnify and hold harmless the Stockholders, in respect of any and all claims, actions, suits or other proceedings and any and all losses, costs, expenses, liabilities, fines, penalties, interest, and damages, whether or not arising out of any claim, action, suit or other proceeding (and including reasonable counsel and accountants' fees and expenses and all other reasonable costs and expenses of investigation, defense or settlement of claims and amounts paid in settlement) incurred by, imposed on or borne by the Stockholders resulting from the breach of any of the representations, warranties or agreements made by BC and Merger Sub in this Agreement. 32 8.3 Indemnification Procedure for Claims. Whenever any claim ------------------------------------ shall arise for indemnification hereunder, the party entitled to indemnification (the "indemnified party") shall promptly notify in writing the other party or ----------------- parties (the "indemnifying party") of the claim and, when known, the facts ------------------ constituting the basis for such claim; provided, that the indemnified party's failure to give such written notice shall not affect any rights or remedies of an indemnified party hereunder with respect to indemnification for damages except to the extent that the indemnifying party is materially prejudiced thereby. In the event of any claim for indemnification hereunder resulting from or in connection with any claim or legal proceedings by a third party, the written notice to the indemnifying party shall specify, if known, the amount or an estimate of the amount of the liability arising therefrom. The indemnified party shall not settle or compromise any claim by a third party for which it is entitled to indemnification hereunder, without the prior written consent of the indemnifying party (which shall not be unreasonably withheld), unless suit shall have been instituted against it and the indemnifying party shall not have taken control of and conducted in a diligent manner the defense of such suit after notification thereof as provided in Section 8.4 of this Agreement. 8.4 Defense by Indemnifying Party. In connection with any claim ----------------------------- giving rise to indemnity hereunder or resulting from or arising out of any claim or legal proceeding by a person who is not a party to this Agreement, the indemnifying party at its sole cost and expense may, upon written notice to the indemnified party, assume the defense of any such claim or legal proceeding if it acknowledges to the indemnified party in writing its obligations to indemnify the indemnified party with respect to all elements of such claim, and thereafter diligently conducts the defense thereof with counsel reasonably acceptable to the indemnified party. If the indemnifying party acknowledges in writing as specified above that it shall assume the defense of any such action, then the indemnifying party shall keep the indemnified party informed with respect to the defense of such action and the indemnified party shall be entitled to participate in (but not control) the defense of such action, with its counsel and at its own expense. If (A) the indemnifying party does not acknowledge in writing as specified above that it shall assume or fails to conduct in a diligent manner the defense of any such claim or litigation resulting therefrom, or (B) the indemnified party shall have reasonably concluded that there may be one or more legal defenses available to it which are different from, or, additional to those available to the indemnifying party or other indemnified parties with respect to such claim or litigation, then, (i) the indemnified party may defend against such claim or litigation, in such manner as it may deem appropriate, including, without limitation, settling such claim or litigation, after giving notice of the same to the indemnifying party, on such terms as the indemnified party may deem appropriate, and (ii) the indemnifying party shall be entitled to participate in (but not control) the defense of such action, with its counsel and at its own expense. If the indemnifying party thereafter seeks to question the manner in which the indemnified party defended such third party claim or the amount or nature of any such settlement, the indemnifying party shall have the burden to prove by a preponderance of the evidence that the indemnified party did not defend or settle such third party claim in a reasonably prudent manner. Each party agrees to cooperate fully with the other, such cooperation to include, without limitation, attendance at depositions and the provisions of relevant documents as may be reasonably requested by the indemnifying party; provided, that the indemnifying party will hold the indemnified party harmless from all of its expenses, including reasonable attorneys' fees, incurred in connection with such cooperation by the indemnified party. 33 8.5 Arbitration. The rights of the indemnified party to ----------- indemnification and the estimated amount thereof, as set forth in the notice, shall be deemed objected to by the indemnifying party unless the indemnifying party notified the indemnified party in writing as specified in Section 8.4 above that the indemnifying party accepts and agrees with the right of the indemnified party to indemnification or that the indemnifying party elects to defend such claim. If the claim to indemnification is deemed objected to, the parties shall attempt to settle and compromise the same, or if unable to do so within sixty (60) days of receipt of the notice of the claim, such dispute shall be submitted to and resolved by prompt binding arbitration in a mutually agreed location or, absent agreement in Orange County, California, and any rights of indemnification established by reason of such settlement, compromise or arbitration shall promptly thereafter be paid and satisfied by the indemnifying party. Arbitration shall be final and binding according to the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator(s) may be entered in any state or federal court in Orange County, California. 8.6 Limits on Indemnification. ------------------------- (a) Notwithstanding any provision of this Agreement to the contrary, the Stockholders shall have no obligation to indemnify any person entitled to indemnity under Section 8.1 unless the persons so entitled to indemnity thereunder have suffered Damages in an aggregate amount in excess of Twenty Five Thousand Dollars ($25,000) and then only to the extent of such excess and (ii) the Stockholders' liability under Section 8.1 shall in no event exceed Ten Million Dollars ($10,000,000); (b) Notwithstanding any provision of this Agreement to the contrary, BC shall have no obligation to indemnify any person entitled to indemnity under Section 8.2, (i) unless the persons so entitled to indemnity thereunder have suffered Damages in an aggregate amount in excess of Twenty Five Thousand Dollars ($25,000) and then only to the extent of such excess and (ii) BC's liability under Section 8.2 shall in no event exceed Ten Million Dollars ($10,000,000). ARTICLE IX GENERAL PROVISIONS ------------------ 9.1 Survival of Representations, Warranties and Agreements. All ------------------------------------------------------ representations, warranties, covenants and agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Closing and shall terminate twenty-four (24) months after the Closing Date. No claim or action for indemnity pursuant to Sections 8.1 or 8.2 hereof shall be asserted or maintained by any party hereto after the second anniversary of the Closing Date, except for claims made in writing prior to such date and actions (whether constituted before or after such date) based on any claim made in writing prior to such date. Each party agrees that, except for the representations and warranties contained in this Agreement and BC Disclosure Schedule and the BuyGolf Disclosure Schedule, no party hereto has made any other representations and warranties, and each party hereby disclaims any other representations and warranties made by itself or any of its officers, directors, employees, agents, financial and legal advisors or other representatives, with respect to execution and delivery of this Agreement or the transactions contemplated herein, notwithstanding the delivery or 34 disclosure to any other party or any party's representatives of any documentation or other information with respect to any one or more of the foregoing. 9.2 Notices. All notices and other communications hereunder ------- shall be in writing and shall be deemed given if delivered personally, telecopied (with confirmation), mailed by registered or certified mail (return receipt requested) or delivered by an express courier (with confirmation) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to BC, to: BUY.COM INC. 21 Brookline Aliso Viejo, California 92656 Attention: Gregory Hawkins with a copy to: Brobeck, Phleger & Harrison LLP 38 Technology Drive Irvine, California 92618 Attention: Bruce R. Hallett, Esq. and (b) if to BuyGolf, or the Stockholders, to: BuyGolf, Com Inc. 1705 South Coast Highway Laguna Beach, California 92651 Attention: Bradford W. Allen with a copy to: Rutan & Tucker 611 Anton Boulevard Suite 1400 Costa Mesa, California 92626 Attention: Natalie Sibbald Dundas, Esq. 9.3 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND ------------- CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA (WITHOUT REFERENCE TO CONFLICT OF LAW PRINCIPLES OTHER THAN THOSE DIRECTING CALIFORNIA LAW) EXCEPT TO THE EXTENT MANDATORILY GOVERNED BY THE LAWS OF THE STATE OF DELAWARE. BC AND EACH OF THE STOCKHOLDERS HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY CALIFORNIA STATE OR FEDERAL COURT SITTING IN ORANGE COUNTY, CALIFORNIA, IN ANY ACTION OR PROCEEDING ARISING OUT 35 OF OR RELATING TO THIS AGREEMENT, AND BUYER AND THE STOCKHOLDERS EACH HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH CALIFORNIA STATE COURT OR SUCH FEDERAL COURT. BC AND THE STOCKHOLDERS EACH HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY TRANSACTION OR AGREEMENT CONTEMPLATED HEREBY OR THE ACTIONS OF ANY PARTY HERETO IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT HEREOF. 9.4 Severability. If any term or other provision of this Agreement is ------------ invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner to the fullest extent permitted by applicable law in order that the Merger may be consummated as originally contemplated to the fullest extent possible. 9.5 Assignment; Binding Effect; Benefit. Neither this Agreement nor ----------------------------------- any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties hereto. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. Notwithstanding anything contained in this Agreement to the contrary, nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto or their respective successors and permitted assigns any rights or remedies under or by reason of this Agreement. 9.6 Headings. The descriptive headings contained in this Agreement -------- are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. 9.7 Entire Agreement. This Agreement (including the Exhibits, the BC ---------------- Disclosure Schedule and the BuyGolf Disclosure Schedule and other Schedules referenced herein) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings among the parties with respect thereto. No addition to or modification of any provision of this Agreement shall be binding upon any party hereto unless made in writing and signed by all parties hereto. 36 9.8 Counterparts. This Agreement may be executed in one or more ------------ counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. Execution and delivery of this Agreement by exchange of facsimile copies bearing the facsimile signature of a party hereto shall constitute a valid and binding execution and delivery of this Agreement by such party. 9.9 Waivers. No waiver of any of the provisions of this Agreement ------- shall be deemed, or shall constitute, a waiver of any other provisions, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver. 9.10 Third Parties. Nothing in this Agreement, whether express or ------------- implied, is intended to confer any rights or remedies under or by reason of this Agreement on any persons other than the parties to it and their respective successors and assigns, nor is anything in this Agreement intended to relieve or discharge the obligation or liability of any third person to any party to this Agreement, nor shall any provision give any third persons any right of subrogation or action over against any party to this Agreement. 9.11 Publicity. None of the Stockholders or BuyGolf shall issue or --------- make, or cause to have issued or made, any press release or announcement concerning, or otherwise disclose to any third person, the terms of the transactions contemplated hereby (including the existence of the transactions contemplated hereby) without the advance approval in writing of the form and substance thereof by BC, unless otherwise required by applicable law, it being understood that the Stockholders and BuyGolf will use their best efforts not to disclose the terms or existence of the transaction prior to the Closing. Further, prior to and following the Closing none of the parties shall disclose the material terms of this Agreement to any third party other than a third party which must have such information in rendering financial, business, legal or tax advice to such party, as required by law or regulatory authority, or with the written consent (not, following the Closing, to be unreasonably withheld) of each other party hereto. 9.12 Schedules. All schedules, exhibits, appendices and documents --------- referred to in or attached to this Agreement are integral parts of this Agreement as if fully set forth herein, and all statements appearing therein shall be deemed disclosed for all purposes, and not only in connection with the specific representation to which they are explicitly referenced. [Signature page to follow] 37 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized, all as of the date first written above. BC: BUYGOLF: BUY.COM INC. BUYGOLF.COM INC. By:______________________________ By:_______________________________ Name: Gregory Hawkins Name: Bradford W. Allen Title: Chief Executive Officer Title: Chief Executive Officer STOCKHOLDERS: Bradford W. Allen Scott A. Blum By:______________________________ By:_______________________________ Thomas Monaco Joseph and April Kramer By:______________________________ By:_______________________________ Sinocorp Investment Ltd. Las Vegas Golf & Tennis, Inc. By:______________________________ By:_______________________________ Name: Name: Title: Title: Wait 1999 Long-Term Trust Ingram Entertainment Holdings Inc. By:______________________________ By:_______________________________ Name: Younghee Waite Name: Title: Trustee Title: SIGNATURE PAGE FOR AGREEMENT AND PLAN OF MERGER AND REORGANIZATION 38 SCHEDULE A SCHEDULE OF STOCKHOLDERS ------------------------
Aggregate BUY.COM Number of Shares to be Issued and Stockholder Shares of BuyGolf/1/ Delivered at Closing - ------------------------------------ --------------------------- -------------------------- Bradford W. Allen 5,188,219 2,697,874 Thomas Monaco 200,000 104,000 Joseph and April Kramer 400,000 208,000 Sinocorp Investment Ltd. 400,000 208,000 Las Vegas Golf & Tennis, Inc. 540,000 280,800 Scott A. Blum 400,000 208,000 Younghee Wait, Trustee of the Wait 1999 400,000 208,000 Long-term Trust Ingram Entertainment Inc. 438,947 228,253 --------------------------- -------------------------- Total: 7,967,166 4,142,927 Exchange Ratio: 0.520
______________________ /1/ Buy.Com Inc. has a five percent (5%) ownership interest in BuyGolf prior to the Merger. SCHEDULE B SCHEDULE OF OPTIONHOLDERS ------------------------- Aggregate BUY.COM Options Number of to be Issued Upon the BuyGolf Shares Assumption and Replacement Optionholders Subject to Options of the BuyGolf Options - ------------------------- ----------------------- ---------------------------- Don Harris 200,000 104,000 Keith Allen 160,000 83,200 Lucy Wojskowicz 20,000 10,400 Jack Souders 35,000 18,200 Steve Jess 40,000 20,800 Jeff Allen 25,000 13,000 Arti Dua 3,000 1,560 Miriam Price 3,000 1,560 Greg Van Ginkel 2,000 1,040 Lori Stewart 1,000 520 Mark Brown 10,000 5,200 ------------------------- ---------------------------- Total: 499,000 259,480 EXHIBITS -------- Exhibit A - Certificate of Merger Exhibit B - Form of Spousal Consent Exhibit C - Form of Proprietary Information and Inventions Agreement Exhibit D - Form of Employee Nondisclosure and Developments Agreement Exhibit E - Form of Release Agreement Exhibit F - Stock Restriction Agreement Exhibit G - Form of Non-Competition Agreement Exhibit H - Non-Disclosure Agreement Exhibit I - Form of Option Assumption Agreement Exhibit J - Form of Optionholder Questionnaire SPOUSAL CONSENT The undersigned, the spouse of Stockholder, acknowledges that he/she is familiar with the substance of the Agreement and Plan of Merger and Reorganization, dated the date hereof, between BuyGolf.com Inc., BUY.COM INC. and the Stockholders (the "Agreement") that his/her spouse has signed today. Without modifying any rights between himself/herself and his/her spouse, the undersigned hereby (i) agrees to be bound by the Agreement; (ii) agrees that his/her spouse may enter into the Agreement and consummate the transactions contemplated thereby; and (iii) agrees that his/her spouse may amend or modify the Agreement without further consent on his/her part. Dated: October ___, 1999 ___________________________________ Print Name:________________________ EX-3.1 4 AMENDED AND RESTATED CERTIFICATE OF BUY.COM EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF BUY.COM INC. BUY.COM INC., a corporation organized and existing under the General Corporation Law of the State of Delaware DOES HEREBY CERTIFY: FIRST: The original Certificate of Incorporation of Buy Corp. was ----- filed with the Secretary of State of Delaware on August 3, 1998. SECOND: The Amended and Restated Certificate of Incorporation of ------ BUY.COM INC. in the form attached hereto as Exhibit A has been duly adopted in accordance with the provisions of Sections 245 and 242 of the General Corporation Law of the State of Delaware by the directors and stockholders of the Corporation. THIRD: The Amended and Restated Certificate of Incorporation so ----- adopted reads in full as set forth in Exhibit A attached hereto and is hereby incorporated herein by this reference. IN WITNESS WHEREOF, BUY.COM INC. has caused this Certificate to be signed this 2nd day of September, 1999. BUY.COM INC. By ____________________________ Murray Williams Secretary AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF BUY.COM INC. FIRST: The name of the corporation (hereinafter called the ----- "Corporation") is BUY.COM INC. SECOND: The address of the registered office of the Corporation in ------ the State of Delaware is 9 East Loockerman Street, City of Dover, County of Kent, and the name of the registered agent of the Corporation in the State of Delaware at such address is National Registered Agents, Inc. THIRD: The purpose of the Corporation is to engage in any lawful act ----- or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: ------ A. This Corporation is authorized to issue two classes of shares to be designated respectively Preferred Stock ("Preferred Stock") and Common Stock ("Common Stock"). The total number of shares of capital stock that the Corporation is authorized to issue is One Billion (1,000,000,000). The total number of shares of Preferred Stock this Corporation shall have authority to issue is One Hundred Fifty Million (150,000,000). The total number of shares of Common Stock this Corporation shall have authority to issue is Eight Hundred Fifty Million (850,000,000). The Preferred Stock shall have a par value of $.0001 per share and the Common Stock shall have a par value of $.0001 per share. The Preferred Stock shall be divided into series. The first series shall consist of Nineteen Million Four Hundred Eighty-One Thousand One Hundred Thirty (19,481,130) shares and is designated "Series A Convertible Participating Preferred Stock" and the second series shall consist of Fifteen Million Eight Hundred Seventy Seven Thousand Two Hundred Forty Nine (15,877,249) shares and is designated "Series B Convertible Participating Preferred Stock." The remaining shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors of the Corporation (the "Board of Directors") is expressly authorized to provide for the issue of all or any of the remaining shares of the Preferred Stock in one or more series, and to fix the number of shares and to determine or alter, for each such series, such voting powers, full or limited, or no voting powers, and such designations, preferences, and relative, participating, optional, or other rights and such qualifications, limitations, or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issue of such shares (a "Preferred Stock Designation") and as may be permitted by the General Corporation Law of the State of Delaware. The Board of Directors is also expressly authorized to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series, other than the Series A Convertible Participating Preferred Stock and the Series B Convertible Participating Preferred Stock, subsequent to the issue of shares of that 2 series. In case the number of shares of such series shall be so decreased, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. B. The powers, preferences, rights, restrictions, and other matters relating to the Series A Convertible Participating Preferred Stock and the Series B Convertible Participating Preferred Stock are as follows: 1. Number of Shares. The series of Preferred Stock designated and known ---------------- as "Series A Convertible Participating Preferred Stock" shall consist of 19,481,130 shares and the series of Preferred Stock designated and known as "Series B Convertible Participating Preferred Stock" shall consist of 15,877,249 shares. 2. Voting. ------ 2A. General. Except as may be otherwise provided in these terms of ------- the Series A Convertible Participating Preferred Stock (the "Series A Stock") and the Series B Convertible Participating Preferred Stock (the "Series B Stock") or by law, the Series A Stock and the Series B Stock shall vote together with all other classes and series of stock of the Corporation as a single class on all actions to be taken by the stockholders of the Corporation, including but not limited to, actions amending the Certificate of Incorporation to increase the number of authorized shares of Common Stock. Each share of Series A Stock and Series B Stock shall entitle the holder thereof to such number of votes per share on each such action as shall equal the number of shares of Common Stock (including fractions of a share) into which each share of Series A Stock and Series B Stock is then convertible. 2B. Board Size. The Corporation shall not, without the written ---------- consent or affirmative vote of the holders of at least two-thirds of the then outstanding shares of Series A Stock and Series B Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) together as a single class, increase the maximum number of directors constituting the Board of Directors to a number in excess of nine (9). 2C. Board Seats. So long as ten percent (10%) of the Series A Stock ----------- and the Series B Stock remains outstanding, the holders of the Series A Stock, voting as a separate series, shall be entitled to elect one director of the Corporation and the holders of Series B Stock, voting as a separate series, shall be entitled to elect one director of the Corporation. The holders of the Common Stock, voting as a separate class, shall be entitled to elect one director of the Corporation. The holders of the Series A Stock, the Series B Stock and the Common Stock, voting together as a single class, shall be entitled to elect the remainder of the directors of the Corporation. At any meeting (or in a written consent in lieu thereof) held for the purpose of electing directors, (i) the presence in person or by proxy (or the written consent) of the holders of a majority of the total shares of the Series A Stock then outstanding shall constitute a quorum of the Series A Stock for the election of directors to be elected solely by the holders of the Series A Stock, (ii) the presence in person or by proxy (or the written consent) of the holders of a majority of the 3 total shares of the Series B Stock then outstanding shall constitute a quorum of the Series B stock for the election of directors to be elected solely by the holders of the Series B Stock, (iii) the presence in person or by proxy (or the written consent) of the holders of a majority of the total shares of Common Stock then outstanding shall constitute a quorum of the Common Stock for the election of directors to be elected solely by the holders of the Common Stock, and (iv) the presence in person or by proxy (or the written consent) of the holders of a majority of the total shares of Series A Stock, Series B Stock and Common Stock, voting as a single class on an as-if converted basis, then outstanding shall constitute a quorum of the Series A Stock, Series B Stock and Common Stock for the election of directors to be elected solely by the holders of Series A Stock, Series B Stock and Common Stock, voting as a single class. A vacancy in any directorship elected by the holders of the Series A Stock shall be filled only by vote or written consent of the holders of the Series A Stock; a vacancy in any directorship elected by the holders of the Series B Stock shall be filled only by vote or written consent of the holders of the Series B Stock; a vacancy in any directorship elected by the holders of the Common Stock shall be filled only by vote or written consent of the holders of the Common Stock; and a vacancy in the directorship elected jointly by the holders of the Series A Stock, the Series B Stock and the Common Stock shall be filled only by vote or written consent of the Series A Stock, the Series B Stock and the Common Stock as provided above. 3. Dividends. The holders of the Series A Stock and the Series B Stock --------- shall be entitled to receive, out of funds legally available therefor, when and if declared by the Board of Directors, quarterly dividends at the rate per annum of $0.0616 per share (the "Accruing Dividends"), appropriately adjusted, for stock splits, recapitalizations and the like subsequent to the date of this Amended and Restated Certificate of Incorporation. Accruing Dividends shall accrue from day to day, whether or not earned or declared, and shall be cumulative. 4. Liquidation. Upon any liquidation, dissolution or winding up of the ----------- Corporation resulting in aggregate proceeds of less than $340,000,000, whether voluntary or involuntary, the holders of the shares of Series A Stock and Series B Stock shall first be entitled, before any distribution or payment is made upon liquidation on any stock ranking junior to the Series A Stock and the Series B Stock, to be paid an amount equal to $1.0266 per share and $5.6685 per share, respectively, plus, in the case of each share, an amount equal to all Accruing Dividends unpaid thereon (whether or not declared) and any other dividends declared but unpaid thereon, computed to the date payment thereof is made available, such amount payable with respect to one share of Series A Stock and Series B Stock, respectively, being sometimes referred to as the "Series A Liquidation Preference Payment" or the "Series B Liquidation Preference Payment," as applicable, and with respect to all shares of Series A Stock or Series B Stock, being sometimes referred to as the "Series A Liquidation Preference Payments" and "Series B Liquidation Preference Payments," respectively. If upon such liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the assets to be distributed among the holders of Series A Stock and Series B Stock shall be insufficient to permit payment in full to the holders of Series A Stock and Series B Stock of the Series A Liquidation Preference Payments and the Series B Liquidation Preference Payments, respectively, then the entire assets of the Corporation to be so distributed shall be distributed ratably among the holders of Series A Stock and Series B Stock (with each share of Series A Stock and Series B Stock being deemed, for such purpose, to be equal to the number of shares of Common Stock (including fractions of a share) into which such share of Series A Stock or Series B Stock is convertible immediately prior to the close of business on the business day fixed for such distribution). Upon any such liquidation, dissolution or winding up of the Corporation, immediately after the holders of 4 Series A Stock and Series B Stock shall have been paid in full the Series A Liquidation Preference Payments and the Series B Liquidation Preference Payments, respectively, the remaining net assets of the Corporation available for distribution shall be distributed ratably among the holders of Series A Stock, Series B Stock and Common Stock (with each share of Series A Stock and Series B Stock being deemed, for such purpose, to be equal to the number of shares of Common Stock (including fractions of a share) into which such share of Series A Stock or Series B Stock is convertible immediately prior to the close of business on the business day fixed for such distribution). Written notice of such liquidation, dissolution or winding up, stating a payment date and the place where said payments shall be made, shall be delivered in person, mailed by certified or registered mail, return receipt requested, or sent by telecopier or telex, not less than 20 days prior to the payment date stated therein, to the holders of record of Series A Stock and Series B Stock, such notice to be addressed to each such holder at its address as shown by the records of the Corporation. The consolidation or merger of the Corporation into or with any other entity or entities which results in the exchange of outstanding shares of the Corporation for securities or other consideration issued or paid or caused to be issued or paid by any such entity or affiliate thereof (other than a merger to reincorporate the Corporation in a different jurisdiction), and the sale, lease, abandonment, transfer or other disposition by the Corporation of all or substantially all its assets, shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of the provisions of this paragraph 4. For purposes hereof, the Common Stock shall rank junior to the Series A Stock and the Series B Stock in the event of liquidation. 5. Restrictions. So long as ten percent (10%) of the Series A Stock and ------------ the Series B Stock remains outstanding, except where the vote or written consent of the holders of a greater number of shares of the Corporation is required by law or by the Certificate of Incorporation, and in addition to any other vote required by law or the Certificate of Incorporation, without the approval of the holders of at least a majority of the then outstanding total shares of each of the Series A Stock and the Series B Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be), separately as series, the Corporation will not: 5A. Create or authorize the creation of any additional class or series of shares of stock unless the same ranks junior to the Series A Stock and the Series B Stock as to the distribution of assets on the liquidation, dissolution or winding up of the Corporation, or increase the authorized amount of the Series A Stock or Series B Stock or increase the authorized amount of any additional class or series of shares of stock unless the same ranks junior to the Series A Stock and the Series B Stock as to the distribution of assets on the liquidation, dissolution or winding up of the Corporation, or create or authorize any obligation or security convertible into shares of Series A Stock or Series B Stock or into shares of any other class or series of stock unless the same ranks junior to the Series A Stock and the Series B Stock as to the distribution of assets on the liquidation, dissolution or winding up of the Corporation, whether any such creation, authorization or increase shall be by means of amendment to the Certificate of Incorporation or by merger, consolidation or otherwise; 5B. Consent to any liquidation, dissolution or winding up of the Corporation or consolidate or merge into or with any other entity or entities or sell, lease, abandon, transfer or 5 otherwise dispose of all or substantially all its assets if the Corporation's valuation for purposes of such transaction is less than One Billion Dollars ($1,000,000,000); 5C. Amend, alter or repeal its Certificate of Incorporation or By-laws in a manner that would materially affect the Series A Stock or the Series B Stock; 5D. Purchase or set aside any sums for the purchase of, or pay any dividend or make any distribution on, any shares of stock other than the Series A Stock and the Series B Stock, except for dividends or other distributions payable on the Common Stock solely in the form of additional shares of Common Stock and except for the purchase of shares of Common Stock from former employees of the Corporation who acquired such shares directly from the Corporation, if each such purchase is made pursuant to contractual rights held by the Corporation relating to the termination of employment of such former employee and the purchase price does not exceed the original issue price paid by such former employee to the Corporation for such shares; or 5E. Redeem or otherwise acquire any shares of Series A Stock or Series B Stock except as expressly authorized in paragraph 7 hereof or pursuant to a purchase offer made pro rata to all holders of the shares of Series A Stock and Series B Stock on the basis of the aggregate number of outstanding shares of Series A Stock and Series B Stock then held by each such holder. In addition, the consent of the holders of a majority of the outstanding Series B Stock, voting as a separate class, shall be required for: (i) any amendment or change of the rights, preferences or powers of the Series B Stock; (ii) any action that reclassifies any outstanding shares into shares having rights as to dividends or assets senior to or on a parity with the Series B Stock; (iii) any amendment of the Company's Certificate of Incorporation that modifies the rights of the Series B Stock in an adverse manner; (iv) any material change in the Corporation's line of business provided that expanding into new markets and new products and services categories or expanding into other e-commerce activities shall not be deemed a material change; (v) any agreement between the Corporation and any officer or director other than in the ordinary course of business; (vi) any issuance of debt in excess of $100,000,000 in the aggregate. In addition, the consent of the holders of a majority of the outstanding Series A Stock, voting as a separate class, shall be required for: (i) any amendment or change of the rights, preferences or powers of the Series A Stock; (ii) any action that reclassifies any outstanding shares into shares having rights as to dividends or assets senior to or on a parity with the Series A Stock; (iii) any amendment of the Company's Certificate of Incorporation that modifies the rights of the Series A Stock in an adverse manner. 6. Conversions. The holders of shares of Series A Stock and Series B ----------- Stock shall have the following conversion rights: 6A. Right to Convert. Subject to the terms and conditions of this ---------------- paragraph 6, the holder of any share or shares of Series A Stock or Series B Stock shall have the right, at its option at any time, to convert any such shares of Series A Stock or Series B Stock (except that 6 upon any liquidation of the Corporation the right of conversion shall terminate at the close of business on the business day fixed for payment of the amount distributable on the Series A Stock and Series B Stock) into such number of fully paid and nonassessable shares of Common Stock as is obtained by (i) multiplying, in the case of the Series A Stock, the number of shares of Series A Stock so to be converted by $1.0266 or, in the case of the Series B Stock, the number of shares of Series B Stock so to be converted by $5.6685 and (ii) dividing the result, in the case of the Series A Stock, by the conversion price of $1.0266 per share or, in the case of the Series B Stock, by the conversion price of $5.6685 or, in case an adjustment of either such conversion price has taken place pursuant to the further provisions of this paragraph 6, then by the conversion price as last adjusted and in effect at the date any share or shares of Series A Stock or Series B Stock are surrendered for conversion (such price, or such price as last adjusted, being referred to as the "Series A Conversion Price" or the "Series B Conversion Price" as applicable). Such rights of conversion shall be exercised by the holder thereof by giving written notice that the holder elects to convert a stated number of shares of Series A Stock and/or Series B Stock into Common Stock and by surrender of a certificate or certificates for the shares so to be converted to the Corporation at its principal office (or such other office or agency of the Corporation as the Corporation may designate by notice in writing to the holders of the Series A Stock and the Series B Stock) at any time during its usual business hours on the date set forth in such notice, together with a statement of the name or names (with address) in which the certificate or certificates for shares of Common Stock shall be issued. 6B. Issuance of Certificates; Time Conversion Effected. Promptly after -------------------------------------------------- the receipt of the written notice referred to in subparagraph 6A and surrender of the certificate or certificates for the share or shares of Series A Stock and/or Series B Stock to be converted, the Corporation shall issue and deliver, or cause to be issued and delivered, to the holder, registered in such name or names as such holder may direct, a certificate or certificates for the number of whole shares of Common Stock issuable upon the conversion of such share or shares of Series A Stock and/or Series B Stock. To the extent permitted by law, such conversion shall be deemed to have been effected and the Series A Conversion Price and/or the Series B Conversion Price shall be determined as of the close of business on the date on which such written notice shall have been received by the Corporation and the certificate or certificates for such share or shares shall have been surrendered as aforesaid, and at such time the rights of the holder of such share or shares of Series A Stock and/or Series B Stock shall cease, and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby. 6C. Fractional Shares; Dividends; Partial Conversion. No fractional ------------------------------------------------ shares shall be issued upon conversion of Series A Stock or Series B Stock into Common Stock, and no payment or adjustment shall be made upon any conversion on account of any cash dividends on the Common Stock issued upon such conversion. At the time of each conversion, the Corporation shall pay in cash an amount equal to all dividends, excluding Accruing Dividends, accrued and unpaid on the shares of Series A Stock and/or Series B Stock surrendered for conversion to the date upon which such conversion is deemed to take place as provided in subparagraph 6B. In case the number of shares of Series A Stock and/or Series B Stock represented by the certificate or certificates surrendered pursuant to subparagraph 6A exceeds the 7 number of shares converted, the Corporation shall, upon such conversion, execute and deliver to the holder, at the expense of the Corporation, a new certificate or certificates for the number of shares of Series A Stock and/or Series B Stock represented by the certificate or certificates surrendered which are not to be converted. If any fractional share of Common Stock would, except for the provisions of the first sentence of this subparagraph 6C, be delivered upon such conversion, the Corporation, in lieu of delivering such fractional share, shall pay to the holder surrendering the Series A Stock and/or the Series B Stock for conversion an amount in cash equal to the current market price of such fractional share as determined in good faith by the Board of Directors of the Corporation. 6D. Adjustment of Price Upon Issuance of Common Stock. Except as ------------------------------------------------- provided in subparagraph 6E, if and whenever the Corporation shall issue or sell, or is, in accordance with subparagraphs 6D(1) through 6D(7), deemed to have issued or sold, any shares of Common Stock for a consideration per share less than the Conversion Price with respect to any series of Preferred Stock in effect on the date of and immediately prior to such issuance or sale, then and in such event, the Conversion Price for such series of Preferred Stock shall be automatically reduced, concurrently with such issuance or sale, to the price determined by dividing (i) an amount equal to the sum of (a) the number of shares of Common Stock outstanding immediately prior to such issuance or sale multiplied by the then existing Conversion Price for such series of Preferred Stock and (b) the consideration, if any, received by the Corporation upon such issuance or sale, by (ii) the total number of shares of Common Stock and Series A Stock or Series B Stock, as the case may be, outstanding immediately after such issuance or sale. For purposes of this subparagraph 6D, the following subparagraphs 6D(1) to 6D(7) shall also be applicable: 6D(1) Issuance of Rights or Options. In case at any time the ----------------------------- Corporation shall in any manner grant (whether directly or by assumption in a merger or otherwise) any warrants or other rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or security convertible into or exchangeable for Common Stock (such warrants, rights or options being called "Options" and such convertible or exchangeable stock or securities being called "Convertible Securities") whether or not such Options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Options or upon the conversion or exchange of such Convertible Securities (determined by dividing (i) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon the exercise of all such Options, plus, in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (ii) the total maximum number of shares of Common Stock issuable upon the exercise of such 8 Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options) shall be less than the Conversion Price of any series of Preferred Stock in effect immediately prior to the time of the granting of such Options, then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to have been issued for such price per share as of the date of granting of such Options or the issuance of such Convertible Securities and thereafter shall be deemed to be outstanding. Except as otherwise provided in subparagraph 6D(3), no adjustment of the Conversion Price of any series of Preferred Stock shall be made upon the actual issuance of such Common Stock or of such Convertible Securities upon exercise of such Options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. 6D(2) Issuance of Convertible Securities. In case the ---------------------------------- Corporation shall in any manner issue (whether directly or by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the rights to exchange or convert any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (i) the total amount received or receivable by the Corporation as consideration for the issuance or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (ii) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the Conversion Price of any series of Preferred Stock in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall be deemed to have been issued for such price per share as of the date of the issue or sale of such Convertible Securities and thereafter shall be deemed to be outstanding, provided that (a) except as otherwise provided in subparagraph 6D(3), no adjustment of the Conversion Price of any series of Preferred Stock shall be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities and (b) if any such issuance or sale of such Convertible Securities is made upon exercise of any Options to purchase any such Convertible Securities for which adjustments of the Conversion Price of any Series of Preferred Stock have been or are to be made pursuant to other provisions of this subparagraph 6D, no further adjustment of the Conversion Price shall be made by reason of such issuance or sale. 6D(3) Change in Option Price or Conversion Rate. Upon the happening ----------------------------------------- of any of the following events, namely, if the purchase price provided for in any Option referred to in subparagraph 6D(1), the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in subparagraph 6D(1) or 6D(2), or the rate at which Convertible Securities referred to in subparagraph 6D(1) or 6D(2) are convertible into or exchangeable for Common Stock shall change at any time (including, but not limited to, changes under or by reason of provisions designed to protect against dilution), the Conversion Price of any series of Preferred Stock in effect at the time of such event shall forthwith be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securitiesstill outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold, but only if as a result of such adjustment the Conversion Price then in effect hereunder is thereby reduced; and on the termination of any such Option or any such right to convert or exchange such Convertible Securities, the 9 Conversion Price for such series of Preferred Stock then in effect hereunder shall forthwith be increased to the Conversion Price for such series of Preferred Sock which would have been in effect at the time of such termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such termination, never been issued. 6D(4) Stock Dividends. In case the Corporation shall declare a --------------- dividend or make any other distribution upon any stock of the Corporation payable in Common Stock (except for dividends or distributions upon the Common Stock), Options or Convertible Securities, any Common Stock, Options or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. 6D(5) Consideration for Stock. In case any shares of Common Stock, ----------------------- Options or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Corporation therefor, without deduction therefrom of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Corporation in connection therewith. In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Corporation shall be deemed to be the fair value of such consideration as determined in good faith by the Board of Directors of the Corporation, without deduction of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Corporation in connection therewith. In case any Options shall be issued in connection with the issue and sale of other securities of the Corporation, together comprising one integral transaction in which no specific consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued for such consideration as determined in good faith by the Board of Directors of the Corporation. 6D(6) Record Date. In case the Corporation shall take a record of ----------- the holders of its Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock, Options or Convertible Securities or (ii) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issuance or sale of the shares of Common Stock 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 granting of such right of subscription or purchase, as the case may be. 6D(7) Treasury Shares. The number of shares of Common Stock --------------- outstanding at any given time shall not include shares owned or held by or for the account of the Corporation, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purpose of this subparagraph 6D. 6E. Certain Issues of Common Stock Excepted. Anything herein to the --------------------------------------- contrary notwithstanding, the Corporation shall not be required to make any adjustment of the Conversion Price of any series of Preferred Stock in the case of the issuance from and after the date of filing of these terms of the Series A Stock and the Series B Stock of (i) shares of Common Stock 10 issuable upon exercise of options granted to directors, officers, employees or consultants of the Corporation in connection with their service as directors of the Corporation, their employment by the Corporation or their retention as consultants by the Corporation, (ii) such number of shares of Common Stock which are repurchased by the Corporation from such persons after such date pursuant to contractual rights held by the Corporation and at repurchase prices not exceeding the respective original purchase prices paid by such persons to the Corporation therefor, (iii) Common Stock or Common Stock Equivalents issued as consideration in a merger, (iv) Common Stock or Common Stock Equivalents issued pursuant to an adjustment in the Conversion Price of the Series B Stock pursuant to Section 6P, (v) Common Stock or Common Stock Equivalents issued or issuable (I) in a public offering before or in connection with which all outstanding shares of Preferred Stock will be converted to Common Stock or (II) upon the exercise of warrants or rights granted to underwriters in connection with such a public offering, or (vi) Common Stock or Common Stock Equivalents issued to a potential or existing customer or supplier or other strategic relationship or issued in connection with a credit facility or equipment lease transaction, including without limitation, warrants previously issued to The Bank of Nova Scotia and United Air Lines, Inc. 6F. Subdivision or Combination of Common Stock. In case the Corporation ------------------------------------------ shall at any time subdivide (by any stock split, stock dividend or otherwise subsequent to the date of this Amended and Restated Certificate of Incorporation) its outstanding shares of Common Stock into a greater number of shares, the Conversion Price of any series of Preferred Stock in effect immediately prior to such subdivision shall be proportionately reduced, and, conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares, the Conversion Price of any series of Preferred Stock in effect immediately prior to such combination shall be proportionately increased. In the case of any such subdivision, no further adjustment shall be made pursuant to subparagraph 6D(4) by reason thereof. 6G. Reorganization or Reclassification. If any capital reorganization ---------------------------------- or reclassification of the capital stock of the Corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization or reclassification, lawful and adequate provisions shall be made whereby each holder of a share or shares of Series A Stock and Series B Stock shall thereupon have the right to receive, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore receivable upon the conversion of such share or shares of Series A Stock and Series B Stock, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such Common Stock immediately theretofore receivable upon such conversion had such reorganization or reclassification not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of such holder to the end that the provisions hereof (including without limitation provisions for adjustments of the Conversion Price) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of such conversion rights. 6H. Notice of Adjustment. Upon any adjustment of the Conversion Price, -------------------- then and in each such case the Corporation shall give written notice thereof, by delivery in person, 11 certified or registered mail, return receipt requested, telecopier or telex, addressed to each holder of shares of Series A Stock and Series B Stock at the address of such holder as shown on the books of the Corporation, which notice shall state the Conversion Price for each series of Preferred Stock resulting from such adjustment, setting forth in reasonable detail the method upon which such calculation is based. 6I. Other Notices. In case at any time: ------------- (1) the Corporation shall declare any dividend upon its Common Stock payable in cash or stock or make any other distribution to the holders of its Common Stock; (2) the Corporation shall offer for subscription pro rata to the --- ---- holders of its Common Stock any additional shares of stock of any class or other rights; (3) there shall be any capital reorganization or reclassification of the capital stock of the Corporation, or a consolidation or merger of the Corporation with or into another entity or entities, or a sale, lease, abandonment, transfer or other disposition of all or substantially all of the assets of the Corporation; or (4) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Corporation; then, in any one or more of said cases, the Corporation shall give, by delivery in person, certified or registered mail, return receipt requested, telecopier or telex, addressed to each holder of any shares of Series A Stock and Series B Stock at the address of such holder as shown on the books of the Corporation, (a) at least 20 days' prior written notice of the date on which the books of the Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding up and (b) in the case of any such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding up, at least 20 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (a) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto and such notice in accordance with the foregoing clause (b) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding up, as the case may be. 6J. Stock to be Reserved. The Corporation will at all times reserve and -------------------- keep available out of its authorized Common Stock, solely for the purpose of issuance upon the conversion of Series A Stock and Series B Stock as herein provided, such number of shares of Common Stock as shall then be issuable upon the conversion of all outstanding shares of Series A Stock and Series B Stock. The Corporation covenants that all shares of Common Stock which shall be so issued shall be duly and validly issued and fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof, and, without limiting the generality 12 of the foregoing, the Corporation covenants that it will from time to time take all such action as may be requisite to assure that the par value per share of the Common Stock is at all times equal to or less than the Conversion Price in effect at the time. The Corporation will take all such action as may be necessary to assure that all such shares of Common Stock may be so issued without violation of any applicable law or regulation, or of any requirement of any national securities exchange or automated quotation system upon which the Common Stock may be listed. The Corporation will not take any action which results in any adjustment of the Conversion Price of any series of Preferred Stock if the total number of shares of Common Stock issued and issuable after such action upon conversion of the Series A Stock and Series B Stock would exceed the total number of shares of Common Stock then authorized by the Certificate of Incorporation. 6K. No Reissuance of Series A Stock or Series B Stock. Shares of Series ------------------------------------------------- A Stock and Series B Stock which are converted into shares of Common Stock as provided herein shall not be reissued. 6L. Issue Tax. The issuance of certificates for shares of Common Stock --------- upon conversion of Series A Stock and Series B Stock shall be made without charge to the holders thereof for any issuance tax in respect thereof, provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the holder of the Series A Stock and/or Series B Stock which is being converted. 6M. Closing of Books. The Corporation will at no time close its ---------------- transfer books against the transfer of any Series A Stock and/or Series B Stock or of any shares of Common Stock issued or issuable upon the conversion of any shares of Series A Stock or Series B Stock in any manner which interferes with the timely conversion of such Series A Stock and/or Series B Stock, except as may otherwise be required to comply with applicable securities laws. 6N. Definition of Common Stock. As used in this paragraph 6, the term -------------------------- "Common Stock" shall mean and include the Corporation's authorized Common Stock, par value $.0001 per share, as constituted on the date of filing of these terms of the Series A Stock and Series B Stock, and shall also include any capital stock of any class of the Corporation thereafter authorized which shall neither be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends nor entitled to a preference in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation; provided that the shares of Common Stock receivable upon conversion of shares of Series A Stock and/or Series B Stock shall include only shares designated as Common Stock of the Corporation on the date of filing of this instrument, or in case of any reorganization or reclassification of the outstanding shares thereof, the stock, securities or assets provided for in subparagraph 6G. 6O. Mandatory Conversion. If at any time the Corporation shall effect a -------------------- firm commitment underwritten public offering ("IPO") of shares of Common Stock in which (i) the aggregate price paid for such shares by the public shall be at least $30,000,000 and (ii) the price paid by the public for such shares shall be at least $2.053 per share (appropriately adjusted to 13 reflect the occurrence of any event described in subparagraph 6F subsequent to the date of this Amended and Restated Certificate of Incorporation), then effective upon the closing of the sale of such shares by the Corporation pursuant to such public offering, all outstanding shares of Series A Stock and Series B Stock shall automatically convert to shares of Common Stock on the basis set forth in this paragraph 6. Holders of shares of Series A Stock and Series B Stock so converted may deliver to the Corporation at its principal office (or such other office or agency of the Corporation as the Corporation may designate by notice in writing to such holders) during its usual business hours, the certificate or certificates for the shares so converted. As promptly as practicable thereafter, the Corporation shall issue and deliver to such holder a certificate or certificates for the number of whole shares of Common Stock to which such holder is entitled, together with any cash dividends and payment in lieu of fractional shares to which such holder may be entitled pursuant to subparagraph 6C. Until such time as a holder of shares of Series A Stock and/or Series B Stock shall surrender his or its certificates therefor as provided above, such certificates shall be deemed to represent the shares of Common Stock to which such holder shall be entitled upon the surrender thereof. 6P. Adjustment to Series B Stock Conversion Price Upon IPO. In the ------------------------------------------------------ event the Corporation consummates an IPO and the IPO Price Per Share is less than the Target Price, then the Series B Conversion Price in effect immediately prior to the IPO shall be adjusted according to the calculation below. In the event the IPO Price Per Share equals or exceeds the Target Price, no adjustment to the Series B Conversion Price shall occur under this Section 6P. This special one-time adjustment shall apply only to the Series B Conversion Price and shall not apply to the Series A Conversion Price. Notwithstanding anything contained herein to the contrary, in no event shall the Series B Conversion Price be adjusted below $2.8343 per share (as adjusted for subsequent stock splits, combinations, stock dividends and the like). Step 1: - ------ Target Price - the IPO Price Per Share = Shortfall Step 2: - ------ Shortfall = Alpha --------- Target Price Step 3: - ------ Alpha x the Series B Issue Price = Beta Step 4: - ------ The Series B Issue Price - Beta = New Series B Conversion Price Definitions: " Target Price" shall equal $7.0856 per share (as adjusted for subsequent stock splits, combinations, stock dividends and the like). 14 "Series B Issue Price" shall equal $5.6685 (as adjusted for subsequent stock splits, combinations, stock dividends and the like). "IPO Price Per Share" shall equal the initial public offering price per share at which the Corporation's Common Stock is first sold to the public pursuant to a Registration Statement on Form S-1 which has been declared effective by the Securities and Exchange Commission. 7. Redemption. The shares of Series A Stock and Series B Stock shall be ---------- redeemed as follows: 7A. Redemption. On August 18, 2003 (the "Series A Redemption Date"), ---------- the Corporation shall at the option of the holders of a majority of the outstanding Series A Stock, redeem all outstanding shares of Series A Stock. On September 2, 2004 (the "Series B Redemption Date"), the Corporation shall at the option of the holders of a majority of the outstanding Series B Stock, redeem all outstanding shares of Series B Stock. The Series A Redemption Date and the Series B Redemption Date shall each be referred to as a "Redemption Date." 7B. Redemption Price and Payment. The shares of Series A Stock to be ---------------------------- redeemed on the Series A Redemption Date shall be redeemed by paying for each share in cash an amount equal to $1.0266 per share plus, in the case of each share, an amount equal to all dividends, excluding Accruing Dividends, declared but unpaid thereon, computed to such Series A Redemption Date, such amount being referred to as a "Redemption Price" or more specifically the "Series A Redemption Price". Such payment shall be made in full on the Series A Redemption Date to the holders entitled thereto. The shares of Series B Stock to be redeemed on the Series B Redemption Date shall be redeemed by paying for each share in cash an amount equal to $5.6685 per share plus, in the case of each share, an amount equal to all dividends, excluding Accruing Dividends, declared but unpaid thereon, computed to such Series B Redemption Date, such amount being referred to as a "Redemption Price" or more specifically the "Series B Redemption Price". Such payment shall be made in full on the Series B Redemption Date to the holders entitled thereto. 7C. Redemption Mechanics. At least 20 but not more than 30 days prior -------------------- to any Redemption Date, written notice (the "Redemption Notice") shall be given by the Corporation by delivery in person, certified or registered mail, return receipt requested, telecopier or telex, to each holder of record (at the close of business on the business day next preceding the day on which the Redemption Notice is given) of shares of Series A Stock or Series B Stock, as the case may be, notifying such holder of the redemption and specifying the Series A Redemption Price or Series B Redemption Price, the Series A Redemption Date or Series B Redemption Date, the number of shares of Series A Stock or Series B Stock to be redeemed from such holder (computed on a pro rata basis in accordance with the number of such shares held by all holders thereof) and the place where said Series A Redemption Price or Series B Redemption Price shall be payable. The Redemption Notice shall be addressed to each holder at his address as shown by the records of the Corporation. From and after the close of business on a Redemption Date, unless there shall have been a default in the payment of the applicable Redemption Price, all rights of holders of shares of Series A Stock or Series B Stock, as the case may be, (except the 15 right to receive the applicable Redemption Price) shall cease with respect to the shares redeemed on such Redemption Date, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the Corporation legally available for redemption of shares of Series A Stock or Series B Stock on the applicable Redemption Date are insufficient to redeem the total number of shares of Series A Stock or Series B Stock to be redeemed on such Redemption Date, the holders of such shares shall share ratably in any funds legally available for redemption of such shares according to the respective amounts which would be payable to them if the full number of shares to be redeemed on such Redemption Date were actually redeemed. The shares of Series A Stock or Series B Stock not so redeemed shall remain outstanding and entitled to all rights and preferences provided herein. At any time thereafter when additional funds of the Corporation are legally available for the redemption of such shares of Series A Stock and/or Series B Stock, such funds will be used, at the end of the next succeeding fiscal quarter, to redeem the balance of such shares, or such portion thereof for which funds are then legally available, on the basis set forth above. 7D. Redeemed or Otherwise Acquired Shares to be Retired. Any shares --------------------------------------------------- of Series A Stock and/or Series B Stock redeemed pursuant to this paragraph 7 or otherwise acquired by the Corporation in any manner whatsoever shall be cancelled and shall not under any circumstances be reissued; and the Corporation may from time to time take such appropriate corporate action as may be necessary to reduce accordingly the number of authorized shares of Series A Stock and/or Series B Stock. 8. Amendments. No provision of these terms of the Series A Stock and/or ---------- Series B Stock may be amended, modified or waived without the written consent or affirmative vote of the holders of at least a majority of the then outstanding total shares of each of the Series A Stock and the Series B Stock, voting as separate series. C. The powers, preferences, rights, restrictions, and other matters relating to the Common Stock are as follows: 1. Dividends. Subject to the rights of holders of all classes of stock --------- at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when, if and as declared by the Board of Directors, out of any assets of the Corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. 2. Liquidation. The liquidation rights of the holders of the Common ----------- Stock shall be as set forth in paragraph B4 above. 3. Voting. The holder of each share of Common Stock shall have the ------ right to one vote for each such share of Common Stock and shall be entitled to notice of any stockholders' meeting in accordance with the Bylaws of the Corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. FIFTH: In furtherance and not in limitation of the powers conferred ----- by statute, the Board of Directors shall have the power, subject to the provisions of paragraphs B.5 of 16 Article FOURTH, both before and after receipt of any payment for any of the Corporation's capital stock, to adopt, amend, repeal or otherwise alter the Bylaws of the Corporation without any action on the part of the stockholders; provided, however, that the grant of such power to the Board of Directors shall not divest the stockholders of nor limit their power, subject to the provisions of paragraph C.5 of Article FOURTH, to adopt, amend, repeal or otherwise alter the Bylaws. SIXTH: Elections of directors need not be by written ballot unless ----- the Bylaws of the Corporation shall so provide. SEVENTH: The Corporation reserves the right to adopt, repeal, rescind ------- or amend in any respect any provisions contained in this Amended and Restated Certificate of Incorporation in the manner now or hereafter prescribed by applicable law, and all rights conferred on stockholders herein are granted subject to this reservation. EIGHTH: A director of the Corporation shall, to the full extent ------ permitted by the Delaware General Corporation Law as it now exists or as it may hereafter be amended, not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Neither any amendment nor repeal of this Article EIGHTH, nor the adoption of any provision of this Amended and Restated Certificate of Incorporation inconsistent with the Article EIGHTH, shall eliminate or reduce the effect of this Article EIGHTH in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article EIGHTH, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. NINTH. Meetings of stockholders may be held within or without the ----- State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. 17 EX-3.3 5 BYLAWS OF BUY.COM EXHIBIT 3.3 BYLAWS OF BUY CORP. a Delaware corporation ARTICLE I OFFICES Section 1. Registered Office. The registered office shall be at the office ----------------- of National Registered Agents, Inc. Section 2. Other Offices. The corporation may also have offices at such ------------- other places both within and without the State of Delaware as the Board of Directors may on an annual basis determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. Annual Meeting. An annual meeting of the stockholders for the -------------- election of directors shall be held at such place either within or without the State of Delaware as shall be designated on an annual basis by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Notice of Annual Meeting. Written notice of the annual meeting ------------------------ stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting. Section 3. Voting List. The officer who has charge of the stock ledger of ----------- the corporation shall prepare and make, or cause a third party to prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 4. Special Meetings. Special meetings of the stockholders of this ---------------- corporation, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, shall be called by the President or Secretary at the request in writing of the President, a majority of the members of the Board of Directors or holders of at least 20% of the total voting power of all outstanding shares of stock of this corporation then entitled to vote, and may not be called absent such a request. Such request shall state the purpose or purposes of the proposed meeting. Section 5. Notice of Special Meetings. As soon as reasonably practicable -------------------------- after receipt of a request as provided in Section 4 of this Article II, written notice of a special meeting, stating the place, date (which shall be not less than ten (10) nor more than sixty (60) days from the date of the notice) and hour of the special meeting and the purpose or purposes for which the special meeting is called, shall be given to each stockholder entitled to vote at such special meeting. Section 6. Scope of Business at Special Meeting. Business transacted at any ------------------------------------ special meeting of stockholders shall be limited to the purposes stated in the notice. Section 7. Quorum. The holders of a majority of the stock issued and ------ outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the chairman of the meeting or the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting as provided in Section 5 of this Article II. Section 8. Qualifications to Vote. The stockholders of record on the books ---------------------- of the corporation at the close of business on the record date as determined by the Board of Directors and only such stockholders shall be entitled to vote at any meeting of stockholders or any adjournment thereof. Section 9. Record Date. The Board of Directors may fix a record date for ----------- the determination of the stockholders entitled to notice of or to vote at any stockholders' meeting and at any adjournment thereof, and to fix a record date for any other purpose. The record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of 2 business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 10. Action at Meetings. When a quorum is present at any meeting, ------------------ the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of applicable law or of the Certificate of Incorporation, a different vote is required, in which case such express provision shall govern and control the decision of such question. Section 11. Voting and Proxies. Unless otherwise provided in the ------------------ Certificate of Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one (1) vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three (3) years from its date, unless the proxy provides for a longer period. Each proxy shall be revocable unless expressly provided therein to be irrevocable and unless it is coupled with an interest sufficient in law to support an irrevocable power Section 12. Nominations for Board of Directors. Nominations for election to ---------------------------------- the Board of Directors must be made by the Board of Directors or by any stockholder of any outstanding class of capital stock of the corporation entitled to vote for the election of directors. Nominations, other than those made by the Board of Directors of the corporation, must be preceded by notification in writing in fact received by the Secretary of the corporation not less than sixty (60) days prior to any meeting of stockholders called for the election of directors. Such notification shall contain the written consent of each proposed nominee to serve as a director if so elected and the following information as to each proposed nominee and as to each person, acting alone or in conjunction with one or more other persons as a partnership, limited partnership, syndicate or other group, who participates or is expected to participate in making such nomination or in organizing, directing or financing such nomination or solicitation of proxies to vote for the nominee: (a) the name, age,residence, address, and business address of each proposed nominee and of each such person; (b) the principal occupation or employment, the name, type of business and address of the corporation or other organization in which such employment is carried on of each proposed nominee and of each such person; (c) the amount of stock of the corporation owned beneficially, either directly or indirectly, by each proposed nominee and each such person; and (d) a description of any arrangement or understanding of each proposed nominee and of each such person with each other or any other person regarding future employment or any 3 future transaction to which the corporation will or may be a party. The presiding officer of the meeting shall have the authority to determine and declare to the meeting that a nomination not preceded by notification made in accordance with the foregoing procedure shall be disregarded. Section 13. Stockholder Proposals for Meetings. At any meeting of the ---------------------------------- stockholders, only such business shall be conducted as shall be properly before the meeting. To be properly before a meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before a meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal place of business of the corporation not less than thirty (30) days nor more than sixty (60) days prior to the meeting; provided, however, that in the event that less than forty (40) days notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. A stockholder's written notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and address as they appear on the corporation's books of the stockholder proposing such business, (c) the class and number of shares of the corporation which are beneficially owned by such stockholder, and (d) any material interest of such stockholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at a meeting unless properly brought before such meeting in accordance with the procedures set forth in this Section 13 of Article II. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 13 of Article II and if it shall be so determined, the chairman of the meeting shall so declare this to the meeting and such business not properly brought before the meeting shall not be transacted. ARTICLE III DIRECTORS Section 1. Powers. The business of the corporation shall be managed by or ------ under the direction of its Board of Directors, which may exercise all such powers of the corporation and do all such lawful acts and things as are not by applicable law or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders. Section 2. Number; Election; Tenure and Qualification. The number of ------------------------------------------ directors which shall constitute the whole Board of Directors shall be fixed from time to time by resolution of the Board of Directors or by the stockholders at an annual meeting of the stockholders provided that 4 the number of directors shall be not less than one (1) nor more than eight (8). With the exception of the first Board of Directors, which shall be elected by the incorporator, and except as provided in the corporation's Certificate of Incorporation or in Section 3 of this Article III, the directors shall be elected at the annual meeting of the stockholders by a plurality vote of the shares represented in person or by proxy and each director elected shall hold office until his successor is elected and qualified unless he shall resign, become disqualified, disabled, or otherwise removed. Directors need not be stockholders. Section 3. Vacancies and Newly Created Directorships. Unless otherwise ----------------------------------------- provided in the Certificate of Incorporation, vacancies and newly-created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director. The directors so chosen shall serve for the remainder of the term of the vacated directorships being filled and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. Section 4. Location of Meetings. The Board of Directors of the corporation -------------------- may hold meetings, both regular and special, either within or without the State of Delaware. Section 5. Meeting of Newly Elected Board of Directors. The first meeting ------------------------------------------- of each newly elected Board of Directors shall be held immediately following the annual meeting of stockholders and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event such meeting is not held at such time, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors. Section 6. Regular Meetings. Regular meetings of the Board of Directors ---------------- may be held upon at least seven (7) days prior written notice at such time and at such place as shall from time to time be determined by the Board of Directors; provided that any director who is absent when such a determination is made shall be given notice of such location. Notice may be waived in accordance with Section 229 of the Delaware General Corporation Law. Section 7. Special Meetings. Special meetings of the Board of Directors ---------------- may be called by the President on seven (7) days' notice to each director by mail or two (2) days' notice to each director by overnight courier service or facsimile; special meetings shall be called by the President or Secretary in a like manner and on like notice on the written request of two (2) directors unless the Board of Directors consists of only one (1) director, in which case special meetings shall be called by the President or Secretary in a like manner and on like notice on the written request of the sole director. Notice may be waived in accordance with Section 229 of the Delaware General Corporation Law. Section 8. Quorum and Action at Meetings. At all meetings of the Board of ----------------------------- Directors, a majority of the directors then in office shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall 5 be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 9. Action Without a Meeting. Unless otherwise restricted by the ------------------------ Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Section 10. Telephonic Meeting. Unless otherwise restricted by the ------------------ Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, upon proper notice duly given, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. Section 11. Committees. The Board of Directors may, by resolution passed ---------- by a majority of the whole board, designate one or more committees, each committee to consist of one (1) or more of the directors of the corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence of disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Section 12. Committee Authority. Any such committee, to the extent ------------------- provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, amending the Bylaws of the corporation, or any action requiring unanimous consent of the Board of Directors pursuant to the terms of the Certificate of Incorporation; and, unless the resolution or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Section 13. Committee Minutes. Each committee shall keep regular minutes ----------------- of its meetings and report the same to the Board of Directors when required. 6 Section 14. Directors Compensation. Unless otherwise restricted by ---------------------- the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. Section 15. Resignation. Any director or officer of the corporation ----------- may resign at any time. Each such resignation shall be made in writing and shall take effect at the time specified therein, or, if no time is specified, at the time of its receipt by either the Board of Directors, the President or the Secretary. The acceptance of a resignation shall not be necessary to make it effective unless expressly so provided in the resignation. ARTICLE IV NOTICES Section 1. Notice to Directors and Stockholders. Whenever, under the ------------------------------------ provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. An affidavit of the Secretary or an Assistant Secretary or of the transfer agent of the corporation that the notice has been given shall in the absence of fraud, be prima facie evidence of the facts stated therein. Notice to directors may also be given by telephone, facsimile or telegram. Section 2. Waiver. Whenever any notice is required to be given under ------ the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. The written waiver need not specify the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. ARTICLE V OFFICERS Section 1. Enumeration. The officers of the corporation shall be ----------- chosen by the Board of 7 Directors and shall be a President and a Secretary and such other officers with such other titles as the Board of Directors shall determine. The Board of Directors may elect from among its members a Chairman or Chairmen of the Board and a Vice Chairman of the Board. The Board of Directors may also choose one (1) or more Vice-Presidents, a Treasurer or Chief Financial Officer, Assistant Secretaries and Assistant Treasurers. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these Bylaws otherwise provide. Section 2. Election. The Board of Directors at its first meeting -------- after each annual meeting of stockholders shall elect a President and a Secretary and such other officers with such other titles as the Board of Directors shall determine. Section 3. Appointment of Other Agents. The Board of Directors may --------------------------- appoint such other officers and agents as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. Section 4. Compensation. The salaries of all officers of the ------------ corporation shall be fixed by the Board of Directors or a committee thereof. The salaries of agents of the corporation shall, unless fixed by the Board of Directors, be fixed by the President or any Vice-President of the corporation. Section 5. Tenure. The officers of the corporation shall hold office ------ until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the directors of the Board of Directors. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. Section 6. Chairman of the Board and Vice-Chairman of the Board. The ---------------------------------------------------- Chairman or Chairmen of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he or they shall be present. He or they shall have and may exercise such powers as are, from time to time, assigned to him or them by the Board and as may be provided by law. In the absence of the Chairman of the Board, the Vice Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. He shall have and may exercise such powers as are, from time to time, assigned to him by the Board of Directors and as may be provided by law. Section 7. President. The President shall be the Chief Executive --------- Officer of the corporation unless such title is assigned to another officer of the corporation; in the absence of a Chairman and Vice Chairman of the Board, the President shall preside as the chairman of meetings of the stockholders and the Board of Directors; and the President shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. The President or any Vice-President shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some 8 other officer or agent of the corporation. Section 8. Vice-President. In the absence of the President or in the -------------- event of his inability or refusal to act, the Vice-President, if any (or in the event there be more than one Vice-President, the Vice-Presidents in the order designated by the Board of Directors, or in the absence of any designation, then in the order of their election) shall perform the duties of the President, and when so acting shall have all the powers of and be subject to all the restrictions upon the President. The Vice-President shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Section 9. Secretary. The Secretary shall attend all meetings of the --------- Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision he shall be subject. He shall have custody of the corporate seal of the corporation and he, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. Section 10. Assistant Secretary. The Assistant Secretary, or if ------------------- there be more than one (1), the Assistant Secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the Secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Section 11. Chief Financial Officer. The Chief Financial Officer may ----------------------- also be known as the Treasurer and shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. The Chief Financial Officer shall disburse the funds of the corporation as may be ordered by the Board of Directors, President or Chief Executive Officer, taking proper vouchers for such disbursements, and shall render to the President, Chief Executive Officer and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Chief Financial Officer and of the financial condition of the corporation. If required by the Board of Directors, the Chief Financial Officer shall give the corporation a bond (which shall be renewed every six (6) years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. 9 ARTICLE VI CAPITAL STOCK Section 1. Certificates. Every holder of stock in the corporation ------------ shall be entitled to have a certificate, signed by, or in the name of the corporation by, the Chairman or Vice-Chairman of the Board of Directors, or the President or a Vice-President and the Treasurer or the Secretary or an Assistant Secretary of the corporation, certifying the number of shares owned by him in the corporation. Certificates may be issued for partly paid shares and in such case upon the face or back of the certificates issued to represent any such partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be specified. Section 2. Class or Series. If the corporation shall be authorized --------------- to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 3. Signature. Any of or all of the signatures on the --------- certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Section 4. Lost Certificates. The Board of Directors may direct a ----------------- new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 5. Transfer of Stock. Upon surrender to the corporation or ----------------- the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of 10 succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 6. Record Date. In order that the corporation may determine ----------- the stockholders entitled to notice of or to vote at any meeting of stockholder or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 7. Registered Stockholders. The corporation shall be ----------------------- entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII GENERAL PROVISIONS Section 1. Dividends. Dividends upon the capital stock of the --------- corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property or in shares of capital stock, subject to the provisions of the Certificate of Incorporation. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purposes as the Board of Directors shall think conducive to the interest of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. Section 2. Checks. All checks or demands for money and notes of the ------ corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 3. Fiscal Year. The fiscal year of the corporation shall be ----------- fixed by resolution of the Board of Directors. 11 Section 4. Seal. The Board of Directors may adopt a corporate seal ---- having inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. Section 5. Loans. The Board of Directors of this corporation may, ----- without stockholder approval, authorize loans to, or guaranty obligations of, or otherwise assist, including, without limitation, the adoption of employee benefit plans under which loans and guarantees may be made, any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the Board of Directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest, and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. ARTICLE VIII INDEMNIFICATION Section 1. Scope. The corporation shall, to the fullest extent ----- permitted by Section 145 of the Delaware General Corporation Law, as that Section may be amended and supplemented from time to time, indemnify any director, officer, employee or agent of the corporation, against expenses (including attorneys' fees), judgments, fines, amounts paid in settlement and/or other matters referred to in or covered by that Section, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. Section 2. Advancing Expenses. Expenses incurred by a director of ------------------ the corporation in defending a civil or criminal action, suit or proceeding by reason of the fact that he is or was a director, officer, employee or agent of the corporation (or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized by relevant provisions of the Delaware General Corporation Law; provided, however, the corporation shall not be required to advance such expenses to a director (i) who commences any action, suit or proceeding as a plaintiff unless such advance is specifically approved by a majority of the Board of Directors, or (ii) who is a party to an action, suit or proceeding brought by the corporation and approved by a majority of the Board of Directors which alleges willful misappropriation of corporate assets by such director, disclosure of confidential information in violation of such director's fiduciary or contractual obligations to the corporation, or any other willful and deliberate breach in bad faith of such director's duty to the corporation or its stockholders. 12 Section 3. Liability Offset. The corporation's obligation to provide ---------------- indemnification under this Article VIII shall be offset to the extent the indemnified party is indemnified by any other source including, but not limited to, any applicable insurance coverage under a policy maintained by the corporation, the indemnified party or any other person. Section 4. Continuing Obligation. The provisions of this Article --------------------- VIII shall be deemed to be a contract between the corporation and each director of the corporation who serves in such capacity at any time while this bylaw is in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought based in whole or in part upon any such state of facts. Section 5. Nonexclusive. The indemnification and advancement of ------------ expenses provided for in this Article VIII shall (i) not be deemed exclusive of any other rights to which those indemnified may be entitled under any by-law, agreement or vote of stockholders or disinterested directors or otherwise, both as to action in their official capacities and as to action in another capacity while holding such office, (ii) continue as to a person who has ceased to be a director and (iii) inure to the benefit of the heirs, executors and administrators of such a person. Section 6. Other Persons. In addition to the indemnification rights ------------- of directors, officers, employees, or agents of the corporation, the Board of Directors in its discretion shall have the power on behalf of the corporation to indemnify any other person made a party to any action, suit or proceeding who the corporation may indemnify under Section 145 of the Delaware General Corporation Law. Section 7. Definitions. The phrases and terms set forth in this ----------- Article VIII shall be given the same meaning as the identical terms and phrases are given in Section 145 of the Delaware General Corporation Law, as that Section may be amended and supplemented from time to time. 13 ARTICLE IX AMENDMENTS Except as otherwise provided in the Certificate of Incorporation, these Bylaws may be altered, amended or repealed, or new Bylaws may be adopted, by the holders of a majority of the outstanding voting shares or by the Board of Directors, when such power is conferred upon the Board of Directors by the Certificate of Incorporation, at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new Bylaws be contained in the notice of such special meeting. If the power to adopt, amend or repeal Bylaws is conferred upon the Board of Directors by the Certificate of Incorporation, it shall not divest or limit the power of the stockholders to adopt, amend or repeal Bylaws. 14 FIRST AMENDMENT TO BYLAWS OF BUY.COM INC. Amendment to Article III, Section 2 of the Bylaws (Amended Bylaws as Adopted March 1, 1999) Article III, Section 2 of the Bylaws of the Corporation be amended in full to read as follows: "Section 3.2 Number of Directors. The number of directors which shall ------------------- constitute the whole Board of Directors shall be fixed from time to time by resolution of the Board of Directors or by the stockholders at an annual meeting of the stockholders provided that the number of directors shall not be less than one (1) nor more than nine (9). With the exception of the first Board of Directors, which shall be elected by the incorporator, and except as provided in the corporation's Certificate of Incorporation or in Section 3 of this Article III, the directors shall be elected at an annual meeting of the stockholders by a plurality vote of the shares represented in person or by proxy and each director elected shall hold office until his successor is elected and qualified unless he shall resign, become disqualified, disabled, or otherwise removed. Directors need not be stockholders. ----------------------------------- Murray Williams, Secretary EX-10.1 6 THIRD AMENDED AND RESTATED INVESTOR'S RIGHTS EXHIBIT 10.1 BUY.COM INC. THIRD AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT September 2, 1999 BUY.COM INC. THIRD AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT This Third amended and Restated Investors' Rights Agreement (the "Agreement") is entered into as of the 2nd day of September, 1999, by and among Buy.Com Inc., a Delaware corporation (the "Company"), the holders of the Company's Series A Convertible Participating Preferred Stock (the "Series A Stock") set forth on Exhibit A hereto, the holders of the Company's Series B --------- Convertible Participating Preferred Stock (the "Series B Stock") and Common Stock set forth on Exhibit B hereto, the Founders set forth on Exhibit C hereto, --------- --------- Ingram Capital Inc. ("Ingram") as the assignee of Ingram Entertainment Inc., The Bank of Nova Scotia ("Nova Scotia") and United Air Lines, Inc. ("UA"). The holders of the Series A Stock shall be referred to hereinafter as the "Series A Investors" and each individually as a "Series A Investor." The holders of the Series B Stock shall be referred to hereinafter as the "Series B Investors" and each individually as a "Series B Investor." The Series A Investors and the Series B Investors shall be referred to collectively as the "Investors" and each individually as an "Investor." The Founders shall be referred to hereinafter together as the "Founders" and each individually as a "Founder." As a matter of clarity, a list of all Holders and the Registrable Securities held by each is attached hereto as Exhibit D. --------- WHEREAS, the Company (under its previous name: "Buy Corp."), the Series A Investors and the Founders were parties to an Investors' Rights Agreement, dated as of August 18, 1998 (the "Original Agreement"). WHEREAS, the Company acquired SpeedServe, Inc. ("SpeedServe") by way of a merger ("Merger") of SpeedServe with and into a wholly owned subsidiary of the Company in which Ingram, as the principal stockholder of SpeedServe, received shares of the Company's Common Stock. WHEREAS, the Original Agreement was amended and restated to extend to Ingram certain registration rights, information rights and other rights pursuant to that certain Amended and Restated Investors' Rights Agreement dated December 3, 1998 (the "First Amended and Restated Agreement"). WHEREAS, the Company secured a credit facility with Nova Scotia pursuant to a Credit Agreement (the "Credit Agreement") dated July 20, 1999 in connection with which Nova Scotia received a warrant (the "Nova Scotia Warrant") to purchase shares of the Company's Common Stock. WHEREAS, the Company effected a 15 for 1 stock split of its Common Stock and Preferred Stock (the "Stock Split"), effective as of July 14, 1999 and the share numbers in the Second Amended and Restated Agreement were adjusted to give effect to the Stock Split. WHEREAS, the Company and UA formed a Delaware limited liability company ("BuyTravel.com") to operate an internet based travel service, and in connection with the BuyTravel.com joint venture, the Company issued to UA a warrant to purchase 2,000,000 shares of the Company's Common Stock (the "UA Warrant"). 1 WHEREAS, the First Amended and Restated Agreement was amended and restated to extend to Nova Scotia and UA certain registration rights and other rights pursuant to that certain Second Amended and Restated Investors' Rights Agreement dated July 20, 1999 (the "Second Amended and Restated Agreement"). WHEREAS, pursuant to the terms and conditions of that certain Series B Convertible Participating Preferred Stock Purchase Agreement, of even date herewith, the Series B Investors have purchased an aggregate of 15,877,249 shares of Series B Stock. WHEREAS, it is a condition to the purchase of the Series B Stock by the Series B Investors that the Series B Investors be granted certain registration rights, information rights and other rights. NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in this Agreement, the Series A Investors, the Series B Investors, Ingram, Nova Scotia, UA and the Founders who are parties to the Second Amended and Restated Agreement hereby agree that the Second Amended and Restated Agreement shall be superseded and replaced by this Agreement, and the parties hereto further mutually agree as follows: 1. General 1.1 Definitions. (a) "Common Stock" shall mean the common stock, $.0001 par value per share, of the Company. (b) "Equity Securities" shall mean (i) any Common Stock, Preferred Stock or other equity security of the Company, (ii) any security convertible into any Common Stock, Preferred Stock or other equity security (including any option to purchase such a security), (iii) any security carrying any warrant or right to subscribe to or purchase any Common Stock, Preferred Stock or other equity security or (iv) any such warrant or right. (c) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (d) "Form S-3" means such form under the Securities Act as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. (e) "Holder" means any Investor, Founder, Ingram, Nova Scotia or UA owning of record Registrable Securities that have not been sold to the public or any assignee of record of such Registrable Securities in accordance with Section 3.9 hereof. (f) "Initial Offering" shall mean the Company's first Qualified Public Offering. 2 (g) "Investor Holders" means the holders of Registrable Securities owned of record by the Investors. (h) "Preferred Stock" shall mean the preferred stock, including the Series A Stock and Series B Stock of the Company. (i) "Qualified Public Offering" shall mean an underwritten public offering covering the offer and sale of Common Stock of the Company in which the per share price to the public is at least $2.053 per share (as adjusted for stock splits, recapitalizations and the like subsequent to the Stock Split Date) and the net cash proceeds to the Company (after underwriting discounts, commissions and fees) are at least $30,000,000. (j) The terms "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and the declaration or ordering of effectiveness of such registration statement or document. (k) The term "Registrable Securities" shall mean (i) Common Stock held by the Founders, (ii) the Common Stock of the Company issued or issuable upon conversion of the Shares, (iii) the Common Stock purchased by the Investors from the Scott A. Blum Separate Property Trust, David Mason and Michael Mason pursuant to that certain Stock Purchase Agreement dated as of the date hereof, (iv) Common Stock held by Ingram and acquired in connection with the Merger, (v) the Common Stock acquired by Ingram Entertainment, Inc. and the Series A Investors upon their exercise of the right of first offer on March 10, 1999, April 5, 1999 and June 29, 1999, (vi) except for purposes of Section 3.1 and Section 3.3, the Common Stock issuable to Nova Scotia upon exercise of the Nova Scotia Warrant, (vii) Common Stock issued to UA upon the exercise of the UA Warrant, and (viii) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, (i), (ii), (iii), (iv), (v), (vi) or (vii) above. Notwithstanding the foregoing, Registrable Securities shall not include any securities sold by a person to the public either pursuant to a registration statement or Rule 144 or sold in a private transaction in which the transferor's rights under Section 3 of this Agreement with respect to such registration rights are not assigned. As a matter of clarity, Nova Scotia shall not have demand registration rights or Form S-3 registration rights pursuant to Section 3.1 and 3.3. (l) "Registrable Securities then outstanding" shall be the number of shares determined by calculating the total number of shares of the Company's Common Stock that are Registrable Securities and either (i) are then issued and outstanding or (ii) are issuable pursuant to then exercisable or convertible securities. (m) "Rule 144" shall mean Rule 144 of the rules and regulations promulgated under the Securities Act. (n) "SEC" means the Securities and Exchange Commission. (o) "Securities Act" shall mean the Securities Act of 1933, as amended. 3 (p) "Shares" shall mean the Company's Series A Stock and Series B Stock issued or sold to and held by the Investors listed on Exhibits A and B ---------------- hereto and their permitted assigns. 2. Restrictions On Transfer. 2.1 Restrictions on Transfer. (a) Each Holder agrees not to make any disposition of all or any portion of the Shares or Registrable Securities unless and until the transferee has agreed in writing for the benefit of the Company to be bound by this Agreement unless and until: (i) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (ii) (A) Such Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition and (B) if reasonably requested by the Company, such Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Securities Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. (iii) Notwithstanding the provisions of paragraphs (i) and (ii) above, no such registration statement or opinion of counsel shall be necessary for a transfer by a Holder which is (A) a partnership to any or all of its partners or former partners, (B) a corporation to its stockholders in accordance with their interests in the corporation, (C) a limited liability company to its members or former members in accordance with their membership interests, (D) by a trust to its beneficiaries in accordance with their interests in the trust or (E) to the Holder's family member or trust for the benefit of an individual Holder; provided, however -------- ------- that, notwithstanding anything in this Section 2.1 to the contrary, (I) the Investors shall be permitted to sell, transfer, assign or pledge all or any part of the Shares to (i) any direct or indirect, wholly-owned subsidiary of SOFTBANK Corp. or of such Investor or (ii) any partnership or other entity of which any direct or indirect subsidiary of SOFTBANK Corp. is a general partner (any person or entity referred to in clause (i) or (ii) being herein referred to as a "SOFTBANK Entity"), (II) UA shall be permitted to sell, transfer, assign or pledge all or any part of the UA Warrant or Common Stock issuable upon exercise thereof to any direct or indirect, subsidiary of UA or any entity which controls, is controlled by, or is under common control with UA or any direct or indirect subsidiary of UA, and (III) Ingram Entertainment, Inc. shall be permitted to transfer the Common Stock described in Section 1.1(k)(v) to Ingram and Ingram shall be permitted to sell, transfer, assign or pledge all or any part of the Common Stock held by Ingram to any direct or indirect, wholly owned subsidiary of Ingram or any entity which controls, is controlled by or under common control with Ingram or any direct or indirect subsidiary of Ingram; provided, further that, 4 the transferee will be subject to the terms of this Agreement to the same extent as if he were an original Holder hereunder. (b) Each certificate representing Shares or Registrable Securities shall (unless otherwise permitted by the provisions of this Agreement) be stamped or otherwise imprinted with a legend substantially similar to the following (in addition to any legend required under applicable state securities laws or as provided elsewhere in this Agreement): First Legend: ------------- THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. Second Legend: -------------- THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED EXCEPT IN COMPLIANCE WITH THE THIRD AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT, DATED SEPTEMBER 2, 1999 AS AMENDED FROM TIME TO TIME, COPIES OF WHICH ARE ON FILE AT THE OFFICE OF THE ISSUER. (c) The Company shall reissue promptly unlegended certificates at the request of any holder thereof if the holder shall have obtained an opinion of counsel (which counsel may be counsel to the Company) reasonably acceptable to the Company to the effect that the securities proposed to be disposed of may lawfully be so disposed of without registration, qualification or legend. (d) Any legend endorsed on an instrument pursuant to applicable state securities laws and the stop-transfer instructions with respect to such securities shall be removed upon receipt by the Company of an order of the appropriate blue sky authority authorizing such removal. 2.2 "Market Stand Off" Agreement. Each Holder hereby agrees that during the one hundred twenty (120)-day period following the effective date of a registration statement of the Company filed under the Securities Act (the "Market Stand Off Period"), it shall not, to the extent requested by the Company and/or the managing underwriter, sell or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any Common Stock of the Company held by it at any time during such period except Common Stock included in such registration; provided, that, officers and directors of the Company (as determined by the managing underwriter) enter into similar agreements. The Holders agree to increase the Market Stand Off Period to one hundred eighty (180) days at the request of the managing underwriter. In order to enforce the foregoing covenant, the Company may impose stop- transfer instructions with respect to the Registrable Securities of each Investor (and the shares or 5 securities of every other person subject to the foregoing restriction) until the end of such one hundred twenty (120)-day or longer period as provided above. 3. Registration. 3.1 Demand Registration. (a) Subject to the conditions of this Section 3.1: (i) If the Company shall receive a written request from the Series A Investor Holders of at least forty percent (40%) of the total Registrable Securities then outstanding and held by the Series A Investors ("Series A Investor Initiating Holders") that the Company file a registration statement under the Securities Act covering the registration of Registrable Securities covering at least twenty percent (20%) of the Registrable Securities then held by the Series A Investors (or any lesser percentage if the anticipated aggregate offering price to the public would exceed $5,000,000), then the Company shall, within fifteen (15) days of the receipt thereof, give written notice of such request to all Holders, and subject to the limitations of this Section 3.1, use its best efforts to effect, as soon as practicable, the registration under the Securities Act of all Registrable Securities that the Holders request to be registered. (ii) If the Company shall receive a written request from the Series B Investor Holders of at least forty percent (40%) of the total Registrable Securities then outstanding and held by the Series B Investor Holders ("Series B Investor Initiating Holders") that the Company file a registration statement under the Securities Act covering the registration of Registrable Securities covering at least twenty percent (20%) of the Registrable Securities then held by the Series B Investors (or any lesser percentage if the anticipated aggregate offering price to the public would exceed $5,000,000), then the Company shall, within fifteen (15) days of the receipt thereof, give written notice of such request to all Holders, and subject to the limitations of this Section 3.1, use its best efforts to effect, as soon as practicable, the registration under the Securities Act of all Registrable Securities that the Holders request to be registered. (iii) If the Company shall receive a written request from Ingram ("Ingram Initiating Holder") that the Company file a registration statement under the Securities Act covering the registration of Registrable Securities covering at least forty percent (40%) of the Common Stock issued to and held by Ingram in connection with the Merger (or any lesser percentage if the anticipated aggregate offering price to the public would exceed $5,000,000), then the Company shall, within fifteen (15) days of the receipt thereof, give written notice of such request to all Holders, and subject to the limitations of this Section 3.1, use its best efforts to effect, as soon as practicable, the registration under the Securities Act of all Registrable Securities that the Holders request to be registered. (iv) If the Company shall receive a written request from UA ("UA Initiating Holder") that the Company file a registration statement under the Securities Act covering the registration of Registrable Securities covering at least forty percent 6 (40%) of the Common Stock issued or issuable upon the exercise of the UA Warrant held by UA (or any lesser percentage if the anticipated aggregate offering price to the public would exceed $5,000,000), then the Company shall, within fifteen (15) days of the receipt thereof, give written notice of such request to all Holders, and subject to the limitations of this Section 3.1, use its best efforts to effect, as soon as practicable, the registration under the Securities Act of all Registrable Securities that the Holders request to be registered. (v) If the Company shall receive a written request from a Founder ("Founder Initiating Holder") that the Company file a registration statement under the Securities Act covering the registration of Registrable Securities covering at least forty percent (40%) of the Common Stock held by Founder (or any lesser percentage if the anticipated aggregate offering price to the public would exceed $5,000,000), then the Company shall, within fifteen (15) days of the receipt thereof, give written notice of such request to all Holders, and subject to the limitations of this Section 3.1, use its best efforts to effect, as soon as practicable, the registration under the Securities Act of all Registrable Securities that the Holders request to be registered. (b) If the Initiating Holders (for purposes of this Section 3.1, the term "Initiating Holder" shall mean a Series A Investor Initiating Holder, a Series B Investor Initiating Holder, the Ingram Initiating Holder, the UA Initiating Holder or the Founder Initiating Holder, as applicable) intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 3.1, and the Company shall include such information in the written notice referred to in Section 3.1(a). In such event, the right of any Holder to include its Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders (which underwriter or underwriters shall be reasonably acceptable to the Company). In the event the underwriter determines in good faith that marketing factors require a limitation of the number of shares to be underwritten, the number of shares that may be included in the underwriting shall be allocated among the Holders in accordance with Section 3.2. Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from the registration. (c) The Company shall not be required to effect a registration pursuant to this Section 3.1: (i) in the case of a demand by a Series A Investor Initiating Holder, prior to the earlier of (A) the consummation by the Company of an Initial Offering and (B) August 18, 2001; or (ii) in the case of a demand by a Series B Investor Initiating Holder, prior to the earlier of (A) the consummation by the Company of an Initial Public Offering and (B) September 2, 2002; or 7 (iii) in the case of a demand by the Ingram Initiating Holder, prior to the earlier of (A) the first anniversary of the consummation by the Company of an Initial Offering and (B) December 3, 2001; or (iv) in the case of a demand by the UA Initiating Holder, prior to the earlier of (A) the 6 months anniversary of the consummation by the Company of an Initial Offering and (B) July 20, 2002; or (v) in the case of a demand by the Founder Initiating Holder, prior to the earlier of (A) the 6 months anniversary of the consummation by the Company of an Initial Offering and (B) the third anniversary of the date hereof; or (vi) in the case of a demand by a Series A Investor Initiating Holder, after the Company has filed three (3) registration statements at the request of the Series A Investor Initiating Holder pursuant to Section 3.1(a)(i), and such registrations have been declared or ordered effective; or (vii) in the case of a demand by a Series B Investor Initiating Holder, after the Company has filed three (3) registration statements at the request of the Series B Investor Initiating Holder pursuant to Section 3.1(a)(ii), and such registrations have been declared or ordered effective; or (viii) in the case of a demand by Ingram, after the Company has filed one (1) registration statement pursuant to Section 3.1(a)(iii), and such registration has been declared or ordered effective; or (ix) in the case of a demand by UA, after the Company has filed one (1) registration statement pursuant to Section 3.1(a)(iv), and such registration statement has been declared or ordered effective; or (x) in the case of a demand by Founder, after the Company has filed two (2) registration statements pursuant to Section 3.1(a)(v), and such registration statements have been declared or ordered effective; or (xi) during the period starting with the date of filing of, and ending on the date one hundred eighty (180) days following the closing of the Company's Initial Offering; provided, that, the Company makes reasonable good faith efforts to cause such registration statement to become effective; or (xii) if within fifteen (15) days of receipt of a written request from Initiating Holders pursuant to Section 3.1(a), the Company gives notice to the Holders of the Company's intention to make an Initial Offering within ninety (90) days; or (xiii) if the Company shall furnish to the Investor Holders requesting a registration statement pursuant to this Section 3.1, a certificate signed by the President and Chairman of the Board stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be effected at such time, in which event 8 the Company shall have the right to defer such filing for a period of not more than ninety (90) days after receipt of the request of the Initiating Holders; provided, that, the right to delay a request may be exercised by the Company not more than once in any twelve (12)-month period. 3.2 Piggyback Registrations. The Company shall notify all Holders of Registrable Securities in writing at least thirty (30) days prior to the filing of any registration statement under the Securities Act for purposes of a public offering of securities of the Company (including, but not limited to, registration statements relating to initial or secondary offerings of securities of the Company and to offerings of securities of the Company initiated by any party exercising its demand registration rights, but excluding registration statements relating to employee benefit plans and corporate reorganizations or other transactions under Rule 145 of the Securities Act) and will afford each such Holder an opportunity to include in such registration statement all or part of such Registrable Securities held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by it shall, within fifteen (15) days after receipt of the above-described notice from the Company, so notify the Company in writing. Such notice shall state the intended method of disposition of the Registrable Securities by such Holder. If a Holder decides not to include all of its Registrable Securities in any registration statement thereafter filed by the Company, such Holder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein. If the registration statement under which the Company gives notice under this Section 3.2 is for an underwritten offering, the Company shall so advise the Holders of Registrable Securities. In such event, the right of any such Holder to be included in a registration pursuant to this Section 3.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Agreement, if the underwriter determines in good faith that marketing factors require a limitation of the number of shares to be underwritten, the number of shares that may be included in the underwriting shall be allocated as follows: (i) first, to the Company, up to fifty percent (50%) of the aggregate offering amount; (ii) second, to Founder, the Investor Holders, Ingram, Nova Scotia and UA on an Adjusted Pro Rata (as defined below) basis; (iii) third, to Founder, the Investor Holders, Ingram, Nova Scotia and UA on a pro rata basis based on the total number of Registrable Securities respectively held by the Founder, the Investor Holders, Ingram, Nova Scotia and UA; (iv) fourth, to the Company, and (v) fifth, to any stockholder of the Company (other than a Holder) on a pro rata basis. No such reduction shall (i) reduce the securities being offered by the Company for its own account to be included in the registration and underwriting below fifty percent (50%) of the total amount of securities included in such registration, unless the Company elects to offer less than 50% of the total amount of securities included in such registration or (ii) reduce the amount of securities of the selling Holders included in the registration below fifty percent (50%) of the total amount of securities included in such registration, unless the Holders elect to offer less than 50% of the total amount of securities included in such registration or (iii) reduce the amount of securities of the Founder 9 included in the registration and underwriting below fifty percent (50%) of the total amount of securities included in such registration, unless the Company elects to offer less than 50% of the total amount of securities included in such registration or (ii) reduce the amount of securities of the selling Holders included in the registration below fifty percent (50%) of the total amount of securities included in such registration, unless the Holders elect to offer less than 50% of the total amount of securities included in such registration or (iii) reduce the amount of securities of the Founder included in the registration and underwriting below seven and one half percent (7.5%) of the total amount of the securities included in such registration, unless the Founder elects to offer less than seven and one half percent (7.5%) of the total amount of securities included in such registration; provided, however, if such offering is the Initial Offering and such registration does not include shares of any other selling stockholders, then any or all of the Registrable Securities of the Holders may be excluded at the request of the underwriter. In no event will shares of any other selling stockholder be included in such registration which would reduce the number of shares which may be included by the Investor Holders, Founder, Ingram, Nova Scotia or UA, without the written consent of a majority in interest of the Registrable Securities proposed to be sold in the offering by the Series A Investors, a majority in interest of the Registrable Securities proposed to be sold in the offering by the Series B Investors, the written consent of Founder, the written consent of Ingram, the written consent of Nova Scotia and the written consent of UA. For purposes of this Section 3.2, "Adjusted Pro Rata" shall mean, with respect to each of Founder, any Series A Investor, any Series B Investor, Ingram, Nova Scotia or UA, the fraction of which (A) the numerator ("Numerator") is equal to the number of shares of Registrable Securities then held by Founder, any Series A Investor, any Series B Investor, Ingram, Nova Scotia or UA, as applicable, (B) the denominator ("Denominator") is equal to the aggregate number of Registrable Securities then held by Founder, the Series A Investors, the Series B Investors, Ingram, Nova Scotia and UA; provided, that so long as Softbank Technology Ventures IV LP, Softbank Technology Ventures V, LP Softbank Technology Advisors Fund V, LP, Softbank Technology Entrepreneurs Fund V, LP and Softbank Technology Advisors Fund LP (collectively, "Softbank Tech") holds or beneficially owns Registrable Securities, (A) the Numerator in any calculation of Adjusted Pro Rata share for Founder shall be equal to the number of Registrable Securities then held or beneficially owned by Softbank Tech and (B) the Denominator in any calculation of Adjusted Pro Rata share for Founder, any Series A Investor, any Series B Investor, Ingram, Nova Scotia or UA shall be reduced by the difference obtained by subtracting (i) the number of Registrable Securities then held or beneficially owned by Softbank Tech from (ii) the number of Registrable Securities then held or beneficially owned by Founder; provided, further, that in no event shall Founder's Adjusted Pro Rata share equal less than 15%. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 3.2 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. The registration expenses of such withdrawn registration shall be borne by the Company in accordance with Section 3.4 hereof. 3.3 Form S-3 Registration. In case the Company shall receive a written request from the Holders (other than Nova Scotia) that the Company effect a registration on Form S-3 (or any successor to Form S-3) or any similar short- form registration statement and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holders, the Company will: (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders of Registrable Securities; and (b) as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders 10 joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 3.3: (i) if Form S-3 (or any successor or similar form) is not available for such offering by the Holders; or (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than $3,000,000; or (iii) if the Company shall furnish to the Holders a certificate signed by the President and Chairman of the Board of Directors of the Company stating that, in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than ninety (90) days after receipt of the request of the Holders under this Section 3.3; provided, that, the right to delay a request may be exercised by the Company not more than once in any twelve (12)-month period. (c) Subject to the foregoing, the Company shall file a Form S-3 registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. All such registration expenses incurred in connection with registrations requested pursuant to this Section 3.3 after the first three (3) registrations per calendar year shall be paid by the selling Holders pro rata in proportion to the number of shares sold by each. 3.4 Registration Expenses. Except as set forth in Section 3.3(c), the Company shall bear all fees and expenses incurred in connection with any registration under this Agreement, including without limitation all registration, filing, qualification, printers' and accounting fees, fees and disbursements of counsel for the Company in its capacity as counsel to the selling Holders hereunder; if the Company counsel does not make itself available for this purpose, the Company will pay the reasonable fees and disbursements of a single special counsel for the Holders, except that each participating Holder shall bear its proportionate share of all amounts payable to underwriters in connection with such offering for discounts and commissions. The Company shall not, however, be required to pay for expenses of any registration proceeding begun pursuant to Sections 3.1 or 3.3, the request of which has been subsequently withdrawn by the Founder, the Investor Holders, Ingram, or UA, as applicable, unless the withdrawal is based upon material adverse information concerning the Company of which the Founder, the Investor Holders, Ingram, or UA, as applicable, initiating the registration request were not aware at the time of such request. If the Holders are required to pay their registration expenses, such expenses shall be borne by the holders of securities (including Registrable Securities) requesting such registration in proportion to the number of shares for which registration was requested. 11 3.5 Obligations of the Company. Whenever required to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder which have not yet been sold, keep such registration statement effective for up to one hundred eighty (180) days. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing. 3.6 Termination of Registration Rights. All registration rights granted under this Section 3 shall terminate and be of no further force and effect five (5) years after the Company has completed its Initial Offering. In addition, the right of any Holder to request inclusion of Registrable Securities in any registration pursuant to this Section 3 shall terminate when (i) all Registrable Securities held by and issuable to such Holder (and its affiliates, partners and former partners) may be sold under Rule 144 during any ninety (90)-day period and (ii) the Company has completed its Initial Offering and is subject to the provisions of the Exchange Act. 3.7 Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 3 that the selling Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as shall be required to effect the registration of their Registrable Securities. 12 3.8 Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 3. 3.9 Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Section 3 may be assigned by a Holder to a transferee or assignee of Registrable Securities which (a) is a subsidiary, parent, general partner, limited partner, retired partner, shareholder, member, retired member, affiliate or trust beneficiaries of a Holder, (b) is a Holder's family member or trust for the benefit of an individual Holder, (c) acquires at least twenty percent (20%) of the Holder's Registrable Securities (as adjusted for stock dividends, stock splits and combination s); provided, that, notwithstanding anything in this Section 3.9 to -------- the contrary, but subject to Section 2.1 hereof, the Investors shall be permitted to assign the rights to cause the Company to register Registrable Securities to any transferee or assignee of Registrable Securities that is a SOFTBANK Entity; provided, further, (A) the transferor shall, within ten (10) days after such transfer, furnish to the Company written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned and (B) such transferee shall agree in writing to be subject to the terms of this Agreement. 3.10 Amendment or Waiver of Registration Rights. Any provision of this Section 3 may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company, Ingram, at least a majority in interest of the Registrable Securities owned by the Series A Investors, and at least a majority in interest of the Registrable Securities owned by the Series B Investors, provided that any amendment or modification of the registration rights of UA, Nova Scotia or Founder that would adversely effect the rights of UA, Nova Scotia or Founder, as the case may be, shall require the prior written consent of UA, Nova Scotia or Founder, as the case may be. Any amendment or waiver effected in accordance with this Section 3.10 shall be binding upon each Holder and the Company. By acceptance of any benefits under this Agreement, Holders of Registrable Securities hereby agree to be bound by the provisions hereunder. 3.11 Indemnification. In the event any Registrable Securities are included in a registration statement under Sections 3.1, 3.2 or 3.3: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, officers and directors of each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation") by the Company: (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not 13 misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any Rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law in connection with the offering covered by such registration statement; and the Company will reimburse each such Holder, partner, officer or director, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, the Company shall not be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder, partner, officer, director, underwriter or controlling person of such Holder. (b) To the extent permitted by law, each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration qualifications or compliance is being effected, indemnify and hold harmless the Company, each of its directors and its officers, and each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder's partners, directors or officers or any person who controls such Holder, against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such Holder, or partner, director, officer or controlling person of such other Holder may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder under an instrument duly executed by such Holder and stated to be specifically for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other Holder, or partner, officer, director or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action if it is judicially determined that there was such a Violation; provided, however, that the indemnity agreement contained in this Section 3.11(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided further, that in no event shall any indemnity under this Section 3.11(b) exceed the net proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 3.11 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 3.11, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or 14 reasonably likely differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 3.11, but the omission to so deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 3.11. (d) If the indemnification provided for in this Section 3.11 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall to the extent permitted by applicable law contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the Violation(s) that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, that, in no event shall any contribution by a Holder hereunder exceed the proceeds from the offering received by such Holder. (e) The obligations of the Company and Holders under this Section 3.11 shall survive completion of any offering of Registrable Securities in a registration statement. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, which consent shall not be unreasonably withheld, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. 3.12 Rule 144 Reporting. With a view to making available to the Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in SEC Rule 144 or any similar or analogous Rule promulgated under the Securities Act, at all times after the effective date of the first registration filed by the Company for an offering of its securities to the general public. (b) File with the SEC, in a timely manner, all reports and other documents required of the Company under the Exchange Act; (c) So long as a Holder owns any Registrable Securities, furnish to such Holder forthwith upon request: a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 of the Securities Act, and of the Exchange Act (at 15 any time after it has become subject to such reporting requirements); a copy of the most recent annual or quarterly report of the Company; and such other reports and documents as a Holder may reasonably request in availing itself of any Rule or regulation of the SEC allowing it to sell any such securities without registration. 3.13 Other Registration Rights. After the date hereof, the Company shall not grant to any holder of securities of the Company or to any person as an inducement to become a holder of securities of the Company, any registration rights that have a priority greater than or that otherwise adversely affect the registration rights of the Holders hereunder without the prior written consent of the Holders of a majority in interest of the Registrable Securities, excluding the Registrable Securities held by Founder; provided, however, that if any of Founder, Ingram, UA or Nova Scotia's registration rights are affected in an adverse manner which is different from the manner in which all Holders' registration rights are affected as a result of the grant of new registration rights or the subordination of the Holders' registration rights pursuant to the prior sentence of this Section 3.13, such Holder must consent in writing to the grant of new registration rights or to the subordination of such Holder's registration rights. 4. Covenants Of The Company. 4.1 Basic Financial Information and Reporting. (a) The Company will maintain true books and records of account in which full and correct entries will be made of all its business transactions pursuant to a system of accounting established and administered in accordance with generally accepted accounting principles consistently applied, and will set aside on its books all such proper accruals and reserves as shall be required under generally accepted accounting principles consistently applied. (b) As soon as practicable after the end of each fiscal year of the Company, and in any event within ninety (90) days thereafter, the Company will furnish each Investor and Ingram an audited consolidated balance sheet of the Company, as at the end of such fiscal year, an audited consolidated statement of income and an audited consolidated statement of cash flows of the Company, for such year, all prepared in accordance with generally accepted accounting principles and setting forth in each case, in comparative form, the figures for the previous fiscal year, all in reasonable detail. (c) The Company will furnish each Investor and Ingram, as soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, and in any event within forty-five (45) days thereafter, an unaudited consolidated balance sheet of the Company as of the end of each such quarterly period, an unaudited consolidated statement of income and an unaudited consolidated statement of cash flows of the Company for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles, with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made. (d) The Company will furnish each Investor and Ingram at least thirty (30) days prior to the beginning of each fiscal year an annual budget and operating plan for such fiscal year (and as soon as available, any subsequent revisions thereto). 16 4.2 Inspection Rights. Each Investor and Ingram shall have the right to visit and inspect any of the properties of the Company or any of its subsidiaries, and to discuss the affairs, finances and accounts of the Company or any of its subsidiaries with its officers, and to review such information as is reasonably requested all at such reasonable times and as often as may be reasonably requested; provided, however, that the Company shall not be obligated to provide access to information which it deems in good faith to be trade secret or similar confidential information. 4.3 Confidentiality of Records. Each Investor, Founder and Ingram agree to use, and to use its best efforts to insure that its authorized representatives use, the same degree of care as such Investor, Ingram or Founder uses to protect its own confidential information to keep confidential any information furnished to it which the Company identifies as being confidential or proprietary (so long as such information is not in the public domain), except that such Investor and Ingram may disclose such proprietary or confidential information to any partner, subsidiary or parent of such Investor for the purpose of evaluating its investment in the Company as long as such partner, subsidiary or parent is advised of the confidentiality provisions of this Section 4.3. 4.4 Reservation of Common Stock. The Company will at all times reserve and keep available, solely for issuance and delivery upon the conversion of the Series A Stock and Series B Stock, all Common Stock issuable from time to time upon such conversion. 4.5 SEC Compliance. During any time that the Company is subject to the reporting requirements of the Exchange Act, the Company shall timely file all required reports pursuant to the Exchange Act. Additionally, the Company shall make available to Investors, Ingram, Nova Scotia and UA the information contemplated by Rule 144A. At such time that any stock held by an Investor, Ingram, Nova Scotia or UA is eligible for transfer pursuant to Rule 144(k), the Company shall, upon the request of such Investor, Ingram, Nova Scotia and UA remove any restrictive legend from the applicable stock certificate at no cost to such Investor, Ingram, Nova Scotia and UA. 4.6 NonDisclosure and Developments Agreement. The Company shall require all employees and consultants to execute and deliver Employee NonDisclosure and Developments Agreements in substantially the forms attached to the Purchase Agreement. 4.7 Committees. In the event that the Board of Directors establishes any committees of the Board of Directors pursuant to the authority granted in the Company's Bylaws, each such committee shall include the board representatives of the Investors. 4.8 Expenses; Compensation. The Company shall reimburse the reasonable out-of-pocket travel expenses of each director incurred to attend Board or committee meetings, as well as any other travel expenses approved by the Company's Board of Directors. 4.9 Stock Vesting. Unless otherwise approved by the Board of Directors (including the representatives of the Investors) all stock options and other stock equivalents issued after the date of this Agreement to employees, directors, consultants and other service providers shall be subject to vesting that is no less favorable to the Company than as follows: no more than twenty- 17 five percent (25%) of such stock options and stock equivalents shall vest on each anniversary of the date of grant. 4.10 Visitation Rights. In addition to its representation on the Board of Directors, for so long as SOFTBANK Technology Ventures (or its affiliates) hold at least ten percent (10%) of the Shares, including shares of Common Stock issued upon conversion of the Shares, the Company shall allow one representative designated by SOFTBANK Technology Ventures IV L.P. to attend all meetings of the board and committees thereof in a nonvoting capacity, and in connection therewith, the Company shall give such representative copies of all notices, minutes, consents and other materials, financial or otherwise, which the Company provides to its board of directors; provided, that, any such representative shall agree to leave all or any portion of a meeting of the Board of Directors or any committee thereof if allowing such representative to remain in such meeting would result in a waiver of the attorney-client privilege or if, in the reasonable good faith belief of the Board of Directors, allowing such representative to remain in the meeting would otherwise result in a conflict of interest. 4.11 Termination of Covenants. All covenants of the Company contained in Section 4 of this Agreement shall expire and terminate as to each Investor, Ingram, Nova Scotia and UA on the effective date of the registration statement pertaining to the Initial Offering. 5. Rights of First Offer. 5.1 Subsequent Offerings of Equity Securities. So long as the Investors hold at least ten percent (10%) of the Shares (the "Investor Threshold"), including shares of Common Stock issued upon conversion of the Shares or so long as Ingram holds at least twenty percent (20%) (the "Ingram Threshold") of the shares of Common Stock acquired by it in the Merger, in the event the Company proposes to issue any Equity Securities, including, without limitation, any preferred stock (other than Equity Securities excluded by Section 5.6 hereof), the Company shall first offer to sell all of such Equity Securities (the "Offered Securities") to the Investors (provided that the Investors meet or exceed the Investor Threshold) and to Ingram (provided that Ingram meets or exceeds the Ingram Threshold) on a pro rata basis, as set forth herein, and each Investor and Ingram shall have a right to purchase up to its pro rata share of the Offered Securities. For purposes of this Section 5 only, each Investor's and Ingram's pro rata share is equal to the ratio of (A) the number of shares of the Company's Common Stock (including all shares of Common Stock issued or issuable upon conversion of the Shares) which such Investor or Ingram owns or is deemed to own immediately prior to the offering of the Offered Securities to (B) the total number of shares of the Company's outstanding Common Stock on a fully diluted basis (including all shares of Common Stock issued or issuable upon conversion of the Shares and excluding all stock options and shares of Common Stock issuable upon the exercise of such stock options) immediately prior to the offering of the Offered Securities. 5.2 Exercise of Rights. The Company shall give each Investor and Ingram written notice of its intention to issue any Equity Securities, which notice shall describe the Offered Securities, the price, and the terms and conditions upon which the Company proposes to issue the Offered Securities. Each Investor and Ingram shall have fifteen (15) days from the receipt of such notice to agree to purchase up to its pro rata share of the Offered Securities for the price and upon the terms and conditions specified in the notice by giving written notice to the Company 18 and stating therein the quantity of Offered Securities to be purchased. Notwithstanding the foregoing, the Company shall not be required to offer or sell any Offered Securities to any Investor or to Ingram if such sale would cause the Company to be in violation of applicable federal securities laws by virtue of such offer or sale. 5.3 Issuance of Offered Securities to Other Investors. If not all of the Investors and Ingram elect to purchase their pro rata share of the Offered Securities, then the Company shall promptly notify in writing the Investors and Ingram who do so elect and shall offer such Investors and Ingram the right to acquire such unsubscribed shares. The Investors and Ingram shall have ten (10) days after receipt of such notice to notify the Company of their respective election to purchase all or a portion thereof of the unsubscribed shares. If the Investors and Ingram fail to exercise in full their rights of first offer as set forth herein, the Company shall have ninety (90) days thereafter to sell the Offered Securities in respect of which such rights were not exercised, at a price and upon terms and conditions no more favorable to the purchasers thereof than specified in the Company's notice to the Investors and Ingram pursuant to Section 5.2 hereof. If the Company has not sold such Offered Securities within one hundred twenty (120) days of the notice provided pursuant to Section 5.2, the Company shall not thereafter issue or sell any Offered Securities, without first offering such securities to the Investors and Ingram in the manner provided by this Section 5. 5.4 Termination of Rights of First Offer. The rights of first offer established by this Section 5 shall not apply to, and shall terminate upon the effective date of the registration statement pertaining to a Qualified Public Offering. 5.5 Transfer of Rights of First Offer. The rights of first offer granted to each Investor and Ingram under this Section 5 may be transferred to the same parties, subject to the same restrictions, as any transfer of registration rights pursuant to Section 3.9. 5.6 Excluded Securities. The rights of first offer established by this Section 5 shall have no application to any of the following Equity Securities: (a) shares of Common Stock (and/or options, warrants or other Common Stock purchase rights issued pursuant to such options, warrants or other rights) issued or to be issued to employees, officers or directors of, or consultants or advisors to the Company or any subsidiary, pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board of Directors, including the representatives designated by the holders of the Shares but excluding the Founders; (b) stock issued pursuant to any rights or agreements outstanding as of the date of this Agreement, options, warrants (including the Nova Scotia and UA Warrants) and convertible promissory notes outstanding as of the date of this Agreement; and stock issued pursuant to any such rights or agreements granted after the date of this Agreement, provided, that, the rights of first offer established by this Section 5 applied with respect to the initial sale or grant by the Company of such rights or agreements; (c) any Equity Securities issued for consideration other than cash pursuant to a merger, consolidation, acquisition or similar business combination; 19 (d) after the date hereof, any Equity Securities which in the aggregate exceed ten percent (10%) of the Company's outstanding capital stock on a fully diluted basis issued to a potential or existing customer or supplier or other strategic relationship or issued in connection with a credit facility or equipment lease transaction; (e) shares of Common Stock issued in connection with any stock split, stock dividend or recapitalization by the Company; (f) shares of Common Stock issued upon conversion of the Shares; (g) any Equity Securities that are issued by the Company pursuant to a registration statement filed under the Securities Act. 6. Miscellaneous. 6.1 Governing Law. This Agreement shall be governed in all respects by the laws of the State of Delaware without regard to principles of conflict of laws. 6.2 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of Registrable Securities from time to time; provided, however, that prior to the receipt by the Company of adequate written notice of the transfer of any Registrable Securities specifying the full name and address of the transferee, the Company may deem and treat the person listed as the holder of such shares in its records as the absolute owner and holder of such shares for all purposes, including the payment of dividends or any redemption price. 6.3 Severability. In case any provision of the Agreement shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 6.4 Amendment and Waiver. (a) Except as otherwise expressly provided, this Agreement may be amended or modified only upon the written consent of (i) the Company; (ii) the holders of a majority in interest of the Registrable Securities owned of record by the Series A Investors; (iii) the holders of a majority in interest of the Registrable Securities owned of record by the Series B Investors; and (iv) any party whose rights and interests under this Agreement would be adversely affected by such an amendment or modification. (b) Except as otherwise expressly provided, the obligations of the Company and the rights of the Holders under this Agreement may be waived only with the written consent of a majority in interest of the Registrable Securities owned of record by the Series A Investors; and the holders of a majority in interest of the Registrable Securities owned of record by the Series B Investors; provided, however, no waiver shall be effective without the consent of any party whose rights and interests under this Agreement would be adversely affected by such waiver. 20 6.5 Notices, Etc. All notices required or permitted hereunder shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the party to be notified at the address set forth on the signature pages hereto or Exhibit ------- A, Exhibit B or Exhibit C hereto or at such other address as such party may - - --------- --------- designate by ten (10) days advance written notice to the other parties hereto. 6.6 Titles and Subtitles. The titles of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 6.7 Complete Agreement. This Agreement constitutes the entire agreement and supersedes all other prior and contemporaneous agreements and undertakings, both written and oral, between the parties hereto with regard to the subject matter hereof. 6.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 6.9 Attorneys' Fees. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 6.10 Supersedence. This Agreement supersedes in its entirety the Second Amended and Restated Agreement by and between the Company, the Investors, Ingram, Nova Scotia, UA and the Founder, and the Second Amended and Restated Agreement shall be of no further force or effect. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 21 In Witness Whereof, the parties hereto have executed this Third Amended and Restated Investors' Rights Agreement as of the date set forth in the first paragraph hereof. COMPANY: BUY.COM INC. By: ______________________________________ Name: Title: INVESTORS: SOFTBANK Technology Ventures IV L.P. By: STV IV LLC Its General Partner By: ______________________________________ Name: Title: SOFTBANK Technology Advisors Fund L.P. By: STV IV LLC Its: General Partner By: ______________________________________ Name: Title: Investors' Rights Agreement SOFTBANK CAPITAL PARTNERS LP By: Softbank Capital Partners LLC Its: General Partner By: __________________________________ Name: Title: SOFTBANK CAPITAL ADVISORS FUND LP By: Softbank Capital Partners LLC Its: General Partner By: __________________________________ Name: Title: SOFTBANK America Inc. By: __________________________________ Name: Title: Investors' Rights Agreement SOFTBANK Technology Ventures V LP By: SBTV V LLC Its: General Partner By: ________________________________________ Name: Edward Scott Russell Title: Managing Director SOFTBANK Technology Advisors Fund V LP By: SBTV V LLC Its: General Partner By: ________________________________________ Name: Edward Scott Russell Title: Managing Director SOFTBANK TECHNOLOGY ENTREPRENEURS FUND V LP By: SBTV V LLC Its: General Partner By: ________________________________________ Name: Edward Scott Russell Title: Managing Director Investors' Rights Agreement E Partners By: ______________________________________ Name: Title: VIVENDI By: ______________________________________ Name: Title: Investors' Rights Agreement INGRAM: INGRAM CAPITAL INC. By: ______________________________________ Name: Title: Address: Two Ingram Blvd. La Vergne, TN 37089 Attn: President NOVA SCOTIA: THE BANK OF NOVA SCOTIA By: ______________________________________ Name: Title: Address: ___________________ ___________________ ___________________ UA: UNITED AIR LINES, INC. By: ______________________________________ Name: Title: Address: ___________________ ___________________ ___________________ Investors' Rights Agreement FOUNDERS: The Scott A. Blum Separate Property Trust u/d/t 8/2/95 By: ______________________________________ Name: Title: Investors' Rights Agreement Exhibit A BUY COM INC. Investors' Rights Agreement Series A Preferred Stock Purchasers
Name and Address Series A Shares - ----------------------------------------------------------- SOFTBANK Technology Ventures IV L.P. 19,114,890 c/o STV IV LLC 333 W. San Carlos San Jose, CA 95110 SOFTBANK Technology Advisors Fund L.P. 366,240 c/o STV IV LLC 333 W. San Carlos San Jose, CA 95110 ---------- Total: 19,481,130
EXHIBIT B BUY COM INC. Investors' Rights Agreement Series B Preferred Stock Purchasers
Common Series B Name and Address Shares(1) Shares - ------------------------------------------------------------------------------ SOFTBANK Capital Partners LP 2,835,295 10,207,063 SOFTBANK Capital Advisors Fund LP 41,133 148,079 SOFTBANK America Inc. 8,820,694 -- SOFTBANK Technology Ventures IV LP 282,154 1,015,735 SOFTBANK Technology Advisors Fund LP 5,405 19,462 SOFTBANK Technology Ventures V LP 287,549 1,035,196 e Partners 575,109 2,070,393 Vivendi 383,700 1,381,321 -------------------------------------- Total: 13,231,040 15,877,249
(1) Reflects Common Stock purchased from the Scott A. Blum Separate Property Trust and the Masons pursuant to a Stock Purchase Agreement dated as of the date hereof. Exhibit C BUY COM INC. Investors' Rights Agreement Founders
Name and Address Shares - -------------------------------------------------------------------------------- The Scott A. Blum Separate Property Trust u/d/t 8/2/95 99,164,464 3 Ritz Cove Monarch Beach, CA 92629
Exhibit D BUY COM INC. Investors' Rights Agreement Schedule of Registrable Securities
Total Registrable Holder Warrant Common(2) Series A Series B Securities ------ ------- --------- -------- -------- ---------- SOFTBANK Technology Ventures IV LP -- 638,059 19,114,890 1,015,735 20,768,684 SOFTBANK Technology Advisors Fund LP -- 12,230 366,240 19,462 397,932 SOFTBANK Technology Ventures V LP -- 287,549 -- 1,035,196 1,322,745 SOFTBANK Capital Partners LP -- 2,835,295 -- 10,207,063 13,042,358 SOFTBANK Capital Advisors Fund LP -- 41,133 -- 148,079 189,212 SOFTBANK America Inc. -- 8,820,694 -- 0 8,820,694 e Partners -- 575,109 -- 2,070,393 2,645,502 Vivendi -- 383,700 -- 1,381,321 1,765,021 United Air Lines Inc. 2,000,000 -- -- -- 2,000,000 The Bank of Nova Scotia(1) 43,500 -- -- -- 43,500 The Scott A. Blum Separate Property Trust -- 99,164,464 -- -- 99,164,464 Ingram Capital -- 7,930,560 -- -- 7,930,560 Total 2,043,500 120,688,793 19,481,130 15,877,249 158,090,672
(1) The Bank of Nova Scotia shares are based upon an estimate. The actual number of shares may vary based upon the terms of the Warrant. (2) Reflects ownership after closing of the Series B Convertible Participating Preferred Stock financing and the sale of 13,231,040 shares of Common Stock. Also includes shares of Common Stock acquired by Ingram and the Series A Investors upon the exercise of their right of first offer on March 10, April 5, and June 29, 1999. EX-10.2 7 VOTING AGREEMENT DATED DECEMBER 1998 EXHIBIT 10.2 VOTING AGREEMENT ---------------- This Voting Agreement (this "Agreement") is made as of the 3rd day of December, 1998, by and among Buy.Com Inc., a Delaware corporation (the "Company"), Ingram Entertainment Inc., a Tennessee corporation ("Ingram"), The Scott A. Blum Separate Property Trust u/d/t 8/2/95 (the "Trust"), SOFTBANK Technology Ventures IV L.P. ("SOFTBANK Ventures"), SOFTBANK Technology Advisors Fund L.P. ("SOFTBANK Advisors"), and SOFTBANK Holdings Inc. ("SOFTBANK Holdings") (each of Ingram, the Trust, SOFTBANK Ventures, SOFTBANK Advisors, and SOFTBANK Holdings are referred to herein individually as a "Stockholder" and, collectively, as the "Stockholders"). RECITALS WHEREAS, the Company has acquired SpeedServe Inc. ("SpeedServe") by way of the merger (the "Merger") of SpeedServe with and into a wholly owned subsidiary of the Company; WHEREAS, prior to the Merger, Ingram was the principal stockholder of SpeedServe; WHEREAS, it was a condition to the Merger that David B. Ingram ("David Ingram") be elected to the Company's Board of Directors (the "Board") and that the parties hereto enter into this Agreement; NOW, THEREFORE, in consideration of the mutual premises and agreements contained herein, the parties hereto mutually agree as follows: 1. Board Representation. -------------------- 1.1 Designation of Ingram Representative to the Board of ---------------------------------------------------- Directors. During the term of this Agreement as set forth in Section 7, the - --------- Board of Directors, so long as it is consistent with the Board's fiduciary duties, shall nominate David Ingram and recommend that the stockholders of the Company vote in favor of David Ingram for election to the Board at each annual or special meeting of stockholders at which directors are to be elected, or in connection with any consent actions in lieu of such meeting, and the Stockholders shall vote all of their shares of Stock in favor of his election to the Board. Nothing herein shall be deemed to require David Ingram to accept such nomination or election; provided, however that if David Ingram does not accept such nomination or election, this Agreement shall terminate at such time. 1.2 Definition of "Stock." For purposes of this Agreement, the --------------------- term "Stock" shall mean all shares of voting securities of the Company then issued and outstanding including, without limitation, all shares of Common Stock and Series A Convertible Participating Preferred Stock. 1.3 Failure to Vote per Agreement. In the event that any ----------------------------- Stockholder 1. shall fail to vote its shares of Stock in favor of the election of David Ingram to the Board as set forth in Section 1.1 above, such Stockholder shall be deemed immediately upon the existence of such a breach to have granted to Ingram a proxy to its shares of Stock to ensure that such shares will be voted for the election of David Ingram. Each of the Stockholders acknowledges that each proxy deemed to be granted hereby, including any successive proxy if need be, is given to secure the performance of a duty, is coupled with an interest, and shall be irrevocable until the duty is performed. 2. Certain Resignations or Removals. Other than for cause, only -------------------------------- Ingram shall have the right to request the resignation or removal of David Ingram. In such event, David Ingram shall immediately resign or be subject to removal by a vote of the Stockholders and the Stockholders shall vote all of their shares of Stock entitled to vote in favor of such removal. If David Ingram shall fail to resign if requested to do so by Ingram or if grounds exist to remove David Ingram for cause, then any Stockholder shall have the right to call a special meeting of stockholders for the purpose of removing such director and the Stockholders shall vote all their shares of Stock entitled to vote at such meeting in favor of removal. 3. [Reserved] 4. Notice of Certain Board Meetings. Ingram shall receive prior -------------------------------- notice, consistent with the notice provided members of the Board pursuant to the Company's Bylaws, of any meeting of the Board at which it is proposed that a vacancy on the Board be filled unless such notice shall have been waived in accordance with the Delaware General Corporation Law. 5. Covenant to Vote. Each of the Stockholders shall appear in ---------------- person or by proxy at any annual or special meeting of stockholders for the purpose of obtaining a quorum and shall vote the shares of Stock owned by such Stockholder entitled to vote, either in person or by proxy, at any annual or special meeting of stockholders of the Company called for the purpose of voting on the election of directors or by consensual action of stockholders with respect to the election of directors, in favor of the election of the directors nominated in accordance with Sections 1.1 hereof. In addition, each Stockholder shall appear in person or by proxy at any annual or special meeting of stockholders for the purpose of obtaining a quorum and shall vote the shares of Stock owned by such Stockholder and entitled to vote upon any other matter submitted to a vote of the Stockholders of the Company in a manner so as to be consistent and not in conflict with, and to implement, the terms of this Agreement. 6. No Voting or Conflicting Agreements. No Stockholder shall grant ----------------------------------- any proxy or enter into or agree to be bound by any voting trust with respect to the Stock held by such Stockholder nor shall any Stockholder enter into any stockholder agreements or arrangements of any kind with any person with respect to the Stock inconsistent with the provisions of this Agreement (whether or not such agreements and arrangements are with other stockholders of the Company that are not parties to this Agreement). The foregoing prohibition includes, but is not limited to, agreements or arrangements with respect to the acquisition, disposition or voting of shares of Series A Convertible Participating Preferred Stock and Common Stock held by such Stockholders to the extent such agreements or arrangements are inconsistent with the provisions of this Agreement. No Stockholder shall act, for any reason, as a member of a group or in concert 2. with any other persons in connection with the acquisition, disposition or voting of shares of the Company's capital stock in any manner which is inconsistent with the provisions of this Agreement. 7. Term. This Agreement will terminate upon the earlier of (i) the ---- closing of an underwritten public offering covering the offer and sale of Common Stock of the Company in which the per share price to the public is at least $30.799 per share (as adjusted for stock splits, recapitalizations and the like) and the net cash proceeds to the Company (after underwriting discounts, commissions and fees) are at least $30,000,000; (ii) the occurrence of the merger or consolidation of the Company into, or the sale of all or substantially all of the Company's assets to another corporation, unless the stockholders of the Company shall own at least 51% of the capital stock of such other corporation immediately after such merger, consolidation or sale; (iii) the date on which Ingram's ownership of the Common Stock of the Company drops below 50% of the number of shares (as such number may be adjusted to account for stock splits and reverse stock splits) of Common Stock of the Company acquired by Ingram in connection with the Merger; or (iv) upon the death of David Ingram or any disability which renders him unable to serve as a director of the Company. 8. Injunctive Relief. It is acknowledged that it will be impossible ----------------- to measure in money the damages that would be suffered if the parties fail to comply with any of the obligations herein imposed on them and that in the event of any such failure, an aggrieved person will be irreparably damaged and will not have an adequate remedy at law. Any such person shall, therefore, be entitled to injunctive relief, including specific performance, to enforce such obligations, and if any action shall be brought in equity to enforce any of the provisions of this Agreement, none of the parties hereto shall raise the defense that there is an adequate remedy at law. 9. Successors and Assigns. Except as otherwise expressly provided ---------------------- herein, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. If any Stockholder or any transferee of any Stockholder shall acquire any securities of the Company which are entitled to voting rights, whether upon exercise, conversion or otherwise, in any manner, whether by operation of law or otherwise, such securities shall be held subject to all of the terms of this Agreement, and by taking and holding such securities such person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement. 10. Governing Law. Regardless of the place of execution, this ------------- Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, applicable to agreements made and to be wholly performed in such State, without regard to the conflicts-of-law principles thereof. 11. Headings. Section headings are inserted herein for convenience -------- only and do not form a part of this Agreement. 12. Entire Agreement; Amendment. This Agreement contains the entire --------------------------- agreement among the parties hereto with respect to the matters contemplated herein, supersedes all prior written agreements and negotiations and oral understandings, if any, and may not be 3. discharged except by performance and may not be amended or supplemented except by an instrument in writing signed by the Company and each other party hereto. 13. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 14. Further Assurances. Each of the parties hereto agrees to execute ------------------ such further instruments and to take such further action as may reasonably be requested by any other party hereto to carry out the intent of this Agreement. 4. VOTING AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first written above. "COMPANY" BUY.COM INC. By: __________________________________ Scott A. Blum President "STOCKHOLDERS" THE SCOTT A. BLUM SEPARATE PROPERTY TRUST, u/d/t/ 8/2/95 By: __________________________________ Scott A. Blum Trustee SOFTBANK TECHNOLOGY VENTURES IV L.P. By: STV IV LLC Its General Partner By: __________________________________ Edward Scott Russell General Partner SOFTBANK TECHNOLOGY ADVISORS FUND L.P. By: STV IV LLC Its General Partner By: __________________________________ Edward Scott Russell General Partner 5. SOFTBANK HOLDINGS INC. By: __________________________________ Name: Title: INGRAM ENTERTAINMENT INC. By: __________________________________ Name: Title: 6. EX-10.11 8 1998 STOCK OPTION/STOCK ISSUANCE PLAN EXHIBIT 10.11 BUY.COM, INC. 1998 STOCK OPTION/STOCK ISSUANCE PLAN ------------------------------------- ARTICLE ONE GENERAL PROVISIONS ------------------ I. PURPOSE OF THE PLAN This 1998 Stock Option/Stock Issuance Plan (the "Plan") is intended to promote the interests of Buy.Com, Inc., a Delaware corporation (the "Corporation"), by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the Corporation's service. Capitalized terms shall have the meanings assigned to such terms in the attached Appendix. II. STRUCTURE OF THE PLAN A. The Plan shall be divided into two separate equity programs: (i) the "Discretionary Option Grant Program" under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock, and (ii) the "Stock Issuance Program" under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock directly, either through the immediate purchase of such shares or as a bonus for services rendered to the Corporation (or any Parent or Subsidiary). B. The provisions of Articles One and Four shall apply to all equity programs under the Plan and shall govern the interests of all persons under the Plan. III. ADMINISTRATION OF THE PLAN A. Except as provided in Paragraph B of this Section III, the Plan shall be administered by the Board or one or more committees appointed by the Board, provided that (1) beginning with the Section 12 Registration Date, the Primary Committee shall have sole and exclusive authority to administer the Plan with respect to Section 16 Insiders, and (2) administration of the Plan may otherwise, at the Board's discretion, be vested in the Primary Committee or a Secondary Committee. B. Members of the Primary Committee or any Secondary Committee shall serve for such period of time as the Board may determine and may be removed by the Board at any time. The Board may also at any time terminate the functions of any Secondary Committee and reassume all powers and authority previously delegated to such committee. 1 C. Each Plan Administrator shall, within the scope of its administrative functions under the Plan, have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Discretionary Option Grant Program and the Stock Issuance Program and to make such determinations under, and issue such interpretations of, the provisions of such programs and any outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator within the scope of its administrative functions under the Plan shall be final and binding on all parties who have an interest in the Discretionary Option Grant Program and/or the Stock Issuance Program under its jurisdiction or any option or stock issuance thereunder. D. Service on the Primary Committee or the Secondary Committee shall constitute service as a Board member, and members of each such committee shall accordingly be entitled to full indemnification and reimbursement as Board members for their service on such committee. No member of the Primary Committee or the Secondary Committee shall be liable for any act or omission made in good faith with respect to the Plan or any option grants or stock issuances under the Plan. IV. ELIGIBILITY A. The persons eligible to participate in the Discretionary Option Grant Program and the Stock Issuance Program are as follows: (i) Employees, (ii) non-employee members of the Board or the board of directors of any Parent or Subsidiary of the Corporation, and (iii) consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary of the Corporation). B. Each Plan Administrator shall, within the scope of its administrative jurisdiction under the Plan, have full authority to determine: (i) with respect to option grants under the Discretionary Option Grant Program, which eligible persons are to receive option grants, the time or times when such option grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non- Statutory Option, the time or times when each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding and (ii) with respect to stock issuances under the Stock Issuance Program, which eligible persons are to receive stock issuances, the time or times when such issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the consideration for such shares. C. The Plan Administrator shall have the absolute discretion either to grant options in accordance with the Discretionary Option Grant Program or to effect stock issuances in accordance with the Stock Issuance Program. 2 V. STOCK SUBJECT TO THE PLAN A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Corporation on the open market. The maximum number of shares of Common Stock initially reserved for issuance over the term of the Plan shall not exceed 2,302,664 shares. Such authorized share reserve includes the number of shares subject to the outstanding options which are hereby incorporated into the Plan. B. Shares of Common Stock subject to outstanding options shall be available for subsequent issuance under the Plan to the extent those options expire or terminate for any reason prior to being exercised in full. Unvested shares issued under the Plan and subsequently cancelled or repurchased by the Corporation, at the original issue price paid per share, pursuant to the Corporation's repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan. C. If any change is made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to: (i) the maximum number and/or class of securities issuable under the Plan; (ii) the number and/or class of securities for which any one person may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances under the Plan per calendar year; and (iii) the number and/or class of securities and the exercise price per share in effect under each outstanding option under the Plan. Such adjustments to the outstanding options are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under such options. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. ARTICLE TWO DISCRETIONARY OPTION GRANT PROGRAM ---------------------------------- I. OPTION TERMS Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document ----------------- shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options. ______________________ /1/ On October 8, 1998 the Board of Directors approved a resolution reducing the amount of shares of Common Stock reserved for issuance unnder the Plan from 2,692,485 to 2,102,664 shares of common Stock. On March 22, 1999 the Board of Directors approved a resolution increasing the number of shares of Common Stock reserved for issuance under the Plan from 2,102,664 to 2,302,664 shares of Common Stock. 3 A. Exercise Price. -------------- 1. The exercise price per share shall be fixed by the Plan Administrator at a price not less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the option grant date; provided, -------- however, that the Plan Administrator may fix the exercise price at less than 85% - ------- if the Optionee, at the time of the option grant, shall have made a payment to the Corporation (including payment made by means of a salary reduction) equal to the excess of the Fair Market Value of the Common Stock on the option grant date over such exercise price. 2. The exercise price shall become immediately due upon exercise of the option and may, subject to the provisions of Section I of Article Four and the documents evidencing the option, be payable in one or more of the forms specified below: (i) cash or check made payable to the Corporation, (ii) with respect to the exercise of options after the Section 12 Registration Date, shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or (iii) with respect to the exercise of options for vested shares after the Section 12 Registration Date and to the extent the sale complies with all applicable laws relating to the regulation and sale of securities, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable written instructions to (a) a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise, and (b) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. Exercise and Term of Options. Each option shall be exercisable at ---------------------------- such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option. However, no option shall have a term in excess of ten (10) years measured from the option grant date. C. Effect of Termination of Service. -------------------------------- 1. The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death: (i) Any option outstanding at the time of the Optionee's cessation of Service for any reason shall remain exercisable for such period of time thereafter as shall be determined by the Plan Administrator and set forth in the documents evidencing the 4 option (which shall in no event be less than six (6) months in the case of death or disability nor less than thirty (30) days in the case of any other cessation of Service), provided no such option shall be exercisable after the expiration of the option term. (ii) Any option exercisable in whole or in part by the Optionee at the time of death may be subsequently exercised by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. (iii) Subject to clause C.2.(ii) below of this Section I, during the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee's cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. 2. The Plan Administrator shall have complete discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to: (i) extend the period of time for which the option is to remain exercisable following the Optionee's cessation of Service from the limited exercise period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or (ii) permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee's cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested had the Optionee continued in Service. D. Shareholder Rights. The holder of an option shall have no ------------------ shareholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares. E. Repurchase Rights. The Plan Administrator shall have the ----------------- discretion to grant options which are exercisable for unvested shares of Common Stock and to reserve the right to repurchase any or all of those unvested shares should the Optionee thereafter cease to be in Service to the Corporation. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. F. Limited Transferability of Options. During the lifetime of the ---------------------------------- Optionee, options shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or by the laws of descent and distribution following the Optionee's death. 5 II. INCENTIVE OPTIONS The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of Articles One, Two and Four shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options when issued under the Plan shall not be subject to the terms of this Section II. --- A. Eligibility. Incentive Options may only be granted to Employees. ----------- B. Exercise Price. The exercise price per share shall not be less -------------- than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. C. Dollar Limitation. The aggregate Fair Market Value of the shares ----------------- of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. D. 10% Shareholder. If any Employee to whom an Incentive Option is --------------- granted is a 10% Shareholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date, and the option term shall not exceed five (5) years measured from the option grant date. III. CANCELLATION AND REGRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the Discretionary Option Grant Program and to grant in substitution new options covering the same or a different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new grant date. ARTICLE THREE STOCK ISSUANCE PROGRAM ---------------------- I. STOCK ISSUANCES Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below. 6 II. STOCK ISSUANCE TERMS A. Purchase Price. -------------- 1. The purchase price per share shall be fixed by the Plan Administrator, but shall not be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the issuance date. 2. Subject to the provisions of Section I of Article Four, shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance: (i) cash or check made payable to the Corporation, or (ii) past services rendered to the Corporation (or any Parent or Subsidiary). B. Vesting Provisions. ------------------ 1. Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant's period of Service or upon attainment of specified performance objectives. The elements of the vesting schedule applicable to any unvested shares of Common Stock issued under the Stock Issuance Program, namely: (i) the Service period to be completed by the Participant or the performance objectives to be attained, (ii) the number of installments in which the shares are to vest, (iii) the interval or intervals (if any) which are to lapse between installments, and (iv) the effect which death, Permanent Disability or other event designated by the Plan Administrator is to have upon the vesting schedule, shall be determined by the Plan Administrator and incorporated into the Stock Issuance Agreement. 2. Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to the Participant's unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant's unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. 7 3. The Participant shall have full shareholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not the Participant's interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. 4. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further shareholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant's purchase-money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to the surrendered shares. 5. The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock which would otherwise occur upon the cessation of the Participant's Service or the non- attainment of the performance objectives applicable to those shares. Such waiver shall result in the immediate vesting of the Participant's interest in the shares as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant's cessation of Service or the attainment or non-attainment of the applicable performance objectives. ARTICLE FOUR MISCELLANEOUS ------------- I. FINANCING The Plan Administrator may permit any Optionee or Participant to pay the option exercise price under the Discretionary Option Grant Program or the purchase price of shares issued under the Stock Issuance Program by delivering a full-recourse, interest bearing promissory note payable in one or more installments. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. In no event may the maximum credit available to the Optionee or Participant exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase. II. SHARE ESCROW/LEGENDS Unvested shares issued under the Plan may, in the Plan Administrator's discretion, be held in escrow by the Corporation until the Participant's interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares. 8 III. CORPORATE TRANSACTION A. Except as otherwise provided in the agreements evidencing an option, each outstanding option under the Discretionary Option Grant Program shall automatically accelerate in the event of a Corporate Transaction so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock, provided that an outstanding option shall not so accelerate if and to the extent: (i) such option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation (or parent thereof) or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation (or parent thereof), (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested option shares at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to those option shares or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant. The determination of option comparability under clause (i) above shall be made by the Plan Administrator, and its determination shall be final, binding and conclusive. B. Except as otherwise provided in the agreements creating the repurchase rights, outstanding repurchase rights, if any, shall terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, provided that such repurchase right shall not lapse to the extent: (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the option is issued or the repurchase right is created. C. Immediately following the consummation of the Corporate Transaction, all outstanding options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments to reflect such Corporate Transaction shall also be made to (i) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain - -------- the same, (ii) the maximum number and/or class of securities available for issuance over the remaining term of the Plan and (iii) the maximum number and/or class of securities for which any one person may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances under the Plan per calendar year. E. Repurchase rights which are assigned in connection with a Corporate Transaction shall be exercisable with respect to the property issued to the Optionee or Participant upon consummation of such Corporate Transaction in exchange for the Common Stock held by 9 the Optionee or Participant subject to the repurchase rights immediately prior to the Corporate Transaction. F. Except as otherwise limited by the Plan Administrator at the time an Option is granted, vesting under outstanding options will automatically accelerate in the event the Optionee's Service subsequently terminates by reason of an Involuntary Termination within eighteen (18) months following the effective date of any Corporate Transaction in which those options are assumed or replaced and do not otherwise accelerate. Any options so accelerated shall remain exercisable for fully-vested shares until the earlier of (i) the ------- expiration of the option term or (ii) the expiration of the one (1)-year period measured from the effective date of the Involuntary Termination. The portion of any Incentive Option accelerated in connection with a Corporate Transaction or Change in Control shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar ($100,000) limitation is not exceeded and the provisions governing the exercise and holding period are met provided that such option is exercised within ninety (90) days of the Involuntary Termination. To the extent the applicable dollar limitation is exceeded or the options are not exercised within the applicable ninety (90) day period, such option shall be exercisable as a Non-Statutory Option. G. Except as otherwise limited by the Plan Administrator at the time the option is granted under the Discretionary Option Program or the repurchase rights are created, the outstanding repurchase rights with respect to shares held by an Optionee or Participant will automatically lapse and cease to be exercisable in the event the Optionee's or the Participant's Service subsequently terminates by means of an Involuntary Termination within eighteen (18) months following the effective date of any Corporate Transaction in which those repurchase rights are assigned or otherwise continue. H. The outstanding options or repurchase rights shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IV. CHANGE IN CONTROL A. In the event of any Change in Control, each outstanding option under the Discretionary Option Grant Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Change in Control, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. B. Outstanding repurchase rights, if any, shall terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Change in Control. 10 V. VESTING Notwithstanding any other provision of this agreement, the vesting schedule imposed with respect to any option grant or share issuance shall not result in the Optionee or Participant vesting in fewer than 20% per year for five years from the date of the option grant or share issuance. VI. TAX WITHHOLDING A. The Corporation's obligation to deliver shares of Common Stock upon the exercise of options or the issuance or vesting of such shares under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. B. The Plan Administrator may, in its discretion, provide any or all holders of Non-Statutory Options or unvested shares of Common Stock under the Plan with the right to use shares of Common Stock in satisfaction of all or part of the Taxes incurred by such holders in connection with the exercise of their options or the vesting of their shares. Such right may be provided to any such holder in either or both of the following formats: 1. Stock Withholding: The election to have the Corporation ----------------- withhold, from the shares of Common Stock otherwise issuable upon the exercise of such Non-Statutory Option or the vesting of such shares, a portion of those shares with an aggregate Fair Market Value equal to the percentage of the Taxes (not to exceed one hundred percent (100%)) designated by the holder. 2. Stock Delivery: The election to deliver to the Corporation, at -------------- the time the Non-Statutory Option is exercised or the shares vest, one or more shares of Common Stock previously acquired by such holder (other than in connection with the option exercise or share vesting triggering the Taxes) with an aggregate Fair Market Value equal to the percentage of the Taxes (not to exceed one hundred percent (100%)) designated by the holder. VII. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan shall become effective immediately upon the Plan Effective Date. Options may be granted under the Discretionary Option Grant Program at any time on or after the Plan Effective Date. However, no options granted under the Plan may be exercised, and no shares shall be issued under the Plan, until the Plan is approved by the Corporation's shareholders. If such shareholder approval is not obtained within twelve (12) months after the Plan Effective Date, then all options previously granted under this Plan shall terminate and cease to be outstanding, and no further options shall be granted and no shares shall be issued under the Plan. B. All options outstanding as of the Plan Effective Date shall be incorporated into the Plan at that time and shall be treated as outstanding options under the Plan. However, each outstanding option so incorporated shall continue to be governed solely by the terms of the documents evidencing such option, and no provision of the Plan shall be deemed to affect or 11 otherwise modify the rights or obligations of the holders of such incorporated options with respect to their acquisition of shares of Common Stock. C. The Plan shall terminate upon the earliest of (i) the tenth -------- anniversary of the Plan Effective Date, (ii) the date on which all shares available for issuance under the Plan shall have been issued as fully-vested shares or (iii) the termination of all outstanding options in connection with a Corporate Transaction. Upon such plan termination, all outstanding option grants and unvested stock issuances shall thereafter continue to have force and effect in accordance with the provisions of the documents evidencing such grants or issuances. VIII. AMENDMENT OF THE PLAN A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to stock options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certain amendments may require shareholder approval if so determined by the Board or pursuant to applicable laws or regulations. B. Options to purchase shares of Common Stock may be granted under the Discretionary Option Grant Program and shares of Common Stock may be issued under the Stock Issuance Program that are in each instance in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under those programs shall be held in escrow until there is obtained any required approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such approval is not obtained within twelve (12) months after the date the first such excess issuances are made, then (i) any unexercised options granted on the basis of such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding. IX. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes. X. REGULATORY APPROVALS A. The implementation of the Plan, the granting of any stock option under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any granted option or (ii) under the Stock Issuance Program shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the stock options granted under it and the shares of Common Stock issued pursuant to it. 12 B. No shares of Common Stock or other assets shall be issued or delivered under the Plan unless and until there shall have been compliance with all applicable requirements of Federal and state securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which Common Stock is then listed for trading. XI. NO EMPLOYMENT/SERVICE RIGHTS Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person's Service at any time for any reason, with or without cause. XII. FINANCIAL REPORTS The Corporation shall deliver a balance sheet and an income statement at least annually to each individual holding an outstanding option under the Plan, unless such individual is a key Employee whose duties in connection with the Corporation (or any Parent or Subsidiary) assure such individual access to equivalent information. 13 APPENDIX -------- The following definitions shall be in effect under the Plan: A. Board shall mean the Corporation's Board of Directors. ----- B. Change in Control shall mean a change in ownership or control of ----------------- the Corporation effected through either of the following transactions: (i) the acquisition, directly or indirectly by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's shareholders which the Board does not recommend such shareholders to accept, or (ii) a change in the composition of the Board over a period of thirty- six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination. C. Code shall mean the Internal Revenue Code of 1986, as amended. ---- D. Common Stock shall mean the Corporation's common stock. ------------ E. Corporate Transaction shall mean either of the following --------------------- shareholder-approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets. F. Corporation shall mean Buy.Com, Inc., a Delaware corporation, and ----------- its successors. G. Discretionary Option Grant Program shall mean the discretionary ---------------------------------- option grant program in effect under the Plan. 14 H. Employee shall mean an individual who is in the employ of the -------- Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. I. Exercise Date shall mean the date on which the Corporation ------------- shall have received written notice of the option exercise. J. Fair Market Value per share of Common Stock on any relevant ----------------- date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be deemed equal to the closing selling price per share of Common Stock on the date in question, as such price is reported on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be deemed equal to the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) For purposes of any option grants made on the Underwriting Date, the Fair Market Value shall be deemed to be equal to the price per share at which the Common Stock is to be sold in the initial public offering pursuant to the Underwriting Agreement. (iv) For purposes of any option grants made prior to the Underwriting Date, the Fair Market Value shall be determined by the Plan Administrator, after taking into account such factors as it deems appropriate. K. Incentive Option shall mean an option which satisfies the ---------------- requirements of Code Section 422. L. Involuntary Termination shall mean the termination of the ----------------------- Service of any individual which occurs by reason of: (i) such individual's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (ii) such individual's voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her level of responsibility, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and participation in any corporate- performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual's place of employment by more than 15 fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without the individual's consent. M. Misconduct shall mean the commission of any act of fraud, ---------- embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary). N. 1934 Act shall mean the Securities Exchange Act of 1934, as -------- amended. O. Non-Statutory Option shall mean an option not intended to satisfy -------------------- the requirements of Code Section 422. P. Optionee shall mean any person to whom an option is granted under -------- the Discretionary Option Grant Program. Q. Parent shall mean any corporation (other than the Corporation) in ------ an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. R. Participant shall mean any person who is issued shares of Common ----------- Stock under the Stock Issuance Program. S. Permanent Disability or Permanently Disabled shall mean the -------------------------------------------- inability of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. T. Plan shall mean the Corporation's 1998 Stock Option/Stock Issuance ---- Plan, as set forth in this document. U. Plan Administrator shall mean the particular entity, whether the ------------------ Primary Committee, the Board or the Secondary Committee, which is authorized to administer the Discretionary Option Grant and Stock Issuance Programs with respect to one or more classes of eligible persons, to the extent such entity is carrying out its administrative functions under those programs with respect to the persons under its jurisdiction. V. Plan Effective Date shall mean the date on which the Plan was ------------------- adopted by the Board. W. Primary Committee shall mean the committee of two (2) or more non- ----------------- employee Board members appointed by the Board to administer the Discretionary Option Grant 16 and Stock Issuance Programs with respect to Section 16 Insiders following the Section 12 Registration Date. X. Secondary Committee shall mean a committee of two (2) or more ------------------- Board members appointed by the Board to administer any aspect of Plan not required hereunder to be administered by the Primary Committee. The members of the Secondary Committee may be Board members who are Employees eligible to receive discretionary option grants or direct stock issuances under the Plan or any other stock option, stock appreciation, stock bonus or other stock plan of the Corporation (or any Parent or Subsidiary). Y. Section 12 Registration Date shall mean the date on which the ---------------------------- Common Stock is first registered under Section 12(g) or Section 15 of the 1934 Act. Z. Section 16 Insider shall mean an officer or director of the ------------------ Corporation subject to the short-swing profit liabilities of Section 16 of the 1934 Act. AA. Service shall mean the performance of services for the ------- Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor, except to the extent otherwise specifically provided in the documents evidencing the option grant or stock issuance. BB. Stock Exchange shall mean either the American Stock Exchange or -------------- the New York Stock Exchange. CC. Stock Issuance Agreement shall mean the agreement entered into by ------------------------ the Corporation and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance Program. DD. Stock Issuance Program shall mean the stock issuance program in ---------------------- effect under the Plan. EE. Subsidiary shall mean any corporation (other than the ---------- Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. FF. Taxes shall mean the Federal, state and local income and ----- employment tax liabilities incurred by the holder of Non-Statutory Options or unvested shares of Common Stock in connection with the exercise of those options or the vesting of those shares. GG. 10% Shareholder shall mean the owner of stock (as determined --------------- under Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary). HH. Underwriting Agreement shall mean the agreement between the ---------------------- Corporation and the underwriter or underwriters managing the initial public offering of the Common Stock. 17 II. Underwriting Date shall mean the date on which the Underwriting ----------------- Agreement is executed and priced in connection with an initial public offering of the Common Stock. 18 EX-10.14 9 DEED OF TRUST DATED DECEMBER 1998 EXHIBIT 10.14 WHEN RECORDED MAIL TO: Bank of Yorba Linda, a division of BYL Bank Group 26137 La Paz Road Suite 102 Mission Viejo, CA 92691 SPACE ABOVE THIS LINE IS FOR RECORDER'S USE ONLY - --------------------------------------------------------------------------------------------------------------------
DEED OF TRUST THIS DEED OF TRUST IS DATED DECEMBER 23, 1998, among Buy.Com Inc., a Delaware Corporation, whose address is 21 Brookline, Aliso Viejo, CA 92656 (referred to below as "Trustor"); Bank of Yorba Linda, a division of BYL Bank Group, whose address is 26137 La Paz Road, Suite 102, Mission Viejo, CA 92691 (referred to below sometimes as "Lender" and sometimes as "Beneficiary"); and Bank of Yorba Linda, a division of BYL Bank Group, whose address is 26137 La Paz Road, Suite 102, Mission Viejo, CA 92691 (referred to below as "Trustee"). CONVEYANCE AND GRANT. For valuable consideration, Trustor Irrevocably grants, transfers and assigns to Trustee in trust, with power of sale, for the benefit of Lender as Beneficiary, all of Trustor's right, title, and interest in and to the following described real property, together with all existing or subsequently erected or affixed buildings, improvements and fixtures; all easements, rights of way, and appurtenances; all water, water rights and ditch rights (including stock in utilities with ditch or irrigation rights); and all other rights, royalties, and profits relating to the real property, including without limitation all minerals, oil, gas, geothermal and similar matters, located in Orange County, State of California (the "Real Property"): SEE EXHIBIT "A" ATTACHED HERETO AND MADE A PART HEREOF The Real Property or its address is commonly known as 21 Brookline, Aliso Viejo, CA 92656. The Assessor's Parcel Number for the Real Property is 623-132-05 and 623-123-06. Trustor presently assigns to Lender (also known as Beneficiary in this Deed of Trust) all of Trustor's right, title, and interest in and to all present and future leases of the Property and all Rents from the Property. This is an absolute assignment of Rents made in connection with an obligation secured by real property pursuant to California Civil Code Section 2938. In addition, Trustor grants Lender a Uniform Commercial Code security interest in the Rents and the Personal Property defined below. DEFINITIONS. The following words shall have the following meanings when used In this Deed of Trust. Terms not otherwise defined in this Deed of Trust shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Beneficiary. The word "Beneficiary" means Bank of Yorba Linda, a division of BYL Bank Group, its successors and assigns. Bank of Yorba Linda, a division of BYL Bank Group also is referred to as "Lender" in this Deed of Trust. Deed of Trust. The words "Deed of Trust" mean this Deed of Trust among Trustor, Lender, and Trustee and include without limitation all assignment and security interest provisions relating to the Personal Property and Rents. Guarantor. The word "Guarantor" means and includes without limitation any and all guarantors, sureties, and accommodation parties in connection with the Indebtedness. Improvements. The word "Improvements" means and includes without limitation all existing and future improvements, buildings, structures, mobile homes affixed on the Real Property, facilities, additions, replacements and other construction on the Real Property. Indebtedness. The word "Indebtedness" means all principal and interest payable under the Note and any amounts expended or advanced by Lender to discharge obligations of Trustor or expenses incurred by Trustee or Lender to enforce obligations of Trustor under this Deed of Trust, together with interest on such amounts as provided in this Deed of Trust. Lender. The word "Lender" means Bank of Yorba Linda, a division of BYL Bank Group, its successors and assigns. Note. The word "Note" means the Note dated December 23,1998, in the principal amount of $1,155,500.00 from Trustor to Lender, together with all renewals, extensions, modifications, refinancings, and substitutions for the Note. NOTICE TO TRUSTOR: THE NOTE CONTAINS A VARIABLE INTEREST RATE. Personal Property. The words "Personal Property" mean all equipment, fixtures, and other articles of personal property now or hereafter owned by Trustor, and now or hereafter attached or affixed to the Real Property; together with all accessions, parts, and additions to, all replacements of, and all substitutions for, any of such property; and together with all proceeds (including without limitation all insurance proceeds and refunds of premiums) from any sale or other disposition of the Property. Property. The word "Property" means collectively the Real Property and the Personal Property. Real Property. The words "Real Property" mean the property, interests and rights described above in the "Conveyance and Grant" section. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. Rents. The word "Rents" means all present and future leases, rents, revenues, income, issues, royalties, profits, and other benefits derived from the Property together with the cash proceeds of the Rents. Trustee. The word "Trustee" means Bank of Yorba Linda, a division of BYL Bank Group and any substitute or successor trustees. Trustor. The word "Trustor" means any and all persons and entities executing this Deed of Trust, including without limitation all Trustors named above. THIS DEED OF TRUST, INCLUDING THE ASSIGNMENT OF RENTS AND THE SECURITY INTEREST IN THE RENTS AND PERSONAL PROPERTY, IS GIVEN TO SECURE (1) PAYMENT OF THE INDEBTEDNESS AND (2) PERFORMANCE OF ANY AND ALL OBLIGATIONS OF TRUSTOR UNDER THE NOTE, THE RELATED DOCUMENTS, AND THIS DEED OF TRUST. THIS DEED OF TRUST IS GIVEN AND ACCEPTED ON THE FOLLOWING TERMS: PAYMENT AND PERFORMANCE. Except as otherwise provided in this Deed of Trust, Trustor shall pay to Lender all amounts secured by this Deed of Trust as they become due, and shall strictly and in a timely manner perform all of Trustor's obligations under the Note, this Deed of Trust, and the Related Documents. POSSESSION AND MAINTENANCE OF THE PROP