-----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, A3qXWyr6RHh6s8zkT/aHa1rLXg8gxOCe+Q7fvBwLaa6FoDx86aGJpUoqb9O8qvTc g97Si0KfYDRihlJoFsmpqg== 0000912057-00-005200.txt : 20000211 0000912057-00-005200.hdr.sgml : 20000211 ACCESSION NUMBER: 0000912057-00-005200 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000210 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHOPNOW COM INC CENTRAL INDEX KEY: 0001087879 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 911628103 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26707 FILM NUMBER: 532265 BUSINESS ADDRESS: STREET 1: 411 FIRST AVE S STREET 2: STE 200 N CITY: SEATTLE STATE: WA ZIP: 98104 BUSINESS PHONE: 2062231996 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------ /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________ COMMISSION FILE NUMBER 000-26707 -------------------------- SHOPNOW.COM INC. (Exact name of registrant as specified in its charter) -------------------------- WASHINGTON 91-1628103 (State or other jurisdiction of Incorporation or (I.R.S. Employer Identification No.) Organization) 411 FIRST AVENUE SOUTH SUITE 200 NORTH 98104 SEATTLE, WASHINGTON (Zip Code) (Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 223-1996 -------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED (None) (None)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001 PAR VALUE PER SHARE (Title of Class) -------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of voting stock held by nonaffiliates of the registrant was $544,623,410 as of December 31, 1999, based on the closing sale price of such stock on the Nasdaq National Market on that date. There were 43,947,409 shares of common stock outstanding as of February 7, 2000. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference from the registrant's definitive proxy statement relating to the annual meeting of shareholders to be held in 2000, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates. PART I ITEM 1. BUSINESS THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS. THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS MAY, WILL, SHOULD, EXPECT, PLAN, INTEND, ANTICIPATE, BELIEVE, ESTIMATE, PREDICT, POTENTIAL OR CONTINUE, THE NEGATIVE OF SUCH TERMS OR OTHER COMPARABLE TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING THESE STATEMENTS, YOU SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS, INCLUDING THE RISKS OUTLINED IN THE "FACTORS AFFECTING OPERATING RESULTS, OUR BUSINESS AND OUR STOCK PRICE" BELOW. THESE FACTORS MAY CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENT. ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER WE NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THE FORWARD-LOOKING STATEMENTS. WE ARE UNDER NO DUTY TO UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS ANNUAL REPORT TO CONFORM SUCH STATEMENTS TO ACTUAL RESULTS OR TO CHANGES IN OUR EXPECTATIONS. OVERVIEW ShopNow offers businesses a tailored end-to-end solution that addresses the challenges associated with implementing a successful e-commerce strategy. We offer access to the ShopNow network and a comprehensive suite of products and services ranging from custom application and online store development to online and traditional sales and marketing services and transaction processing. The ShopNow marketplace, which includes the ShopNow.com portal and its affiliate and syndication sites, allows merchants to target specific groups of shoppers. Our recently launched business-to-business marketplace, b2bNow.com, allows businesses to buy, sell and exchange goods and services with one another. This combination of products, services and marketplace access enables businesses to create online stores and custom web sites, access customers and transact business efficiently. ShopNow was incorporated in Washington in January 1994. As used in this annual report, the terms "we" and "ShopNow" mean ShopNow.com Inc. and its subsidiaries. INDUSTRY BACKGROUND RAPID GROWTH OF THE INTERNET AND E-COMMERCE The Internet has grown in less than a decade from a limited research tool into a global network consisting of millions of computers and users. The Internet is an increasingly significant medium for communication, information and commerce. International Data Corporation, or IDC, estimates that at the end of 1998 there were over 62 million web users in the United States and over 142 million web users worldwide and that by the end of 2003 the number of web users will increase to 177 million in the United States and to over 502 million worldwide. The rapid growth of the Internet has given businesses, merchants and shoppers the opportunity to conduct an increasing amount of commerce online. We believe that e-commerce offers numerous advantages to businesses, merchants and shoppers. Shoppers receive increased selection, competitive prices and the convenience of being able to shop on the Internet 24 hours a day, 7 days a week from the location of their choice. The Internet enables merchants to reach a global audience and operate with limited infrastructure, reduced overhead and greater economies of scale. Merchants can customize web site content to match the needs and preferences of individual shoppers by transparently personalizing content for each shopper. By facilitating access to information, the Internet enables merchants to give customers more detailed product information while affording merchants the opportunity to obtain detailed information about the purchasers of their products. In addition, online merchants can reduce selling costs by reducing or eliminating investments in physical retail locations and automating much of the interaction with their customers. These advantages are resulting in a dramatic increase in the amount of commerce conducted over the Internet and the number of businesses and merchants advertising and selling goods and services online. According to IDC, worldwide transactions on the Internet are expected to increase from approximately $111 billion in 1999 to 1 approximately $1.3 trillion in 2003, with the total number of users who purchase products and services online increasing from approximately 48 million to approximately 182 million worldwide during the same period. CHALLENGES TO CONDUCTING COMMERCE OVER THE INTERNET Businesses and merchants increasingly are determining that they need an online presence to take advantage of the rapid growth and benefits of e-commerce. To conduct commerce online effectively and efficiently, however, businesses and merchants must address a number of challenges: - WEB SITE PLANNING AND STOREFRONT DESIGN: Businesses and merchants must design and implement the look and feel of their online stores and custom web sites in a way that provides a rich, easy-to-use and generally satisfying end-user experience that fosters buying and repeat visits. Storefront design must promote the merchants' brands, identities and product information through the use of graphics, images and text content. - VISIBILITY AND CUSTOMER ACQUISITION: Merchants need to effectively communicate with their targeted online audience to maximize the number of visits to, and purchases from, their web sites. Both online merchants seeking to establish a brand and traditional merchants with established brands need to create visibility online and to distinguish themselves from the significant number of competitors selling products and services on the Internet. Achieving widespread brand recognition and customer loyalty in a crowded market where consumers are inundated with Internet-related advertising requires a comprehensive and focused marketing strategy to reach the desired audience. These efforts require a broad range of both online and traditional techniques ranging from banner and hyperlink advertisements or e-mail communications to traditional methods, such as direct mail. In order to attract the highest number of desired online shoppers, merchants need to employ creative marketing solutions that position their products and services more effectively than those of their many competitors. - TRANSACTION PROCESSING: Businesses and merchants must implement solutions that enable them to efficiently and effectively process orders once they are placed. Online transaction processing is complex and involves a number of elements including secure, dependable, automated real-time payment authorization, calculation of tax and shipping charges, order tracking and customer service. Online orders for physical goods must be transmitted to fulfillment centers, distributors or merchant-owned distribution centers for shipment of the goods. In light of these challenges, businesses and merchants who choose to internally develop and maintain an e-commerce presence must invest a significant amount of capital and technical resources. E-commerce technology evolves rapidly, necessitating timely implementation and upgrades. The lengthy and often cost-prohibitive nature of in-house development and maintenance has caused an increasing number of businesses and merchants to outsource some or all of their e-commerce capability development to third-party service providers. Outsourced solutions offer convenience and savings but most service providers specialize in specific, limited aspects of an Internet merchant's business. Merchants who outsource their e-commerce capability development typically must devote significant technical expertise and other resources to coordinate multiple vendors and integrate the various components. As e-commerce solutions evolve and online businesses and merchants proliferate, need and demand increase for outsourced e-commerce solutions that seamlessly integrate every aspect of an online business from storefront development to marketing services, transaction processing and fulfillment. THE SHOPNOW SOLUTION We are an end-to-end developer and provider of e-commerce enabling solutions for businesses and merchants. We provide a comprehensive suite of products and services that enable businesses and merchants to create, support and grow an efficient, scaleable and reliable online presence. Our marketing services use both traditional and online methods to bring businesses, merchants and shoppers together, while our other e-commerce products and services enable businesses and merchants to develop and complete online transactions. Our e-commerce platform includes custom application and online store development and design, hosting and maintenance, fraud prevention, payment processing and order fulfillment. We provide customers with a wide variety of supporting technologies in order to 2 meet their specific needs. Our sales and marketing services include merchant and product listing on our online marketplaces, advertisements and e-mail promotions and other creative services. We also operate the ShopNow marketplace, a distributed network of web sites comprised of the ShopNow.com portal and more than 4,000 affiliate and syndication shopping sites, which together provide access to more than 45,000 merchants offering over five million products. In addition, we operate b2bNow.com, our business-to-business portal and online marketplace. Key benefits of our solution include: - END-TO-END INTEGRATED SOLUTION. We believe that we provide all of the critical capabilities required to enable businesses and merchants to conduct commerce online. We offer businesses and merchants a comprehensive suite of e-commerce products and services and access to online marketplaces. Our marketing services include advertising, merchandising and e-mail services on our ShopNow marketplace and on our b2bNow.com marketplace. Our end-to-end solution minimizes the time, complexity, inconvenience and cost ordinarily associated with a multi-vendor or internally developed solution. - QUICK TIME TO MARKET. The pace of change and the rate of growth of the Internet require greater speed in implementation of e-commerce solutions. Our extensive experience in web site planning and storefront development allows us to create commerce-enabled web sites for our clients - ranging from the basic to the highly customized - in less time than such tasks typically require of an in-house developer. - IMMEDIATE AND LONG-TERM SAVINGS. We enable businesses and merchants to improve their return on investment by allowing them to avoid the significant diversion or investment of resources required to develop and maintain e-commerce capabilities internally or to integrate a multi-vendor solution. Because we regularly reevaluate and update our merchant services and network offerings, our clients can easily keep pace with rapidly evolving e-commerce technology. - FACILITATE CUSTOMER ACQUISITION. ShopNow.com allows merchants to market their products and services in an established online marketplace where shoppers congregate for the specific purpose of making purchases. We enable shoppers to search for products and services in an organized manner and to evaluate offerings from numerous merchants based on a variety of criteria. Unlike content and community-oriented portals, ShopNow.com is focused principally on, and identified with, shopping. As a result, we can attract visitors who are more likely to buy a product or service at our clients' sites. Our ability to utilize detailed demographic and shopper preference data enables us to offer targeted marketing services to our merchant customers. The ShopNow marketplace, together with our merchant marketing services, allows merchants to quickly and efficiently attract a targeted group of customers. - COMPREHENSIVE TECHNOLOGY PLATFORM. We provide a flexible scaleable technology platform from which we can tailor solutions to meet the changing needs of our clients. Our platform is a combination of third-party technologies and technologies that we have developed. We also have serving and hosting capabilities that enable our clients to outsource the storage and transmission functions of their e-commerce operations. This technology provides merchants a high level of reliability, 24 hours a day, 7 days a week. Using data centers with redundant servers, continuous monitoring and high speed Internet connections, we can provide clients with the performance they require for uninterrupted e-commerce operations. STRATEGY Our goal is to be the leading e-commerce enabling company for businesses and merchants. We plan to achieve this goal through the following strategies: - EXPAND OUR BUSINESS-TO-BUSINESS PORTAL. Through our recently launched business-to-business portal and online marketplace, b2bNow.com, we provide e-commerce enabling solutions for businesses and merchants seeking to transact business with one another online. Currently, b2bNow.com includes the following features: a request for quotation/request for proposal search engine, a business directory, online store building tools, sales and marketing services and information and content relevant to businesses. We intend to further expand b2bNow.com by adding features such as a procurement system, by entering into additional key relationships 3 and by encouraging merchants on the ShopNow marketplace to participate in b2bNow.com. Upon completion of the acquisition of Ubarter.com, we plan to integrate Ubarter's online barter marketplace into b2bNow.com. In addition, we plan to offer our suite of merchant services on b2bNow.com. - EXPAND THE SHOPNOW MARKETPLACE. We intend to aggressively expand the ShopNow marketplace primarily by using the technology and services acquired through our recent acquisitions to broaden the range of features available to listed merchants. We will continue to promote a high volume of shopper traffic on our network and attempt to increase the number of quality customer leads generated for listed merchants. We plan to rapidly expand the number of new ShopNow affiliate and syndication shopping sites to increase revenues and make the ShopNow marketplace more visible and accessible. In addition, we are currently exploring the use of technologies and applications relating to commerce transactions over wireless communication devices. We also intend to enrich shoppers' experiences on the ShopNow marketplace through applications that take advantage of broadband technologies. - ENHANCE AND EXTEND OUR SUITE OF E-COMMERCE ENABLING PRODUCTS AND SERVICES. We intend to continue to add new features to our suite of e-commerce enabling solutions. We believe that, for little incremental cost, we can easily integrate into our suite new features that will contribute additional revenues from lead generation, advertising, upselling merchant services and licensing and syndication. For example, we are attempting to expand our merchant marketing services by updating our technology to increase the quality and amount of data provided by shoppers on the ShopNow marketplace. To provide additional and better quality leads to merchants, we recently expanded the tools available to shoppers to include price search engines and merchant rating systems. - PROMOTE BRAND VISIBILITY. We will continue to promote the ShopNow.com and b2bNow.com brands as the best means for conducting business on the Internet. To accelerate the acceptance and penetration of our brands among businesses, merchants and shoppers, we will continue to advertise our brands through both online and traditional channels such as radio and newspapers. Online efforts include placing banner and other hyperlink advertisements on portal and other destination web sites. To reach a mass audience, we will continue to conduct national advertising campaigns in traditional media. We will also expand our efforts to promote our brands through trade publication advertisements, direct mail and promotional activities, trade shows and media events. - PURSUE ACQUISITIONS AND STRATEGIC BUSINESS RELATIONSHIPS. We intend to make acquisitions and enter into business relationships that enhance the effectiveness of our products and services and the quality of our online marketplaces. To date, we have focused on acquisitions and strategic business relationships that provide us access to improved technology, new domestic and international markets and prospective clients. In the future, we expect to focus principally on acquisitions and strategic business relationships that will enhance and grow b2bNow.com. - EXPAND INTERNATIONALLY. We will seek to leverage the anticipated global growth in e-commerce by expanding our online marketplaces internationally. We plan to commence our international expansion with the development of business opportunities in Japan in the first half of 2000. We intend to accelerate our international expansion by entering into strategic alliances with foreign businesses. We also plan to register our web sites on international search engines, seek relationships with foreign portal web sites and develop foreign-language user interfaces. We believe that these features will enable international shoppers to more easily access our online marketplaces, thereby increasing the number of participants on the ShopNow network. OUR PRODUCTS AND SERVICES MERCHANT SERVICES We offer businesses and merchants a wide variety of enabling products and services, including: - SECURE PAYMENT AND ORDER PROCESSING. We provide online payment and order processing software and services. Our software and services assist our merchant clients with credit card authorization, address verification, 4 automated tax and shipping calculations, order tracking and customer service. Our payment processing system currently interacts with 21 credit card processors. For security, we use advanced encryption methods. To exchange information with merchants and shoppers on our web sites, our network servers use software that complies with the Secure Sockets Layer specification, the predominant method for managing the security of transmissions over a network. - FRAUD PREVENTION. Our fraud prevention services use artificial intelligence programs, a database of historical transactions and validation by an authorized financial institution to confirm shoppers' identities and to assess their credit status. We can adjust the stringency of the fraud screening process based upon a merchant's requirements and the nature of the transaction to assist the merchant in maximizing sales opportunities. Under an agreement with HNC Software, we have licensed the right to use their eFalcon fraud management system. - E-COMMERCE HOSTING AND MAINTENANCE. We provide services to operate and maintain online stores on behalf of our listed merchants. We use data centers with redundant servers, 24-hour monitoring and support and high-speed Internet connections to provide customers with continuous e-commerce operations. We also provide merchants with detailed electronic and hard copy reports summarizing visits to and transactions made on their online stores. - CUSTOM APPLICATION AND ONLINE STORE DEVELOPMENT. We provide businesses and merchants with design and technical development services for their web sites and online stores, including design and advertisement copy services and image management and production. We create commerce-enabled web sites ranging from the basic to the highly customized. - MARKETING AND CUSTOMER ACQUISITION SERVICES. Our marketing services are designed to enable merchants to enhance their visibility on the ShopNow marketplace, facilitate customer acquisition and retention, and increase sales. We offer a range of online advertising and listing services, e-mail promotions and lead delivery programs for merchants. We offer merchants a variety of listing positions in our merchant database, which shoppers access through ShopNow.com. The merchant listing positions differ by length of store description, number of search engine keywords that refer to the merchant's products, order in which the merchant is listed within a product category and availability of certain promotional listings. Advertisements can be prominently displayed on ShopNow.com or on the web site networks of our marketing affiliate, 24/7 Media. From these advertisements, shoppers can hyperlink directly to an advertiser's web site, enabling the advertiser to directly interact with an interested shopper. Merchants can also reach a more focused audience by sponsoring a specific product category or, alternatively, a wider audience by marketing to visitors on our affiliate and syndication shopping sites. Our e-mail promotions enable merchants to alert shoppers registered with us to special merchant product or service offerings. We also offer a lead delivery program that provides merchants with a specific number of visits by shoppers to the merchants' web sites over a given period of time. If we fail to deliver the specified number of visits, the contractual term is extended until we have delivered the required number of leads. - CUSTOMER ORDER FULFILLMENT AND CALL CENTER MANAGEMENT. We have preferred supplier agreements with several companies that specialize in providing customer order fulfillment services for merchants that lack such capabilities. These services include warehousing, packaging and distribution and call center services. Our preferred supplier agreements allow us to obtain pricing discounts and other favorable terms from these companies by aggregating several of our clients' order fulfillment and call center activities under one contract that we enter into and manage on behalf of our clients. We also have relationships with several vendors whose warehouses we use to fill orders that we take on behalf of our clients through our web sites and to deliver the purchased merchandise directly to shoppers. We have integrated our order processing, payment processing and fraud prevention systems with those of our preferred suppliers to provide our merchants with an integrated e-commerce platform. Our various merchant services can be purchased as an integrated suite or individually, which allows businesses and merchants to tailor their service package to their particular needs. Fee arrangements are based on the specific service 5 purchased and may be computed on a project basis, a monthly fee basis, a per transaction basis or a combination thereof. THE SHOPNOW MARKETPLACE The ShopNow marketplace aggregates merchants and shoppers over a distributed network of web sites. The ShopNow marketplace consists of ShopNow.com, our shopping portal, and more than 4,000 affiliate and syndication sites. Our marketplace aggregates more than five million products and services offered by more than 45,000 merchants, including retailers, catalog companies, manufacturers and individuals. The ShopNow.com directory lists merchants under 28 different product categories. Our web site provides shoppers with multiple ways to search our merchant database. To reach a specific merchant's web site, a shopper clicks on the hyperlink to that site. Shoppers complete transactions directly at a merchant's web site, allowing merchants to conduct e-commerce under their own brand names. In some cases, we act as the merchant-of-record and offer products directly to consumers from the ShopNow marketplace. These products usually are shipped directly from the manufacturer or distributor. We principally offer these products to drive traffic to the ShopNow marketplace. During the last quarter of 1999, we completed three acquisitions to enhance the ShopNow marketplace. They were the acquisition of the SpeedyClick community web site, the bottomdollar.com comparison shopping engine and the Cortix merchant rating system. The acquired businesses also provide additional means for shoppers to access our merchants' web sites. We believe that these enhancements will generate additional consumer traffic on the ShopNow marketplace, which in turn will attract additional participating merchants to whom we can cross-sell our e-commerce enabling products and services. We recently launched eBuy, our proprietary transactional banner service. eBuy allows a shopper to click on a banner advertisement from within any web site and purchase the product or service in the banner advertisement without leaving the site where the shopper originally saw the banner advertisement. We have licensed the eBuy technology to 24/7 Media, GiftSpot.com, AthleteNow.com, ChickClick.com and ArtGalleryLive.com. The private label version of eBuy for 24/7 Media is marketed as Click2Buy. b2bNow.com b2bNow.com is a global business-to-business portal that enables businesses to buy, sell and promote their products and services to other businesses in a single online marketplace. Launched in January 2000, b2bNow.com's e-commerce features currently include a request for quotation/request for proposal search engine, enhanced business listings and placements, business web hosting, business web store building tools, business headlines, financial news, targeted newsletters, stock quotes, site traffic reports and other sales and marketing services. In addition, following completion of our proposed acquisition of Ubarter.com, we plan to integrate Ubarter.com's online barter marketplace into b2bNow.com. We believe barter provides a valuable and flexible alternative to cash transactions for businesses wishing to exchange goods and services without disadvantaging their distribution partners. The availability of an online barter marketplace will allow our clients to better manage sales of business assets, excess inventory, surplus production and other goods and services. Our advertising and merchandising revenues are subject to seasonality, and our online marketplaces and the other components of our solution may develop seasonal and cyclical patterns as our market becomes more developed. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company -- Seasonality" contained in Part II, Item 7 of this annual report. 6 CUSTOMERS The following is a list of our top ten customers in terms of revenues from merchant services and revenues from our top ten advertising and merchandising customers on the ShopNow marketplace for the year ended December 31, 1999:
Merchant Services ShopNow Marketplace - ----------------- ------------------- ArtGalleryLive.com Accounting.net AthleteNow.com AuctioNet.com Birkenstock Damark Hallmark Cards eBay The Nature Company ephones.com Palm Computing FashionMall.com SelfCare iWin.com Service Merchandise MVP.com Snowball.com Perfumania.com Sony Social Net
Our top ten merchant services customers accounted for 19% of our total revenues for the year ended December 31, 1999. Our top ten advertising and merchandising customers on the ShowNow marketplace accounted for 8% of our total revenues for the year ended December 31, 1999. RECENT ACQUISITIONS We have acquired a number of businesses that expand the range of our e-commerce enabling products and services, enhance our technology and facilitate our international expansion. We intend to continually evaluate acquisition opportunities. In the future, we expect to focus principally on acquisitions that will enhance and grow b2bNow.com. Since January 1999, we have acquired seven companies that possess attributes complementary to our products and services for an aggregate consideration of approximately $132 million in common stock (valued as of the date of each acquisition) and $19 million in cash. The companies acquired include: SPEEDYCLICK. On November 12, 1999, we acquired SpeedyClick, Corp., one of the fastest growing web communities for women. SpeedyClick is highly targeted, with a special focus on creating a fun, interactive and commerce-oriented community for women. Of the sites specifically targeted to women, SpeedyClick has had the first or second largest number of hits from women Internet users in each of the seven months between June and December 1999, according to PC Data Online. SpeedyClick is headquartered in Glendale, California. CORTIX (20-20CONSUMER.COM). On December 3, 1999, we acquired Cortix Inc., an operator of comparison-shopping services, which include online reviews and ratings of commerce oriented businesses, merchants and products. Cortix's independent and unbiased online comparison-shopping service saves online shoppers time and money and generates qualified leads for merchants. The service tracks prices and information on thousands of products. Shoppers can comparison shop and retrieve and post ratings of Internet merchants using Cortix technology. We believe that this technology will enhance the shopping experience on ShopNow.com. WEBCENTRIC (BOTTOMDOLLAR.COM). On December 17, 1999, we acquired WebCentric, Inc., a developer of e-commerce integration technology and applications, including bottomdollar.com. Bottomdollar.com is a comparison shopping engine that provides shoppers with comparisons of products offered by Internet merchants in the United States, the United Kingdom, France and Canada. The bottomdollar.com shopping engine also provides comparison services on affiliate web sites. In addition, in January 2000 we entered into a definitive agreement to acquire Ubarter.com Inc., a business-to-business barter marketplace. We believe that the availability of an online barter marketplace will allow 7 our clients to better manage sales of business assets, excess inventory, surplus production and other goods and services. We expect to complete this acquisition in the second quarter of 2000. STRATEGIC BUSINESS RELATIONSHIPS We have entered into strategic business relationships with the following companies: PRIVASEEK. On January 5, 2000, we announced a strategic alliance with PrivaSeek, Inc., a developer of permission marketing and privacy management solutions. We intend to jointly launch Persona, PrivaSeek's suite of identity and permission management tools, by the end of 2000. Persona will allow shoppers and merchants to conveniently exchange and effectively manage shopper information, permissioning and usage online across the ShopNow marketplace. Currently, an online shopper's personal information is stored on individual web sites, and use of the information is determined by the web sites' operators. After we launch Persona, shoppers visiting the ShopNow marketplace will experience personalized advertisements or special offers relevant to their interests or personal life events. TRADEX TECHNOLOGIES. On January 27, 2000, we entered into a strategic relationship with TRADEX Technologies, Inc., a platform provider for business-to-business marketplaces which enables businesses to exchange goods, services and information over the Internet. We intend to integrate the TRADEX platform on b2bNow.com to enable the businesses using our business-to-business portal to simplify their procurement and trading processes. We expect to receive transaction fees from businesses that buy or sell products or services in the b2bNow marketplace using this and other online trading technologies. We expect that this integration will be complete by the end of the second quarter of 2000. On December 16, 1999, TRADEX and Ariba Inc. announced the execution of a definitive agreement for Ariba's acquisition of TRADEX. We believe that our strategic relationship with TRADEX and Ariba will allow the businesses on b2bNow.com to satisfy their procurement needs in a competitive e-commerce marketplace while enabling such businesses to buy and sell more efficiently. ESCROW.COM. On October 25, 1999, we entered into a three-year agreement to serve as the exclusive payment processing service provider to escrow.com, Inc., a developer of e-commerce processing and fulfillment for buyer and seller sites, including online auctions, online business-to-business sites and online business-to-consumer sites. As part of the agreement, we will receive a fee for each escrow transaction processed by escrow.com through our payment processing technology. CHASE MANHATTAN BANK. In July 1999, we entered into an agreement with Chase Manhattan Bank, through one of its affiliates, to launch an Internet shopping site featuring Chase and ShopNow. This site, ChaseShop.com, was launched in October 1999 and is part of Chase's online banking site. It possesses the same core functionality as ShopNow.com with the design, color scheme and branding of Chase.com. Similar to ShopNow.com, visitors can shop at the sites of over 45,000 merchants, as well as shop for particular products and brands. We jointly sell advertising and merchandising on the site. Pursuant to this agreement, Chase pays us a licensing fee to use the technology underlying the site. Chase is a preferred provider of financial services for ShopNow.com and the exclusive marketer of credit cards featuring the ShopNow brand. Each party shares in the revenues of the other based on the amount of business generated through the agreement. The agreement has an initial term of 27 months, with a three-year renewal at Chase's option. ABOUT.COM. In July 1999, we entered into an agreement with About.com, Inc., a leading Internet network of commerce communities. Under this agreement, we became the exclusive generalized shopping directory service on About.com, obtained designated placement on About.com of a hyperlink to the ShopNow.com site and are guaranteed to receive a minimum number of banner ads annually from About.com. This shopping section gives us access to all visitors to the About.com network, which we believe will attract additional visitors to our online marketplaces. The agreement has a five-year term, and each party has the right to terminate upon 90 days notice after April 1, 2000. HNC SOFTWARE. In May 1999, we entered into a three-year agreement with HNC Software, Inc. Under the agreement, HNC will provide us with a number of e-commerce products including marketing, fraud detection and 8 customer support software at preferential prices. Integration of these products with our technology platform will allow us to provide merchants with better tools to manage their customer relationships. 24/7 MEDIA. In April 1999, we entered into a three-year cross promotion agreement with 24/7 Media, Inc., an online advertising network. Under the agreement, 24/7 Media promotes our e-commerce and marketing services to its network of affiliated web sites in exchange for our promotion of 24/7 Media's advertising, representation and e-mail management services to our merchant customers. 24/7 Media is primarily a point of distribution for advertising campaigns that serve banner advertisements on web sites or by e-mail. Our marketing services are oriented toward strategic planning and creative implementation of the online marketing or advertising campaigns distributed by companies such as 24/7 Media. Although we view our business relationships as an important factor in our overall business strategy, the other parties to these relationships may reassess their significance at any time. These relationships generally do not establish minimum performance requirements but instead rely on the contractual best efforts of the parties. In addition, several of our strategic business relationships may be terminated with little notice. SALES AND MARKETING SALES Our sales strategy is designed to increase market awareness of the ShopNow.com and b2bNow.com brands, expand the ShopNow and b2bNow marketplaces, and develop additional revenue opportunities by cross-selling and upselling additional e-commerce and marketing services to our existing clients. We sell our merchant services primarily through our direct sales force. Our sales organization targets businesses and merchants seeking online marketing services and custom e-commerce services. These employees are currently located at our headquarters in Seattle, Washington. We intend to increase our sales presence by opening field sales offices. Our success in doing so will depend on our ability to attract additional qualified sales personnel. MARKETING We currently employ a variety of traditional and online marketing programs, business development and promotional activities as part of our marketing strategy. We place advertisements on high-profile third-party web sites and on our own web sites. We also rely on relationship marketing, including word-of-mouth advertising by merchants and shoppers, indirect promotions by merchants with links to our web sites and indirect advertising arising through use of our services. Although we have reduced our reliance on traffic promotion agreements as awareness of the ShopNow brand has increased, we believe that relationship marketing will continue to generate a substantial number of new merchant customers and additional shopper traffic. We intend to introduce a number of other brand awareness and customer loyalty programs through our web sites. To augment our online marketing efforts, we have initiated an aggressive brand promotion campaign using traditional media, including print, radio, billboard and television advertising. We also rely on public relations activities, attendance at industry trade shows and direct mail programs to increase merchant awareness of our products and services and to generate additional sales. We intend to continue to participate in joint promotions using online and traditional advertising media. TECHNOLOGY AND INFRASTRUCTURE Our e-commerce enabling products and services and online marketplaces require the development and deployment of advanced e-commerce technologies and methodologies. Consequently, we have invested heavily in licensing advanced technologies and in developing a core set of technologies. Our third-party vendors provide relational databases, such as Oracle and Microsoft SQL server, search technologies, ad servers, catalog engines and various back-end automation technologies. Our proprietary technologies include interfaces to customer order fulfillment systems and payment systems. We provide fraud prevention software through a proprietary interface with HNC Software. 9 Our software runs on system hardware that is hosted in leased and third-party data centers located in Seattle, Washington and Sterling, Virginia. These data centers are connected to our headquarters in Seattle, Washington through high speed networks. These data centers, as well as the system hardware located at our headquarters, are connected to back-up generators to maintain uninterrupted electrical service and to the Internet through multiple Internet service providers to avoid connectivity problems. Our systems are redundant, and we maintain multiple clustered high speed routers, multiple clustered load balancing hardware, multiple web servers and multiple application and database servers. Data for our networks is stored on dedicated, high speed and redundant disk appliances that provide continuous access to the data even if individual disk drives, computers and power supplies fail. Data is backed up regularly and is stored off site at the third-party data centers to provide for data recovery in the event of a disaster. We employ extensive automated and manual monitoring to maintain a high level of network uptime. We employ several relational databases to collect product stock keeping unit transaction data and to track multiple resellers or affiliates. Our databases have been designed for high levels of performance and scaleability. Shopper data is maintained in a profile database that is used for targeted shopper relationship management. The software architecture has been designed to accommodate our expected growth over the next 24 months. We believe that our future success will depend in part on our ability to license, develop and maintain advanced e-commerce technologies. Consequently, we expect to invest heavily in developing new technologies and to continue to make strategic acquisitions to increase our direct control and ownership of proprietary technology. INTELLECTUAL PROPERTY Intellectual property is critical to our success, and we rely upon patent, trademark, copyright and trade secret laws in the United States and other jurisdictions to protect our proprietary rights and intellectual property. However, patent, trademark, copyright and trade secret protection may not be available in every country in which our products and services are distributed or made available. Our proprietary software, documentation and other written materials are provided limited protection by international and United States copyright laws. In addition, we protect our proprietary rights through the use of confidentiality and license agreements with employees, consultants and affiliates. We currently have five pending United States patent applications. We do not have any issued patents. We have registered the trademark "ShopNow." We have applied for United States trademark registrations for the marks "ShopNow.com" and "b2bNow.com." These marks may also be protected in other jurisdictions. Our transaction processing and advertisement serving technology collects and uses data derived from user activity on our web sites and those of our merchants customers that we maintain. This data is intended to be used for targeted marketing and for predicting advertisement performance. Although we believe that we have the right to use such data, trade secret, copyright or other protection may not be available for such information or others may claim rights to such information. In December 1999, we acquired WebCentric, operator and creator of bottomdollar.com, a proprietary search engine capable of aggregating large amounts of product data and information (i.e. price, delivery times) from participating web sites. RESEARCH AND DEVELOPMENT Our research and development efforts are directed towards improving the design and functionality of our online marketplaces, improving our network systems and enhancing the technology underlying the features of our e-commerce products and services. Research and development expenses were $2.4 million in 1997, $4.4 million in 1998 and $8.9 million in 1999. COMPETITION The market for e-commerce enabling solutions and online marketplaces is new, intensely competitive, highly fragmented and rapidly changing. Barriers to entry are not significant and we expect competition to intensify in the 10 future. Although we believe no one company currently offers a range of e-commerce enabling solutions as comprehensive as our suite of products and services, many companies offer alternatives to one or more of our products and services. These companies include InfoSpace, Go2Net, Yahoo! and Cybersource. The number of companies providing products and services that compete with ours is large and increasing at a rapid rate. Many of our competitors and potential competitors have substantially greater financial, technical, marketing and other resources. We expect that additional companies which to date have not had a substantial commercial presence on the Internet or in our markets, will offer competing products and services. In addition, as the use of the Internet and online products and services increases, larger well-established and well-financed entities may continue to acquire, invest in or form joint ventures with providers of e-commerce products and services and existing providers of e-commerce solutions may continue to consolidate. Providers of Internet browsers and other Internet products and services who are affiliated with providers of web directories and information services may more tightly integrate these affiliated offerings into their browsers or other products or services. Any of these trends would increase the competition we face. EMPLOYEES At December 31, 1999, we had 476 employees, including 208 in merchant services and b2bNow.com, 229 in the ShopNow marketplace, and 39 in general and administrative functions. We are not subject to any collective bargaining agreements and believe that our employee relations are good. 11 FACTORS AFFECTING OUR OPERATING RESULTS, OUR BUSINESS AND OUR STOCK PRICE YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS ANNUAL REPORT. WHILE WE HAVE ATTEMPTED TO IDENTIFY ALL RISKS THAT ARE MATERIAL TO OUR BUSINESS, ADDITIONAL RISKS THAT WE HAVE NOT YET IDENTIFIED OR THAT WE CURRENTLY THINK ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF THESE RISKS. IN ASSESSING THESE RISKS, YOU SHOULD ALSO REFER TO THE OTHER INFORMATION IN THIS ANNUAL REPORT, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES. RISKS RELATED TO OUR BUSINESS OUR RAPID GROWTH AND EVOLUTION MAY MAKE IT DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS ShopNow was incorporated in January 1994 and operated initially as a computer services company. In 1996, we began to change the focus of our business to conducting commerce over the Internet. In August 1998, we launched our first online marketplace, ShopNow.com. In recent months, particularly with the launch of b2bNow.com, our business-to-business marketplace, we have increasingly focused on developing and providing products and services to enable businesses to conduct online commerce. The recent shifts in our business focus may make it difficult for you to evaluate our business and prospects. You should also consider the risks, expenses and difficulties that we may encounter as a young company in a rapidly evolving market. WE HAVE A HISTORY OF LOSSES AND WE EXPECT FUTURE LOSSES We incurred net losses of $24.7 million for the year ended December 31, 1998 and $75.9 million for the year ended December 31, 1999. At December 31, 1999, we had an accumulated deficit of $105.3 million. We have historically invested heavily in sales and marketing, technology infrastructure and research and development and expect to continue to do so in the future. As a result, we must generate significant revenues to achieve and maintain profitability. We expect that our sales and marketing expenses, research and development expenses and general and administrative expenses will continue to increase in absolute dollars and may increase as a percentage of revenues. In addition, we may incur substantial expenses in connection with future acquisitions. OUR FUTURE REVENUES ARE UNPREDICTABLE AND WE EXPECT OUR OPERATING RESULTS TO FLUCTUATE FROM PERIOD TO PERIOD Our business model has only been applied to the Internet since the mid-1990's and continues to evolve. Therefore we have limited experience in planning the financial needs and operating expenses of our business. It is difficult for us to accurately forecast our revenues in any given period. We may not be able to sustain our recent revenue growth rates or obtain sufficient revenues to achieve profitability. If our revenues in a particular period fall short of our expectations, we will likely be unable to quickly adjust our spending in order to compensate for that revenue shortfall. Our operating results are likely to fluctuate substantially from period to period as a result of a number of factors, such as: - declines in the number of businesses and merchants to which we provide our products and services; - the amount and timing of operating costs and expenditures relating to expansion of our operations; and - the mix of products and services that we sell. In addition, factors beyond our control may also cause our operating results to fluctuate, such as: - the announcement or introduction of new or enhanced products or services by our competitors; and - the pricing policies of our competitors. 12 Period-to-period comparisons of our operating results are not a good indicator of our future performance. It is likely that our operating results in some quarters may not meet the expectations of stock market analysts and investors and this could cause our stock price to decline. OUR BUSINESS MODEL IS UNPROVEN AND CHANGING Our business model consists of providing businesses and merchants with e-commerce enabling solutions. We have limited experience as a company and, additionally, the Internet, on which our business model relies, is still unproven as a business medium. Accordingly, our business model may not be successful, and we may need to change it. Our ability to generate sufficient revenues to achieve profitability will depend, in large part, on our ability to successfully market our e-commerce products and services to businesses and merchants that may not be convinced of the need for an online presence or may be reluctant to rely upon third parties to develop and manage their e-commerce offerings and marketing efforts. OUR FUTURE GROWTH WILL DEPEND ON OUR ABILITY TO MAKE AND SUCCESSFULLY INTEGRATE ADDITIONAL ACQUISITIONS Our success depends on our ability to continually enhance and expand our e-commerce enabling products and services and our online marketplaces in response to changing technologies, customer demands and competitive pressures. Consequently, we have acquired complementary technologies or businesses in the past, and intend to do so in the future. We have entered into a definitive agreement to acquire Ubarter.com, subject to the approval of Ubarter.com's shareholders. The acquisition of Ubarter.com is intended to expand our capability to enable businesses to exchange business products and services. If we are unable to identify suitable acquisition targets, or if we are unable to successfully complete acquisitions and successfully integrate the acquired businesses, technologies and personnel, our ability to increase product and service offerings will be reduced. This could cause us to lose business to our competitors, and our operating results could suffer. ACQUISITIONS INVOLVE A NUMBER OF RISKS We actively seek to identify and acquire companies with attributes complementary to our e-commerce products and services. Since October 1, 1999, we have acquired five companies. In addition, as described above, we recently agreed to acquire Ubarter.com. Acquisitions that we make may involve numerous risks, including: - diverting management's attention from other business concerns; - being unable to maintain uniform standards, controls, procedures and policies; - entering markets in which we have no direct prior experience; - improperly evaluating new services and technologies or otherwise being unable to fully exploit the anticipated opportunity; and - being unable to successfully integrate the acquired businesses, technologies and other assets. If we are unable to accurately assess any newly acquired businesses or technologies, our business could suffer. For example, in June 1998 we acquired e-Warehouse and CyberTrust. These companies had developed payment processing technologies that we planned to utilize as part of our e-commerce products and services. However, we are not currently utilizing the acquired technologies, and we have determined that the technologies have no other use or value to us. Because we are not using the acquired technologies, we wrote off substantially all of the $5.4 million aggregate purchase price for e-Warehouse and CyberTrust in 1998. Future acquisitions may involve the assumption of obligations or large one-time write-offs and amortization expenses related to goodwill and other intangible assets. Any of the factors listed above would adversely affect our results of operations. 13 In addition, in order to finance any future acquisition, we may need to raise additional funds through public or private financings. In this event, we could be forced to obtain equity or debt financing on terms that are not favorable to us and that may result in dilution to our shareholders. OUR SUCCESS DEPENDS UPON ACHIEVING ADEQUATE MARKET SHARE TO INCREASE OUR REVENUES AND BECOME PROFITABLE Our success depends upon achieving significant market penetration and acceptance of our e-commerce enabling products and services. We have only recently begun to expand our business-to-business initiatives designed to enable businesses to maximize their e-commerce opportunities, and our online marketplaces have achieved only limited market acceptance to date. We may not currently have adequate market share to successfully execute our business plan. If we are unable to reach and retain substantial numbers of businesses, merchants and shoppers, our business model may not be sustainable. To successfully market and sell our e-commerce enabling products and services we must: - become recognized as a leading provider of end-to-end enabling solutions; - enhance existing products and services; - add new products and services; - complete projects on time; - increase the number of businesses and merchants using our e-commerce products and services and online marketplaces; and - continue to increase the attractiveness of the ShopNow marketplace to shoppers. IF WE DO NOT INCREASE BRAND AWARENESS OUR SALES MAY SUFFER Due in part to the emerging nature of the markets for e-commerce enabling products and services and online marketplaces, together with the substantial resources available to many of our competitors, our opportunity to achieve and maintain a significant market share may be limited. Developing and maintaining awareness of the ShopNow.com and b2bNow.com brand names is critical in achieving widespread acceptance of our e-commerce enabling products and services and our online marketplaces. We launched the ShopNow marketplace in August 1998 and we have only recently begun to expand our business-to-business initiatives designed to enable businesses to maximize their e-commerce opportunities. The importance of brand recognition will increase as competition in our markets increases. Successfully promoting and positioning our brands will depend largely on the effectiveness of our marketing and sales efforts and our ability to develop reliable and useful products and services at competitive prices. If our planned marketing and sales efforts are ineffective, we may need to increase our financial commitment to creating and maintaining brand awareness among businesses, merchants and shoppers, which could divert financial and management resources from other aspects of our business, or cause our operating expenses to increase disproportionately to our revenues. This could cause our business and operating results to suffer. WE FACE SIGNIFICANT COMPETITION The market for e-commerce enabling products and services and online marketplaces is highly competitive, and we expect competition to intensify in the future. Barriers to entry are not significant. Our failure to compete effectively could result in the following: - fewer businesses and merchants relying upon our enabling solutions; - the obsolescence of the technology underlying our products and services; - fewer businesses and merchants listed in our directories; - a decrease in shopper traffic on our web sites; and 14 - a reduction in the prices of or profits on our products and services. The number of companies providing e-commerce enabling products and services is large and increasing at a rapid rate. We expect that additional companies which to date have not had a substantial commercial presence on the Internet or in our markets will offer competing products and services. Although we believe no one company currently offers a range of e-commerce enabling solutions as comprehensive as our suite of products and services, companies such as InfoSpace, Go2Net, Yahoo! and Cybersource offer alternatives to one or more of our products and services. Many of our competitors and potential competitors have substantial competitive advantages as compared to us, including: - larger customer or user bases; - the ability to offer a wider array of e-commerce products and solutions; - greater name recognition and larger marketing budgets and resources; - substantially greater financial, technical and other resources; - the ability to offer additional content and other personalization features; and - larger production and technical staffs. These advantages may enable our competitors to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products and services, initiate or withstand substantial price competition, take advantage of acquisition or other opportunities more readily or develop and expand their product and service offerings more quickly. In addition, as the use of the Internet and online products and services increases, larger well-established and well-financed entities may continue to acquire, invest in or form joint ventures with providers of e-commerce enabling solutions, and existing providers may continue to consolidate. Providers of Internet browsers and other Internet products and services who are affiliated with providers of web directories and information services that compete with our products and services may more tightly integrate these affiliated offerings into their browsers or other products or services. Any of these trends would increase the competition we face. IF WE FAIL TO MAINTAIN OUR STRATEGIC BUSINESS RELATIONSHIPS AND ENTER INTO NEW RELATIONSHIPS OUR BUSINESS WILL SUFFER An important element of our strategy involves entering into business relationships with other companies. Our success is dependent on maintaining our current contractual relationships and developing new strategic relationships. These contractual relationships typically involve joint marketing, licensing or promotional arrangements. For example, we have entered into a licensing and co-marketing agreement with Chase Manhattan Bank, a marketing agreement with About.com, a cross promotion agreement with 24/7 Media and a software license agreement with HNC Software. Although these relationships are an important factor in our strategy because they enable us to enhance our product and service offerings, the parties with which we contract may not view their relationships with us as significant to their own businesses. To date, we have not derived material revenue from these relationships, and some of these relationships impose substantial obligations on us. It is not certain that the benefits to us will outweigh our obligations. For example, our relationship with 24/7 Media requires us to refer to them any business that would benefit from the advertising services offered by 24/7 Media and makes 24/7 Media the only third party authorized to sell advertising on our web site. Several of our significant business arrangements do not establish minimum performance requirements but instead rely on contractual best efforts obligations of the parties with which we contract. In addition, most of these relationships may be terminated by either party with little notice. Accordingly, in order to maintain our strategic business relationships we will need to meet our partners' specific business objectives, including incremental revenue, brand awareness and implementation of specific e-commerce applications. If our strategic business relationships are discontinued for any reason, or if we are unsuccessful in entering into new relationships in the future, our business and results of operations may be harmed. 15 IF WE FAIL TO EFFECTIVELY MANAGE THE RAPID GROWTH OF OUR OPERATIONS OUR BUSINESS WILL SUFFER Our ability to successfully offer e-commerce enabling products and services and implement our business plan in a rapidly evolving market requires an effective planning and management process. We are increasing the scope of our operations domestically and internationally, and we have recently increased our headcount substantially. From December 31, 1997 to December 31, 1999, our total number of employees increased from less than 50 to 476. This growth has placed and will continue to place a significant strain on our management systems, infrastructure and resources. We will need to continue to improve our financial and managerial controls and reporting systems and procedures, and will need to continue to expand, train and manage our workforce worldwide. Furthermore, we expect that we will be required to manage an increasing number of relationships with various customers and other third parties. Any failure to expand any of the foregoing areas efficiently and effectively could cause our business to suffer. WE DEPEND ON OUR KEY MANAGEMENT PERSONNEL FOR SUCCESSFUL OPERATION OF OUR BUSINESS Our success depends on the skills, experience and performance of our senior management and other key personnel. Our key personnel include Dwayne Walker, our Chairman and Chief Executive Officer, Joe Arciniega, our President and Chief Operating Officer, Alan Koslow, our Chief Financial Officer, and Dr. Ganapathy Krishnan, our Chief Technology Officer. Only Mr. Walker has an employment agreement with ShopNow. Many of our executive officers have joined us within the past three years. If we do not quickly and efficiently integrate these new personnel into our management and culture, our business could suffer. Our business could also suffer if we do not retain our key personnel. WE MUST HIRE ADDITIONAL PERSONNEL TO EXPAND OUR OPERATIONS Our future success depends on our ability to identify, hire, train, retain and motivate highly skilled executive, technical, managerial, sales and marketing, business development and administrative personnel. We intend to hire a significant number of personnel during the next year, and as of December 31, 1999 we had openings for 67 job positions. Competition for qualified personnel is intense, particularly in the technology and Internet markets. If we fail to successfully attract and retain a sufficient number of qualified executive, technical, managerial, sales and marketing, business development and administrative personnel, our ability to manage and expand our business could suffer. OUR ABILITY TO DEVELOP AND INTEGRATE E-COMMERCE TECHNOLOGIES IS SUBJECT TO UNCERTAINTIES We have limited experience delivering our e-commerce products and services and operating online marketplaces. In order to remain competitive, we must regularly upgrade our e-commerce products and services to incorporate current technology, which requires us to integrate complex computer hardware and software components. If we do not successfully integrate these components, the quality and performance of our online offerings may be reduced. In addition, the ability of our online marketplaces to accommodate an increasing number of businesses, merchants and shoppers would suffer. While these technologies are generally commercially available, we may be required to expend considerable time and money in order to successfully integrate them into our products and services and this may cause our business to suffer. We must also maintain an adequate testing and technical support infrastructure to ensure the successful introduction of products and services. OUR COMPUTER SYSTEMS MAY BE VULNERABLE TO SYSTEM FAILURES Our success depends on the performance, reliability and availability of the technology supporting our e-commerce products and services and our online marketplaces. Our revenues depend, in large part, on the number of businesses and merchants that use our products and services and the number of shoppers that access the ShopNow marketplace. This depends, in part, upon our actual and perceived reliability and performance. Any inability to provide our products and services or any slowdown or stoppage of our online marketplaces could cause us to lose clients and therefore lose revenue. Substantially all of our computer and communications hardware is located at 16 leased and third-party facilities in Seattle, Washington and Sterling, Virginia. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, break-in, earthquake and similar events. Because we presently do not have fully redundant systems or a formal disaster recovery plan, a systems failure could adversely affect our business. Our computer systems are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which may lead to interruptions, delays, loss of data or inability to process online transactions for our clients. We may be required to expend considerable time and money to correct any system failure. If we are unable to fix a problem that arises, we may lose clients or be unable to conduct our business at all. OUR BUSINESS MAY BE HARMED BY DEFECTS IN OUR SOFTWARE AND SYSTEMS We have developed custom software for our network servers and have licensed additional software from third parties. This software may contain undetected errors or defects. Although we have not suffered significant harm from any errors or defects to date, we may discover significant errors or defects in the future that we may be unable to fix in a timely or cost-effective manner. WE WILL NEED TO EXPAND AND UPGRADE OUR SYSTEMS IN ORDER TO MAINTAIN CUSTOMER SATISFACTION We must expand and upgrade our technology, transaction processing systems and network infrastructure if the number of businesses and merchants using our e-commerce products and services and online marketplaces, or the volume of traffic on our web sites or our clients' web sites, increases substantially. We could experience periodic capacity constraints, which may cause unanticipated system disruptions, slower response times and lower levels of customer service. We may be unable to accurately project the rate or timing of increases, if any, in the use of our products or services or our web sites or when we must expand and upgrade our systems and infrastructure to accommodate these increases in a timely manner. Any inability to do so could harm our business. OUR INTERNATIONAL OPERATIONS INVOLVE RISKS We are subject to risks specific to Internet-based companies in foreign markets. These risks include: - delays in the development of the Internet as a commerce medium in international markets; - restrictions on the export of encryption technology; and - increased risk of piracy and limits on our ability to enforce our intellectual property rights. In addition, we intend to begin developing business opportunities in Japan in the first half of 2000. We may be unable to develop sufficient relationships in Japan to take advantage of business opportunities there. In recent periods, the Japanese economy has experienced weakness. If the Japanese economy continues to exhibit weakness, our efforts to develop business opportunities in Japan and our ability to grow in that market could be impaired. In addition, the failure to succeed in the Japanese market could impair our ability to enter other international markets. WE MAY REQUIRE ADDITIONAL FUNDING TO SUCCESSFULLY OPERATE AND GROW OUR BUSINESS Although we believe that our cash reserves and cash flows from operations will be adequate to fund our operations for at least the next twelve months, these resources may be inadequate. Consequently, we may require additional funds during or after this period. Additional financing may not be available on favorable terms or at all. If we raise additional funds by selling stock, the percentage ownership of our then current shareholders will be reduced. If we cannot raise adequate funds to satisfy our capital requirements, we may have to limit our operations significantly. Our future capital requirements depend upon many factors, including, but not limited to: - the rate at which we expand our sales and marketing operations and our product and service offerings; - the extent to which we develop and upgrade our technology and data network infrastructure; and - the occurrence, timing, size and success of acquisitions. 17 WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS We regard our intellectual property rights as critical to our success, and we rely on trademark and copyright law, trade secret protection and confidentiality and license agreements with our employees, customers and others to protect our proprietary rights. Despite our precautions, unauthorized third parties might copy portions of our software or reverse engineer and use information that we regard as proprietary. We currently have five patents pending in the United States Patent and Trademark Office covering different aspects of our product architecture and technology. However, we do not currently own any issued patents and there is no assurance that any pending patent application will result in an issued patent, or that any future patent will not be challenged, invalidated or circumvented, or that the rights granted under any patent will provide us with a competitive advantage. The laws of some countries do not protect proprietary rights to the same extent as do the laws of the United States, and our means of protecting our proprietary rights abroad may not be adequate. Any misappropriation of our proprietary information by third parties could adversely affect our business by enabling third parties to compete more effectively with us. OUR TECHNOLOGY MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS Although we have not received notice of any alleged infringement by us, we cannot be certain that our technology does not infringe issued patents or other intellectual property rights of others. In addition, because patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed which relate to our software. We may be subject to legal proceedings and claims from time to time in the ordinary course of our business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties. Intellectual property litigation is expensive and time-consuming, and could divert our management's attention away from running our business. IF THE SECURITY PROVIDED BY OUR E-COMMERCE SERVICES IS BREACHED WE MAY BE LIABLE TO OUR CLIENTS AND OUR REPUTATION COULD BE HARMED A fundamental requirement for e-commerce is the secure transmission of confidential information of businesses, merchants and shoppers over the Internet. Among the e-commerce services we offer to merchants are security features such as: - secure online payment services; - secure order processing services; and - fraud prevention and management services. Third parties may attempt to breach the security provided by our e-commerce products and services or the security of our clients' internal systems. If they are successful, they could obtain confidential information about businesses and shoppers using our online marketplaces, including their passwords, financial account information, credit card numbers or other personal information. We may be liable to our clients or to shoppers for any breach in security. Even if we are not held liable, a security breach could harm our reputation, and the mere perception of security risks, whether or not valid, could inhibit market acceptance of our products and services. We may be required to expend significant capital and other resources to license additional encryption or other technologies to protect against security breaches or to alleviate problems caused by these breaches. In addition, our clients might decide to stop using our e-commerce products and services if their customers experience security breaches. PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR BUSINESS Prior to January 1, 2000 we devoted substantial resources in an effort to ensure that our proprietary software, the third-party software on which we rely, and the underlying systems and protocols did not contain errors or defects associated with Year 2000 date functions. Since January 1, 2000, we have not experienced any disruption to our business as the result of any Year 2000 problems or otherwise. If problems do arise, they could adversely affect our business. 18 RISKS RELATED TO OUR INDUSTRY OUR SUCCESS DEPENDS ON CONTINUED INCREASES IN THE USE OF THE INTERNET AS A COMMERCIAL MEDIUM We depend on the growing use and acceptance of the Internet by businesses, merchants and shoppers as a medium of commerce. Rapid growth in the use of and interest in the Internet and online products and services is a recent development. No one can be certain that acceptance and use of the Internet and online products and services will continue to develop or that a sufficiently broad base of businesses, merchants and shoppers will adopt and continue to use the Internet and online products and services as a medium of commerce. The Internet may fail as a commercial marketplace for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies, including security technology and performance improvements. For example, if technologies such as software that stops advertising from appearing on a web user's computer screen gain wide acceptance, the attractiveness of the Internet to advertisers would be diminished, which could harm our business. RAPID TECHNOLOGICAL CHANGE COULD NEGATIVELY AFFECT OUR BUSINESS Rapidly changing technology, evolving industry standards, evolving customer demands and frequent new product and service introductions characterize the market for e-commerce products and services and online marketplaces. Our future success will depend in significant part on our ability to improve the performance, content and reliability of our products and services in response to both the evolving demands of the market and competitive product and service offerings. Our efforts in these areas may not be successful. If a large number of our clients adopt new Internet technologies or standards, we may need to incur substantial expenditures modifying or adapting our e-commerce products and services to remain compatible with their systems. WE RELY ON THE INTERNET INFRASTRUCTURE PROVIDED BY OTHERS TO OPERATE OUR BUSINESS Our success depends in large part on other companies maintaining the Internet infrastructure. In particular, we rely on other companies to maintain a reliable network backbone that provides adequate speed, data capacity and security and to develop products that enable reliable Internet access and service. If the Internet continues to experience significant growth in the number of users, frequency of use and amount of data transmitted, the Internet infrastructure of thousands of computers communicating via telephone lines, coaxial cable and other telecommunications systems may be unable to support the demands placed on it, and the Internet's performance or reliability may suffer as a result of this continued growth. If the performance or reliability of the Internet suffers, Internet users could have difficulty obtaining access to the Internet. In addition, data transmitted over the Internet, including information and graphics contained on web pages, could reach Internet users much more slowly. This could result in frustration of Internet users, which could decrease online traffic and cause advertisers to reduce their Internet expenditures. FUTURE GOVERNMENTAL REGULATION AND PRIVACY CONCERNS COULD ADVERSELY AFFECT OUR BUSINESS We are not currently subject to direct regulation by any government agency, other than regulations applicable to businesses generally, and there are currently few laws or regulations directly applicable to access to or commerce on the Internet. However, due to the increasing popularity and use of the Internet, a number of legislative and regulatory proposals are under consideration by federal, state, local and foreign governmental organizations, and it is possible that a number of laws or regulations may be adopted with respect to the Internet relating to issues such as user privacy, taxation, infringement, pricing, quality of products and services and intellectual property ownership. The adoption of any laws or regulations that have the effect of imposing additional costs, liabilities or restrictions relating to the use of the Internet by businesses or consumers could decrease the growth in the use of the Internet, which could in turn decrease the demand for our products and services, decrease traffic on our online marketplaces, increase our cost of doing business, or otherwise have a material adverse effect on our business. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, copyright, trademark, trade secret, 19 obscenity, libel and personal privacy is uncertain and developing. Any new legislation or regulation, or application or interpretation of existing laws, could have a material adverse effect on our business. The Federal Communications Commission is currently reviewing its regulatory positions on the privacy protection given to data transmissions over telecommunications networks and could seek to impose some form of telecommunications carrier regulation on telecommunications functions of information services. State public utility commissions generally have declined to regulate information services, although the public service commissions of some states continue to review potential regulation of such services. Future regulation or regulatory changes regarding data privacy could have an adverse effect on our business by requiring us to incur substantial additional expenses in order to comply with this type of regulation. A number of proposals have been made at the federal, state and local level that would impose additional taxes on the sale of goods and services over the Internet and certain states have taken measures to tax Internet-related activities. Foreign countries also may tax Internet transactions. The taxation of Internet-related activities could have the effect of imposing additional costs on companies, such as ShopNow, that conduct business over the Internet. This, in turn, could lead to increased prices for products and services, which could result in decreased demand for our solutions. WE COULD FACE LIABILITY FOR MATERIAL TRANSMITTED OVER THE INTERNET BY OTHERS Because material may be downloaded from web sites hosted by us and subsequently distributed to others, there is a potential that claims will be made against us for negligence, copyright or trademark infringement or other theories based on the nature and content of this material. Negligence and product liability claims also potentially may be made against us due to our role in facilitating the purchase of some products, for example firearms. Although we carry general liability insurance, our insurance may not cover claims of these types, or may not be adequate to indemnify us against this type of liability. Any imposition of liability, and in particular liability that is not covered by our insurance or is in excess of our insurance coverage, could have a material adverse effect on our reputation and our operating results, or could result in the imposition of criminal penalties on us. WE DO NOT CURRENTLY COLLECT SALES TAX FROM ALL TRANSACTIONS We do not currently collect sales or other similar taxes on products sold by us and delivered into states other than Washington, California, Georgia, Arizona, Kansas, New York, Tennessee and Kentucky. However, one or more states or foreign countries may seek to impose sales tax collection obligations on out-of-state or foreign companies engaging in e-commerce. In addition, any new operation in states outside the states for which we currently collect sales tax could subject shipments into these states to state or foreign sales taxes. A successful assertion by one or more states or any foreign country that we should collect sales or other similar taxes on the sale of merchandise or services could result in liability for penalties as well as substantially higher expenses incurred by our business. RISKS RELATED TO AN INVESTMENT IN OUR STOCK PROVISIONS OF OUR CHARTER DOCUMENTS AND WASHINGTON LAW COULD DISCOURAGE OUR ACQUISITION BY A THIRD PARTY Specific provisions of our articles of incorporation and bylaws and Washington law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders. Our articles of incorporation and bylaws establish a classified board of directors, eliminate the ability of shareholders to call special meetings, eliminate cumulative voting for directors and establish procedures for advance notification of shareholder proposals. The presence of a classified board and the elimination of cumulative voting may make it more difficult for an acquirer to replace our board of directors. Further, the elimination of cumulative voting substantially reduces the ability of minority shareholders to obtain representation on the board of directors. Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by our shareholders. The issuance of preferred stock could have the effect of delaying, deferring or 20 preventing a change of control of ShopNow and may adversely affect the market price of the common stock and the voting and other rights of the holders of common stock. Washington law imposes restrictions on some transactions between a corporation and significant shareholders. Chapter 23B.19 of the Washington Business Corporation Act prohibits a target corporation, with some exceptions, from engaging in particular significant business transactions with an acquiring person, which is defined as a person or group of persons that beneficially owns 10% or more of the voting securities of the target corporation, for a period of five years after the acquisition, unless the transaction or acquisition of shares is approved by a majority of the members of the target corporation's board of directors prior to the acquisition. Prohibited transactions include, among other things: - a merger or consolidation with, disposition of assets to, or issuance or redemption of stock to or from the acquiring person; - termination of 5% or more of the employees of the target corporation; or - allowing the acquiring person to receive any disproportionate benefit as a shareholder. A corporation may not opt out of this statute. This provision may have the effect of delaying, deterring or preventing a change in control of ShopNow. The foregoing provisions of our charter documents and Washington law could have the effect of making it more difficult or more expensive for a third party to acquire, or could discourage a third party from attempting to acquire, control of ShopNow. These provisions may therefore have the effect of limiting the price that investors might be willing to pay in the future for our common stock. OUR STOCK PRICE MAY BE VOLATILE The stock market in general, and the stock prices of Internet-related companies in particular, have recently experienced extreme volatility, which has often been unrelated to the operating performance of any particular company or companies. Our stock price could be subject to wide fluctuations in response to factors such as the following: - actual or anticipated variations in quarterly results of operations; - the addition or loss of merchants and shopper traffic; - announcements of technological innovations, new products or services by us or our competitors; - changes in financial estimates or recommendations by securities analysts; - conditions or trends in the Internet, e-commerce and marketing industries; - changes in the market valuations of other Internet or online service or software companies; - our announcements of significant acquisitions, strategic relationships, joint ventures or capital commitments; - additions or departures of key personnel; - sales of our common stock; - general market conditions; and - other events or factors, many of which are beyond our control. These broad market and industry factors may materially and adversely affect our stock price, regardless of our operating performance. The trading prices of the stocks of many technology companies are at or near historical highs and reflect price to earnings ratios substantially above historical levels. These trading prices and price-to-earnings ratios may not be sustained. 21 In the past, securities class action litigation has often been brought against companies following periods of volatility in their stock prices. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert our management's time and resources, which could cause our business to suffer. FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE We have filed a registration statement relating to a proposed offering in the first quarter of 2000 of 10,000,000 shares of our common stock, plus up to 1,500,000 additional shares subject to the underwriters' over-allotment option. Of these shares, we propose to sell 8,550,000, plus the additional 1,500,000 shares subject to the underwriters' over-allotment option, and certain selling shareholders propose to sell the other 1,450,000 shares. After the offering, a total of approximately 51,568,035 shares of our common stock will be outstanding. All the 10,000,000 shares sold in the offering will be freely tradable. Of the remaining 41,568,035 outstanding shares, 33,107,310 are unregistered restricted shares and are or will become available for public sale as follows: ------------ Number of Date of Availability for Sale Shares - ------------------------------------------------------------ ------------ Currently available for sale................................ 974,913 On March 27, 2000, upon the expiration of our initial public 10,299,088 offering lock-up period..................................... Ninety days after the date of the prospectus related to our 9,544,622 proposed offering........................................... At various times upon expiration of one-year holding 12,288,687 periods.....................................................
Many of the shares not currently available for sale are subject to vesting restrictions and the holding period, volume and other restrictions of Rule 144 under the Securities Act of 1933. These restrictions have the effect of staggering the dates on which the shares become available for sale and the number of shares that become available for sale. If our shareholders sell a substantial number of these shares in the public market during a short period of time, our stock price could decline significantly. 22 ITEM 2. PROPERTIES Our principal executive offices are located in Seattle, Washington, where we lease approximately 57,000 square feet under a lease that expires in August 2001. We also lease space in various geographic locations for sales and marketing personnel and for our servers. We also lease space in San Francisco, California; Glendale, California; Phoenix, Arizona; Savannah, Georgia; and Wichita, Kansas for the operations of various subsidiaries. We believe that our current facilities are adequate to meet our needs through the end of 2000, at which time we may need to lease additional space. In December 1999, we executed a new lease for our principal executive offices in Seattle, Washington. This lease covers approximately 100,000 square feet and has a ten year term. We expect to move into our new offices in February 2001. This move could cause a disruption in our operations and unexpected costs, which would adversely affect our business. ITEM 3. LEGAL PROCEEDINGS From time to time we have been, currently are and expect to continue to be, subject to legal proceedings and claims in the ordinary course of business. We do not believe that any of our currently pending litigation is material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during our fourth quarter. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION Since our initial public offering on September 28, 1999, our common stock has traded on the Nasdaq Stock National Market under the symbol SPNW. The following table shows the range of high and low closing sales prices of our common stock for the periods indicated, as reported by the Nasdaq National Market.
HIGH LOW -------- -------- 4th Quarter 1999 (from September 28, 1999).................. $25.13 $10.94
DIVIDENDS We have never declared or paid any dividends on our common stock. We currently expect to retain future earnings, if any, for use in the expansion and operations of our business and do not anticipate paying any cash dividends in the foreseeable future. HOLDERS As of February 8, 2000, there were 794 holders of record of our common stock. RECENT SALES OF UNREGISTERED SECURITIES Between October 1, 1999 and December 31, 1999, we issued and sold unregistered securities as set forth below: - On October 1, 1999, in connection with the provision of consulting services, we issued warrants to purchase 30,000 shares of common stock at $7.50 to Woodstock Group International, LLC. - On October 5, 1999, in connection with the provision of professional services, we issued warrants to purchase 10,000 shares of common stock at $10.00 to StairMaster Corp. - On October 9, 1999, in connection with a prior private placement, we issued warrants to purchase 7,000 shares of common stock at $4.00 to Jim Saunders Wood Specialties. 23 - On October 28, 1999, in connection with a prior private placement, we issued warrants to purchase 7,000 shares of common stock at $4.00 to Jason Bank. - On October 28, 1999, pursuant to a Stock Purchase Agreement between ShopNow.com Inc. and escrow.com, Inc., we issued 208,334 shares of common stock at $12.00 per share to escrow.com in exchange for 50% of (i) 500,000 shares of escrow.com's common stock at purchase price of $0.25 per share and (ii) 2,000,000 shares of Series A Preferred Stock at a purchase price of $2.44 per share. - On November 11, 1999, we issued warrants to purchase 129,500 and 35,050 shares of common stock at $4.00 and $6.25, respectively, to 20 investors pursuant to a private placement between December 1997 and January 1999. - On November 11, 1999, we issued warrants to purchase 2,000 and 1,000 shares of common stock at $4.00 and $6.25, respectively, to Brian Staubus pursuant to a private placement between December 1997 and January 1999. Mr. Staubus exercised these warrants in full on November 16, 1999, under the cashless exercise terms, for net 1,440 and 563 shares, respectively. - On November 12, 1999, pursuant to an Agreement and Plan of Merger between ShopNow.com Inc., Racer Acquisition, Inc. and SpeedyClick, Corp., we issued 3,799,237 shares of common stock at $12.31 per share to shareholders of SpeedyClick, Corp. in exchange for all equity securities of SpeedyClick, Corp. - On December 6, 1999, pursuant to an Agreement and Plan of Merger between ShopNow.com Inc., Cardinals Acquisition, Inc. and Cortix, Inc., we issued 711,435 shares of common stock at $16.85 per share to shareholders of Cortix, Inc. in exchange for all equity securities of Cortix, Inc. - On December 8, 1999, in connection with the provision of services, we issued warrants to purchase 7,500 and 2,500 shares of common stock at $12.00 to Intec Inc. and e-solutions Inc., respectively. - On December 14, 1999, we issued 17,730 shares of common stock to GiftSpot.com in exchange for 174,825 shares of Series A Preferred Stock at $1.43 per share. - On December 17, 1999, pursuant to an Agreement and Plan of Merger between ShopNow.com Inc., Chiefs Acquisition, Inc. and WebCentric, Inc., we issued 2,161,904 shares of common stock at $21.61 per share to WebCentric, Inc. in exchange for all equity securities of WebCentric, Inc.. - On December 22, 1999, we issued 264,199 shares of common stock at $18.93 per share to PrivaSeek, Inc. in exchange for 1,262,626 shares of the Series C Preferred Stock of PrivaSeek at $3.96 per share. No underwriters were engaged in connection with these issuances and sales. These securities were issued in transactions exempt from registration under the Securities Act of 1933 in reliance upon Section 4(2) of the Securities Act and Regulation D promulgated thereunder. Between October 1, 1999 and December 31, 1999, we issued 8,792 shares of common stock in conjunction with the exercise of options granted under our stock option plans. The options granted under the stock option plan were issued to our officers, employees and consultants at exercise prices ranging from $1.00 to $4.00. No options were granted outside of our stock option plans. These securities were issued in transactions exempt from registration under the Securities Act of 1933 in reliance upon Rule 701 promulgated under the Securities Act of 1933. Where Rule 701 was not available, the securities were issued in transactions exempt from registration under the Securities Act of 1933 in reliance upon Section 4(2) of the Securities Act of 1933. USE OF PROCEEDS On September 28, 1999, our registration statement on Form S-1, file number 333-80981, became effective. The offering date was September 28, 1999. All shares offered in the final prospectus (filed with the Securities and Exchange Commission on September 29, 1999) were sold, thus terminating our offering. The managing underwriters were Dain Rauscher Wessels, U.S. Bancorp Piper Jaffray, SoundView Technology Group and Wit Capital Corporation. The offering consisted of 7,250,000 shares of ShopNow.com Inc. common stock issued in September 1999 and an 24 additional 1,087,500 shares of common stock subject to the underwriter's over-allotment option, which was exercised on October 28, 1999. The aggregate price of the shares offered and sold was $100.0 million. Proceeds to us, after accounting for $7.0 million in underwriting discounts and commissions and $1.9 million in other expenses, were $91.1 million. Since our initial public offering, we used approximately $5.2 million of the net offering proceeds to repay indebtedness, approximately $19.4 million for working capital paid directly or indirectly to third parties, approximately $3.9 million for the purchase or installation of software and equipment, approximately $5.0 million in connection with the acquisitions of SpeedyClick, Corp., Cortix, Inc. and WebCentric, Inc., approximately $6.6 million for the purchase of equity securities of various e-commerce companies and approximately $51.5 million for the net purchase of temporary investments consisting of cash, cash equivalents and short-term, interest-bearing, investment-grade securities. We have not used any of the net offering proceeds for the construction of plant, building or facilities or purchases of real estate. The use of proceeds from our initial public offering does not represent a material change in the use of proceeds described in the registration statement relating to the offering. None of the net offering proceeds were paid, and none of the initial public offering expenses related to payments, directly or indirectly, to directors, officers or general partners of ShopNow or their associates, persons owning 10% or more of any class of our securities, or affiliates of ShopNow.com Inc. ITEM 6. SELECTED FINANCIAL DATA Due to the acquisitions effected in 1998 and 1999, we believe that period-to-period comparisons are not meaningful, and you should not rely on them as indicative of our future performance. You should read the following selected consolidated financial data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Consolidated Financial Statements and related Notes appearing elsewhere in this annual report.
--------------------------------------------------------------------- January 20, 1994 (Inception) to Year Ended December 31, December 31, ---------------------------------------------------- 1994 1995 1996 1997 1998 1999 DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA -------------- -------- -------- -------- -------- -------- Consolidated Statements of Operations Data: Revenues:................................................ $ 279 $ 727 $ 993 $ 604 $ 7,154 $ 36,955 Cost of revenues:........................................ 127 323 430 515 5,849 27,329 ------------ ------- ------ ------- -------- -------- Gross profit........................................... 152 404 563 89 1,305 9,626 ------------ ------- ------ ------- -------- -------- Operating expenses: Sales and marketing.................................... 116 163 610 1,201 12,183 55,072 General and administrative............................. 216 347 656 918 3,549 8,342 Research and development............................... -- -- 25 2,436 4,370 8,885 Amortization of intangible assets...................... -- -- 32 136 730 8,805 Stock-based compensation............................... -- -- -- -- 182 7,216 Unusual item - write-off of acquired technology........ -- -- -- -- 5,207 -- ------------ ------- ------ ------- -------- -------- Total operating expenses............................... 332 510 1,323 4,691 26,221 88,320 ------------ ------- ------ ------- -------- -------- Loss from operations................................. (180) (106) (760) (4,602) (24,916) (78,694) Nonoperating income (expense), net....................... (1) (7) (50) (164) 171 2,751 ------------ ------- ------ ------- -------- -------- Net loss............................................. $ (181) $ (113) $ (810) $(4,766) $(24,745) $(75,943) ============ ======= ====== ======= ======== ======== Basic and diluted net loss per share(1).................. $ (0.11) $ (0.06) $(0.40) $ (1.83) $ (7.01) $ (5.80) ============ ======= ====== ======= ======== ========
------------------ December 31, 1999 DOLLARS IN THOUSANDS ------------------ Consolidated Balance Sheet Data: Cash and cash equivalents................................. $ 10,660 Working capital........................................... 43,431 Total assets.............................................. 274,174 Total liabilities......................................... 44,961 Total shareholders' equity................................ 229,213
25
------------------------------------------ As of and for the three months ended ------------------------------------------ June 30, Sept. 30, Dec. 31, 1999 1999 1999 ------------ ------------ ------------ Other Data(2): Number of advertising and merchandising clients on the ShopNow marketplace....................................... 181 336 514 Number of merchants listed on the ShopNow marketplace....... 33,841 37,099 45,522 Number of shopper visits to the ShopNow marketplace......... 6,422,000 7,485,000 21,461,497
(1) See Note 2 to the Consolidated Financial Statements for a description of the method used to compute basic and diluted net loss per share. (2) The number of advertising and merchandising clients represents the number of clients that purchased an advertising/merchandising package during the applicable quarter; the number of merchants listed represents the number of merchants as of the last day of the applicable quarter; the number of shopper visits represents the total number of shopper visits to the ShopNow marketplace during the applicable quarter. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS. THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS MAY, WILL, SHOULD, EXPECT, PLAN, INTEND, ANTICIPATE, BELIEVE, ESTIMATE, PREDICT, POTENTIAL OR CONTINUE, THE NEGATIVE OF SUCH TERMS OR OTHER COMPARABLE TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING THESE STATEMENTS, YOU SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS, INCLUDING THE RISKS OUTLINED IN THE "FACTORS AFFECTING OPERATING RESULTS, OUR BUSINESS AND OUR STOCK PRICE" SECTION IN PART I, ITEM 1. OVERVIEW ShopNow provides an end-to-end solution that enables businesses to engage in e-commerce with other businesses, merchants and shoppers. Our end-to-end solution consists of access to online marketplaces combined with a comprehensive suite of e-commerce enabling products and services. These products and services include custom application and online store development and design, hosting and maintenance, sales and marketing services and transaction processing. The ShopNow marketplace aggregates merchants and shoppers over a distributed network of web sites. Our recently launched business-to-business portal and marketplace, b2bNow.com, is designed to enable businesses to conveniently engage in online transactions with one another. We were incorporated in January 1994 and initially operated as a computer services company. In 1996, we began to change the focus of our business to conducting commerce over the Internet. In May 1997, we launched BuySoftware.com, an online computer products store. During 1998, we completed three acquisitions, including the acquisition of Media Assets, Inc., a direct marketing company, launched ShopNow.com and began offering merchants e-commerce enabling products and services. In April 1999, we changed our name from TechWave Inc. to ShopNow.com Inc. In June 1999, we ceased operation of BuySoftware.com because we determined it was inconsistent with our evolving strategy. We consummated three acquisitions in the fourth quarter of 1999 and two acquisitions in January 2000, and we recently launched our business-to-business portal, b2bNow.com. We currently derive substantially all of our revenues from merchant services and the ShopNow marketplace. With the recent launch of b2bNow.com, we expect to derive additional revenues from the purchase, sale and exchange of goods and services through that portal. Revenues from merchant services are generated principally through development fees, hosting fees and sales and marketing services. Our merchant services can be purchased as a complete end-to-end suite of services or separately, allowing businesses and merchants to select only those services they desire. We recognize revenues from development of custom applications and online stores and marketing projects on a percentage of completion basis over the period of development or the period of the marketing project. These projects generally range from two to five months. Hosting contracts typically have a term of one year, with fees charged on a monthly basis. 26 Revenues from the ShopNow marketplace, exclusive of BuySoftware.com, are generated primarily from advertising and merchandising fees paid by merchants, leads and orders delivered to merchants, as well as transaction processing and licensing fees. Advertising consists of the sale of impressions on the ShopNow.com site and merchandising consists of the sale of specific positions or category sponsorships on the site. These agreements typically have a term of one to four months. We generate transaction processing and licensing fees from our payment processing and fraud prevention products and services. In limited circumstances, we offer products directly to shoppers on the ShopNow marketplace. We principally offer these products to increase the number of leads we generate for merchants on the ShopNow marketplace. In these instances where we act as merchant-of-record, we record as revenues the full sales price of the product sold and record the full cost of the product to us as our cost of revenues. These sales revenues represented approximately 20% of our pro forma (excluding BuySoftware.com) revenues in 1999, and we anticipate that this percentage will decrease in 2000 and thereafter. Our gross profit on the products we sell is generally lower than the gross profit on our other revenues. We expect to derive revenues from transactions, advertising, merchandising and services fees from b2bNow.com, our business-to-business portal and online marketplace. In addition, in January 2000 we entered into a definitive agreement to acquire Ubarter.com, which operates an online business-to-business barter marketplace. We plan to incorporate the barter marketplace as an additional feature of b2bNow.com to provide businesses with an alternative way to conduct transactions with each other. As of December 31, 1999, we had not recorded any revenues from b2bNow.com. Cost of revenues generated from merchant services includes all direct labor costs incurred in connection with the provision of services, as well as fees charged by third-party vendors that have directly contributed to the design, development and implementation of our merchant services. Cost of revenues generated from the ShopNow marketplace consists primarily of the portion of our Internet telecommunications connections that are directly attributable to traffic on the ShopNow marketplace and the direct labor costs incurred in maintaining and enhancing our network infrastructure. In order to fulfill our obligations under our lead and order delivery programs, we occasionally purchase shopping traffic from third parties by placing on their web sites advertisements that, when clicked on by a visitor, send the visitor to the ShopNow marketplace. Any shopping traffic that we purchase from a third party that is used to fulfill these obligations is included as cost of revenues. Cost of revenues on the products that we sell as merchant-of-record includes the cost of the product, credit card fees and shipping costs. RESULTS OF OPERATIONS COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998 REVENUES Revenues for the year ended December 31, 1999 were $37.0 million compared to $7.2 million for the year ended December 31, 1998, an increase of $29.8 million. The increase in revenues was due primarily to the expansion of the ShopNow marketplace and increased demand for merchant services, including the services of Media Assets, which we acquired in September 1998. The BuySoftware.com portion of revenues for the year ended December 31, 1999 was $9.9 million compared to $4.5 million for the year ended December 31, 1998, an increase of $5.4 million, or 18.3% of the total increase in revenues for the year. SHOPNOW MARKETPLACE AND TRANSACTION PROCESSING. The ShopNow marketplace and transaction processing portion of revenues for the year ended December 31, 1999 was $25.8 million compared to $4.2 million for the year ended December 31, 1998, an increase of $21.6 million. The BuySoftware.com portion of these revenues was 37.7% for the year ended December 31, 1999, compared to 93.4% for the year ended December 31, 1998. During 1999 we experienced a significant increase in our merchant listings, shopper traffic and affiliate and syndication shopping sites, which resulted in an increase in merchandising and advertising revenues, transaction processing fees and sales of products to shoppers, exclusive of BuySoftware.com. 27 MERCHANT SERVICES. The merchant services portion of revenues for the year ended December 31, 1999 was $11.1 million compared to $2.9 million for the year ended December 31, 1998, an increase of $8.2 million. The increase in our merchant services revenues was due primarily to increased demand for merchant services, including the services of Media Assets. COST OF REVENUES The cost of revenues for the year ended December 31, 1999 was $27.3 million compared to $5.8 million for the year ended December 31, 1998, an increase of $21.5 million. The increase in our cost of revenues was due primarily to increased product sales from the ShopNow marketplace and cost of revenues for merchant services, including the services of Media Assets. The BuySoftware.com portion of cost of revenues for the year ended December 31, 1999 was $11.2 million compared to $4.5 million for the year ended December 31, 1998, an increase of $6.7 million, or 31.4% of the total increase in the cost of revenues. SHOPNOW MARKETPLACE AND TRANSACTION PROCESSING. The ShopNow marketplace and transaction processing portion of cost of revenues for the year ended December 31, 1999 was $20.2 million compared to $4.5 million for the year ended December 31, 1998, an increase of $15.7 million. The BuySoftware.com portion of these cost of revenues was 55.3% for the year ended December 31, 1999, compared to 96.8% for the year ended December 31, 1998. The increase in our ShopNow marketplace and transaction processing cost of revenues, exclusive of BuySoftware.com, was due primarily to increased merchandising revenues and product sales from the ShopNow marketplace. MERCHANT SERVICES. The merchant services portion of cost of revenues for the year ended December 31, 1999 was $7.2 million compared to $1.4 million for the year ended December 31, 1998, an increase of $5.8 million. The increase in our merchant services cost of revenues was due primarily to increased demand for merchant services, including the services of Media Assets. GROSS PROFIT. Gross profit for the year ended December 31, 1999 was $9.6 million, compared to a gross profit of $1.3 million for the year ended December 31, 1998, an increase of $8.3 million. This increase in gross profit was due primarily to the increase in revenues from advertising and merchandising over the ShopNow marketplace and merchant services, which contribute greater gross profits than revenues generated on the sales of products over the ShopNow marketplace. Discontinuing the BuySoftware.com business in June 1999 also had a positive effect on our overall gross profit. The BuySoftware.com business had historically operated with minimal or negative gross profits. We expect that any future sales of products on the ShopNow marketplace will be sold at minimal or negative gross profits. SALES AND MARKETING. Sales and marketing expenses consist primarily of costs associated with marketing programs such as advertising and public relations, as well as salaries and commissions. Sales and marketing expenses for the year ended December 31, 1999 were $55.1 million compared to $12.2 million for the year ended December 31, 1998, an increase of $42.9 million. This increase was due primarily to increased spending as a result of the expansion of our merchant services and of the ShopNow marketplace, including additional personnel and nationwide print, radio and television advertisements. We expect to continue to increase our sales and marketing expenses in 2000 to promote our merchant services offerings and the ShopNow network. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of salaries and other personnel-related costs for executive, financial, human resources, information services and other administrative personnel, as well as legal, accounting and insurance costs. General and administrative expenses for the year ended December 31, 1999 were $8.3 million, compared to $3.5 million for the year ended December 31, 1998, an increase of $4.8 million. This increase was due primarily to an increase in personnel from internal growth and acquisitions. We anticipate continued growth in our general and administrative expenses at least through 2000. In September 1999, we settled a lawsuit brought by a party with which we had entered into a contract. As a result of the terms of this settlement, in the quarter ended September 30, 1999, we recognized additional general and administrative expenses in the amount of $1.5 million. 28 RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of salaries and related costs associated with the development of new products and services, the enhancement of existing products and services, and the performance of quality assurance and documentation activities. Research and development expenses for the year ended December 31, 1999 were $8.9 million, compared to $4.4 million for the year ended December 31, 1998, an increase of $4.5 million. This increase was due primarily to the development and enhancement of our technology platform and to an increase in technology personnel. These employees focus on developing our technology platform as well as building the overall infrastructure that supports our merchant services and the ShopNow marketplace. We anticipate continued growth in our research and development expenses at least through 2000. AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets resulting from acquisitions is primarily related to the amortization of customer lists, domain names, acquired technology, proprietary concepts and goodwill. Amortization of intangible assets expense for the year ended December 31, 1999 was $8.8 million, compared to $730,000 for the year ended December 31, 1998, an increase of $8.1 million. This increase was due primarily to the increase in intangible assets and related amortization expenses from business acquisitions completed during 1999, including the acquisitions of GO Software, Inc., SpeedyClick, Corp., Cortix, Inc. and Webcentric, Inc. We expect continued growth in our amortization of intangible assets expense resulting from future business acquisitions. STOCK-BASED COMPENSATION. Stock-based compensation expense is related to the amortization of deferred compensation resulting from stock option grants to employees with an option exercise price below the estimated fair market value of our common stock as of the date of grant. Stock-based compensation expense for the year ended December 31, 1999 was $7.2 million, compared to $182,000 for the year ended December 31, 1998, an increase of $7.0 million. The amount of deferred compensation resulting from these grants is generally amortized over a three-year vesting period. During the fourth quarter of 1999, the contingent performance criteria relating to a stock option grant for 310,000 shares of the Company's common stock with an exercise price of $4.00 were satisfied. Accordingly, a stock-based compensation charge of approximately $3.3 million was recognized in the fourth quarter of 1999. GAIN ON SALE OF MARKETABLE EQUITY SECURITIES. Gain on sale of marketable equity securities consists primarily of the gains recognized from the sale of our investment in 110,000 shares of common stock of FreeShop.com in the fourth quarter of 1999. There were no gains on sales of marketable equity securities in 1998. OTHER INCOME (EXPENSE), NET. Other income (expense), net consists primarily of interest income on cash and cash equivalents and interest expense on our outstanding debt obligations. Other expense, net for the year ended December 31, 1999 was $127,000, compared to other income, net of $171,000 for the year ended December 31, 1998, a decrease of $298,000. Although interest income in 1999 increased due to the increase in our cash and short-term investments realized from our initial public offering, the amount of additional interest charges from our notes and leases payable, as well as the amortization of debt financing costs incurred during 1999, resulted in an overall other expense, net position for the year ended 1999. NET LOSS. Net loss for the year ended December 31, 1999 was $75.9 million, compared to a net loss of $24.7 million for the year ended December 31, 1998, an increase of $51.2 million. This increase was due primarily to an increase in our operating expenses, most significantly sales and marketing expenses, partially offset by our increase in gross profit during the same period. We expect to incur additional net losses in 2000. COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997 REVENUES Revenues for the year ended December 31, 1998 were $7.2 million compared to $604,000 for the year ended December 31, 1997, an increase of $6.6 million. The increase in revenues was due primarily to increased product sales from the BuySoftware.com business and revenues generated by Media Assets, which we acquired in September 1998. The BuySoftware.com portion of revenues for the year ended December 31, 1998 was $4.5 million compared to $69,000 for the year ended December 31, 1997, an increase of $4.4 million, or 67.0% of the total increase in revenues for the year. 29 SHOPNOW MARKETPLACE AND TRANSACTION PROCESSING. The ShopNow marketplace and transaction processing portion of revenues for the year ended December 31, 1998 was $4.2 million compared to $69,000 for the year ended December 31, 1997, an increase of $4.1 million. The increase in our ShopNow marketplace and transaction processing revenues was due primarily to increased product sales from the BuySoftware.com business. MERCHANT SERVICES. The merchant services portion of revenues for the year ended December 31, 1998 was $2.9 million compared to $535,000 for the year ended December 31, 1997, an increase of $2.4 million. The increase in our merchant services revenues was due primarily to revenues generated from Media Assets. Revenues in 1997 were generated from our previous business of providing computer services to clients, which was completely phased out in early 1998. These computer services consisted primarily of providing computer training, consulting and Internet site design to businesses. COST OF REVENUES The cost of revenues for the year ended December 31, 1998 was $5.8 million compared to $515,000 for the year ended December 31, 1997, an increase of $5.3 million. The increase in our cost of revenues was due primarily to increased product sales from the BuySoftware.com business and cost of revenues incurred by Media Assets. The BuySoftware.com portion of cost of revenues for the year ended December 31, 1998 was $4.4 million compared to $124,000 for the year ended December 31, 1997, an increase of $4.3 million, or 81.2% of the total increase in cost of revenues. SHOPNOW MARKETPLACE AND TRANSACTION PROCESSING. The ShopNow marketplace and transaction processing portion of cost of revenues for the year ended December 31, 1998 was $4.5 million compared to $159,000 for the year ended December 31, 1997, an increase of $4.3 million. The increase in our ShopNow marketplace and transaction processing cost of revenues was due primarily to increased product sales from the BuySoftware.com business. MERCHANT SERVICES. The merchant services portion of cost of revenues for the year ended December 31, 1998 was $1.4 million compared to $356,000 for the year ended December 31, 1997, an increase of $1.0 million. The increase in our merchant services cost of revenues was due primarily to cost of revenues incurred by Media Assets. Cost of revenues for 1997 was comprised of direct labor and related costs to provide computer services to clients. GROSS PROFIT. Gross profit for the year ended December 31, 1998 was $1.3 million compared to $89,000 for the year ended December 31, 1997, an increase of $1.2 million. This increase in gross profit was due primarily to the positive gross profit contributed from Media Assets. SALES AND MARKETING. Sales and marketing expenses for the year ended December 31, 1998 were $12.2 million compared to $1.2 million for the year ended December 31, 1997, an increase of $11.0 million. The increase was due primarily to increased spending as a result of the development and expansion of the ShopNow marketplace. Substantially all of the selling expenses incurred in 1997 were in support of our previous computer services business, which was discontinued in early 1998. GENERAL AND ADMINISTRATIVE. General and administrative expenses for the year ended December 31, 1998 were $3.5 million compared to $918,000 for the year ended December 31, 1997, an increase of $2.6 million. The increase was due primarily to an increase in personnel from internal growth and acquisitions. RESEARCH AND DEVELOPMENT. Research and development expenses for the year ended December 31, 1998 were $4.4 million compared to $2.4 million for the year ended December 31, 1997, an increase of $2.0 million. The increase was due primarily to the development of our technology platform, an increase in our technology personnel and expansion of the overall infrastructure that supports the ShopNow marketplace. AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets expense for the year ended December 31, 1998 was $730,000 compared to $136,000 for the year ended December 31, 1997, an increase of $594,000. The acquisition of Media Assets and The Internet Mall resulted in $387,000 of this increase. The remainder of this increase resulted from other purchases of intangible assets, including domain names and customer lists. 30 STOCK-BASED COMPENSATION. Stock-based compensation expense for the year ended December 31, 1998 was $182,000 compared to no expense for the same period ended December 31, 1997. The expenses are related to employee stock option grants with option exercise prices below the estimated fair market value of our common stock as of the date of grant. The amount of deferred compensation resulting from these grants is generally amortized over a three-year period. UNUSUAL ITEM - IMPAIRMENT OF ACQUIRED TECHNOLOGY. In June 1998, we acquired e-Warehouse and CyberTrust with the intent of integrating the acquired technologies with our own e-commerce product and service offerings. The amount we paid for these acquisitions was $5.4 million. We are presently not utilizing the acquired technologies and have determined that they have no alternative future use or value to us, as our technology platform provides superior functionality. As a result, we wrote off $5.2 million of the purchase price during the fourth quarter of 1998. OTHER INCOME (EXPENSE), NET. Other income, net for the year ended December 31, 1998, was $171,000, compared to $164,000 of other expense, net for the year ended December 31, 1997, an increase of $335,000. The increase was due primarily to an increase in interest income earned by our increased cash reserves as a result of our financing activities during 1998 as compared to 1997. NET LOSS. Net loss for the year ended December 31, 1998 was $24.7 million, compared to a net loss of $4.8 million for the year ended December 31, 1997, an increase of $19.9 million. This increase was due primarily to an increase in our operating expenses, most significantly sales and marketing expenses, partially offset by our increase in gross profit during the same period. COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996 REVENUES Revenues for the year ended December 31, 1997 were $604,000 compared to $993,000 for the year ended December 31, 1996, a decrease of $389,000. The overall decrease was due primarily to the phase out beginning in late 1997 of our computer services business. SHOPNOW MARKETPLACE AND TRANSACTION PROCESSING. The ShopNow marketplace and transaction processing portion of revenues for the year ended December 31, 1997 was $69,000 compared to no revenues for the year ended December 31, 1996. All of ShopNow marketplace and transaction processing revenues were attributable to the BuySoftware.com business. MERCHANT SERVICES. The merchant services portion of revenues for the year ended December 31, 1997 was $535,000 compared to $993,000 for the year ended December 31, 1996, a decrease of $458,000. All of merchant services revenues were related to providing computer services to businesses. COST OF REVENUES The cost of revenues for the year ended December 31, 1997 was $515,000 compared to $430,000 for the year ended December 31, 1996, an increase of $85,000. The overall increase in cost of revenues was due to the cost of expanding the BuySoftware.com business, partially offset by the phase out of our computer services business. SHOPNOW MARKETPLACE AND TRANSACTION PROCESSING. The ShopNow marketplace and transaction processing portion of cost of revenues for the year ended December 31, 1997 was $159,000 compared to no cost of revenues for the year ended December 31, 1996. All of ShopNow marketplace and transaction processing cost of revenues were attributable to the BuySoftware.com business, which initially incurred higher cost of revenues as the business was being developed. MERCHANT SERVICES. The merchant services portion of cost of revenues for the year ended December 31, 1997 was $356,000 compared to $430,000 for the year ended December 31, 1996, a decrease of $74,000. The decrease was due primarily to decreased direct labor and other costs incurred in delivering our previous business of providing computer services to clients. All of the merchant services cost of revenues was related to providing computer services to businesses. 31 GROSS PROFIT. Gross profit for the year ended December 31, 1997 was $89,000 compared to $563,000 for the year ended December 31, 1996, a decrease of $474,000. This decrease in gross profit was due primarily to the decrease in revenues from the phase out of our computer services business and the introduction and operation of the BuySoftware.com business, which had historically operated at a minimal or negative gross profit level. SALES AND MARKETING. Sales and marketing expenses for the year ended December 31, 1997 were $1.2 million compared to $610,000 for the year ended December 31, 1996, an increase of $591,000. The increase was due primarily to increased spending as a result of development and expansion of our online computer products store. In the year ended December 31, 1997, $644,000 of the sales and marketing expenses were in support of our previous computer services business compared to $610,000 of such expenses in the year ended December 31, 1996. GENERAL AND ADMINISTRATIVE. General and administrative expenses for the year ended December 31, 1997 were $918,000 compared to $656,000 for the year ended December 31, 1996, an increase of $262,000. The increase was due primarily to an increase in employees to support our growth and transition to an online computer products store. RESEARCH AND DEVELOPMENT. Research and development expenses for the year ended December 31, 1997 were $2.4 million compared to $25,000 for the year ended December 31, 1996, an increase of $2.4 million. The increase was due entirely to the development of our technology platform, which began in 1997 to support our growth and transition to an online computer products store. AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets expense for the year ended December 31, 1997 was $136,000 compared to $32,000 for the year ended December 31, 1996, an increase of $104,000. The increase was due primarily to various acquisitions of web domain names during 1997, resulting in an increase in amortization of intangible assets expense recorded from these transactions. OTHER INCOME (EXPENSE), NET. Other expense, net for the year ended December 31, 1997, was $164,000 compared to $50,000 for the year ended December 31, 1996, an increase of $114,000. The increase was due primarily to an increase in interest expense from our various financing activities by means of notes payable and lines of credit with commercial banks. NET LOSS. Net loss for the year ended December 31, 1997 was $4.8 million, compared to a net loss of $810,000 for the year ended December 31, 1996, an increase of $4.0 million. This increase was due primarily to an increase in our operating expenses, most significantly research and development and sales and marketing expenses, as well as our decrease in gross profit during the same period. NET OPERATING LOSS CARRYFORWARDS As of December 31, 1999, we had net operating loss carryforwards of approximately $76.4 million. If not used, the net operating loss carryforwards will expire at various dates beginning in 2012. The Tax Reform Act of 1986 imposes restrictions on the use of net operating losses and tax credits in the event that there has been an ownership change of a corporation since the periods in which the net operating losses were incurred. Our ability to use net operating losses incurred prior to July 1999 is limited to an aggregate of approximately $14.3 million per year due to sales of Series D and Series E convertible preferred stock to third parties in April 1998 and the sale of Series I convertible preferred stock to Chase Manhattan Bank in July 1999, which resulted in ownership changes. We have provided a full valuation allowance on our deferred tax assets because of the uncertainty regarding their realization. Our accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of our deferred tax assets. In concluding that a full valuation allowance was required, management considered such factors as our history of operating losses, potential future losses and the nature of our deferred tax assets. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have experienced net losses and negative cash flows from operations. As of December 31, 1999, we had an accumulated deficit of $105.3 million. We have financed our activities largely through issuances of common stock and preferred stock, from the issuance of short-term and long-term obligations and from capital leasing transactions for certain of our fixed asset purchases. Through December 31, 1999, our aggregate net proceeds 32 have been $161.4 million from issuing equity securities and $21.8 million from issuing debt securities. As of December 31, 1999, we had $62.8 million in cash and short-term investments. During the fourth quarter of 1999, we closed our initial public offering of 8,337,500 shares of common stock and received net proceeds of $91.1 million. Net cash used in operating activities was $48.0 million for the year ended December 31, 1999, compared to $16.0 million for the year ended December 31, 1998. The increase was due primarily to the increase in our net loss for the year ended December 31, 1999, to $75.9 million compared to $24.7 million for the year ended December 31, 1998. Net cash used in investing activities was $82.0 million for the year ended December 31, 1999, compared to $5.3 million for the year ended December 31, 1998. The increase was due primarily to the net increase in purchases of short-term investments of $52.0 million during 1999, compared to $150,000 during 1998, and due to the increase in purchases of property and equipment of $13.5 million during 1999, compared to $2.2 million during 1998. Net cash provided by financing activities was $130.8 million for the year ended December 31, 1999, compared to $30.8 million for the year ended December 31, 1998. The increase was due primarily to net proceeds from the issuance of common stock of $92.8 million during 1999, compared to $25,000 during 1998, and to the increase in the amount of proceeds from issuances of debt of $12.4 million during 1999, compared to $3.7 million during 1998. In March 1999 we entered into a loan and security agreement with Transamerica Business Credit Corporation for a term loan and line of credit. In May 1999, the agreement was amended and restated allowing us to borrow up to $8.5 million at any one time, consisting of a $3.5 million term loan, a $4.0 million bridge loan and a line of credit of up to $2.5 million, initially capped at $1.0 million until the bridge loan was repaid. The line of credit bears interest at Transamerica Business Credit Corporation's base rate plus 2%, is secured by substantially all of our assets and was amended in January 2000 to expire on March 31, 2001. The term loan bears interest at 12%, is secured by substantially all of our assets and matures in March 2002. The bridge loan bore interest at 12% and was repaid in October 1999 after the closing of our initial public offering. Our capital requirements depend on numerous factors, including the rate of expansion of the b2bNow.com and ShopNow marketplaces, the investments we make in our technology platform, the number of acquisitions that are completed and the composition of the consideration between cash, debt and stock for any future acquisitions, and the resources we devote to expansion of our sales, marketing and branding programs. We have also entered into agreements with Chase Manhattan Bank, About.com and 24/7 Media, which together require us to make aggregate advertising and marketing expenditures of approximately $6.0 million in 2000, decreasing annually to $1.0 million in 2004. We believe that existing cash balances and cash generated from operations, together with the net proceeds from our initial public offering (excluding the proceeds from our proposed public offering), will be sufficient to meet our anticipated cash needs for working capital and capital expenditures at least through the next 12 months. After that time, we may be required to raise additional financing. We cannot be sure that the assumed levels of revenues and expenses underlying our anticipated cash needs will prove to be accurate. The sale of additional equity or convertible debt securities could result in additional dilution to our shareholders. We cannot be sure that financing will be available in amounts or on terms acceptable to us, if at all. 33 SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA The following table sets forth our unaudited selected consolidated quarterly financial data for the years ended December 31, 1998 and 1999.
Three Months Ended 1998 Three Months Ended 1999 ------------------------------------------------ ------------------------------------------------- March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA Revenues................... $ 399 $ 740 $ 1,858 $ 4,157 $ 7,568 $ 8,414 $ 7,555 $ 13,418 Cost of revenues........... 431 753 1,629 3,036 7,140 7,543 4,811 7,835 --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Gross profit............. (32) (13) 229 1,121 428 871 2,744 5,583 --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Operating expenses: Sales and marketing...... 1,345 3,133 3,212 4,493 5,472 12,808 15,265 21,527 General and administrative........... 509 699 1,069 1,272 960 1,521 3,012 2,849 Research and development.............. 459 983 1,560 1,368 1,600 1,334 2,433 3,518 Amortization of intangible assets........ 57 61 223 389 558 1,080 2,096 5,071 Stock-based compensation............. -- 2 35 145 133 1,822 592 4,669 Unusual item--write-off of acquired technology.... -- -- -- 5,207 -- -- -- -- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total operating expenses................. 2,370 4,878 6,099 12,874 8,723 18,565 23,398 37,634 --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Loss from operations... (2,402) (4,891) (5,870) (11,753) (8,295) (17,694) (20,654) (32,051) Nonoperating income (expense), net........... 12 97 68 (6) 15 (260) (360) 3,356 --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net loss............... $(2,390) $(4,794) $(5,802) $(11,759) $(8,280) $(17,954) $(21,014) $(28,695) ========= ========== ========== ========== ========== ========== ========== ========== Basic and diluted pro forma net loss per share (1)... $ (0.28) $ (0.37) $ (0.41) $ (0.75) $ (0.48) $ (0.80) $ (0.82) $ (0.77) ========= ========== ========== ========== ========== ========== ========== ========== Weighted average shares used to calculate pro forma basic and diluted net loss per share (1)... 8,639,544 13,022,436 14,017,673 15,661,418 17,168,592 22,538,696 25,776,927 37,313,691 ========= ========== ========== ========== ========== ========== ========== ==========
(1) Basic and diluted pro forma net loss per share is computed based on the weighted average number of shares outstanding, giving effect to the conversion of convertible preferred stock on an as-if converted basis from the original issuance date. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998 the American Institute of Certified Public Accountants issued Statement of Position 98-1, "ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE." Statement of Position 98-1 is effective for financial statements for years beginning after December 15, 1998. Statement of Position 98-1 provides guidance on accounting for computer software developed or obtained for internal use, including the requirement to capitalize specified costs and amortization of such costs. The implementation of Statement of Position 98-1 did not have a material impact on our financial position or operating results. In April 1998 the American Institute of Certified Public Accountants issued Statement of Position 98-5, "REPORTING ON THE COSTS OF START-UP ACTIVITIES." Statement of Position 98-5, which is effective for fiscal years beginning after December 15, 1998, provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred. As we have expensed these costs historically, the implementation of Statement of Position 98-5 did not have a material effect on our financial condition or operating results. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin (SAB) No. 101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS," to provide guidance on the recognition, presentation and disclosure of revenues in financial statements. We believe our revenue recognition practices are in conformity with the guidelines prescribed in SAB No. 101. 34 SEASONALITY We believe that our advertising and merchandising revenues on the ShopNow marketplace are subject to seasonality changes as retail transactions and advertising sales in traditional media, such as television and radio, generally are lower in the first and third calendar quarters of each year. In addition, Internet usage typically declines during the summer and certain holiday periods. If our market makes the transition from an emerging to a more developed market, seasonal and cyclical patterns may develop in our industry and in the usage of, and transactions on, our web sites and those of our merchants. Seasonal and cyclical patterns in online transactions and advertising would affect our revenues. Those patterns may also develop on our web sites. Given the early stage of the development of the Internet and our company, however, we cannot predict to what extent, if at all, our operations will prove to be seasonal. IMPACT OF THE YEAR 2000 COMPUTER PROBLEM Prior to January 1, 2000, we devoted substantial resources in an effort to ensure that our proprietary software, the third-party software on which we rely, and the underlying systems and protocols did not contain errors associated with Year 2000 date functions. Since January 1, 2000, we have not experienced any disruption as a result of any Year 2000 problems or otherwise. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We currently have instruments sensitive to market risk relating to exposure to changing interest rates and market prices. We do not enter into financial instruments for trading or speculative purposes and do not currently utilize derivative financial instruments. Our operations are conducted primarily in the United States and as such are not subject to material foreign currency exchange rate risk. The fair value of our investment portfolio or related income would not be significantly impacted by either a 100 basis point increase or decrease in interest rates due mainly to the short-term nature of the major portion of our investment portfolio. All of the potential changes noted above are based on sensitivity analyses performed on our investment portfolio balances as of December 31, 1999. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 35 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To ShopNow.com Inc.: We have audited the accompanying consolidated balance sheets of ShopNow.com Inc. (a Washington corporation) and subsidiaries as of December 31, 1998 and 1999, and the related consolidated statements of operations, comprehensive loss, shareholders' equity and cash flows for each of the years in the three year period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether these 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 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 ShopNow.com Inc. and subsidiaries as of December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1999, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to consolidated financial statements and Financial Statement Schedules is presented for purpose of complying with the Securities and Exchange Commission rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Seattle, Washington, January 19, 2000 36 SHOPNOW.COM INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------- As of December 31, --------------------------- 1998 1999 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents................................. $ 9,849 $ 10,660 Short-term investments.................................... 150 52,172 Accounts receivable, net of allowance for doubtful accounts of $230 in 1998 and $291 in 1999................................................. 2,266 6,591 Unbilled services......................................... 1,448 2,102 Prepaid expenses and other................................ 709 5,559 ------------ ------------ Total current assets.................................... 14,422 77,084 Property and equipment, net................................. 4,185 19,385 Goodwill, net............................................... 515 23,860 Other intangible assets, net................................ 3,944 104,713 Investments in marketable equity securities................. -- 30,884 Other assets, net........................................... 717 18,248 ------------ ------------ Total assets............................................ $ 23,783 $ 274,174 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable.......................................... $ 3,551 $ 8,330 Accrued liabilities....................................... 1,132 8,778 Line of credit............................................ 238 -- Current portion of notes and leases....................... 1,133 8,565 Customer deposits......................................... 2,155 2,194 Deferred revenue.......................................... 535 5,786 ------------ ------------ Total current liabilities............................... 8,744 33,653 Notes and leases payable, less current portion.............. 1,837 5,409 Put warrant liability....................................... -- 1,388 Deferred tax liabilities.................................... -- 4,511 ------------ ------------ Total liabilities....................................... 10,581 44,961 ------------ ------------ Commitments (Note 11) Shareholders' Equity: Convertible preferred stock, $0.001 par value: Authorized shares - 20,000,000 in 1998 and 5,000,000 in 1999; issued shares - 12,299,896 in 1998 and none in 1999, preference in liquidation of $41,753 in 1998............ 35,070 -- Common stock, $0.001 par value: Authorized shares - 200,000,000; issued shares - 4,602,573 in 1998 and 42,923,035 in 1999.................................. 6,559 325,502 Common stock warrants..................................... 1,866 8,260 Deferred compensation..................................... (930) (6,713) Accumulated other comprehensive income.................... -- 7,470 Accumulated deficit....................................... (29,363) (105,306) ------------ ------------ Total shareholders' equity................................ 13,202 229,213 ------------ ------------ Total liabilities and shareholders' equity................ $ 23,783 $ 274,174 ============ ============
The accompanying notes are an integral part of these consolidated balance sheets. 37 SHOPNOW.COM INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
------------------------------------------ For the Year Ended December 31, ------------------------------------------ 1997 1998 1999 ------------ ------------ ------------ Revenues: ShopNow marketplace and transaction processing........ $ 69 $ 4,211 $ 25,841 Merchant services..................................... 535 2,943 11,114 ------------ ------------ ------------ Total revenues...................................... 604 7,154 36,955 ------------ ------------ ------------ Cost of Revenues: ShopNow marketplace and transaction processing........ 159 4,493 20,169 Merchant services..................................... 356 1,356 7,160 ------------ ------------ ------------ Total cost of revenues.............................. 515 5,849 27,329 ------------ ------------ ------------ Gross profit............................................ 89 1,305 9,626 ------------ ------------ ------------ Operating Expenses: Sales and marketing................................... 1,201 12,183 55,072 General and administrative............................ 918 3,549 8,342 Research and development.............................. 2,436 4,370 8,885 Amortization of intangible assets..................... 136 730 8,805 Stock-based compensation.............................. -- 182 7,216 Unusual item - impairment of acquired technology...... -- 5,207 -- ------------ ------------ ------------ Total operating expenses............................ 4,691 26,221 88,320 ------------ ------------ ------------ Loss from operations.............................. (4,602) (24,916) (78,694) ------------ ------------ ------------ Nonoperating Income (Expense): Gain on sale of marketable equity securities.......... -- -- 2,878 Interest income (expense), net........................ (164) 171 (127) ------------ ------------ ------------ Total nonoperating income (expense)................. (164) 171 2,751 ------------ ------------ ------------ Net loss................................................ $ (4,766) $ (24,745) $ (75,943) ============ ============ ============ Basic and diluted net loss per share.................... $ (1.83) $ (7.01) $ (5.80) ============ ============ ============ Weighted average shares outstanding used to compute basic and diluted net loss per share.................. 2,608,398 3,532,054 13,095,893 ============ ============ ============ Basic and diluted pro forma net loss per share.......... $ (2.95) ============ Weighted average shares outstanding used to compute basic and diluted pro forma net loss per share........ 25,754,882 ============
The accompanying notes are an integral part of these consolidated statements. 38 SHOPNOW.COM INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (IN THOUSANDS)
------------------------------------------ For the Year Ended December 31, ------------------------------------------ 1997 1998 1999 ------------ ------------ ------------ Net loss................................................ $ (4,766) $ (24,745) $ (75,943) Unrealized gain on marketable equity securities......... -- -- 7,470 ------------ ------------ ------------ Comprehensive loss...................................... $ (4,766) $ (24,745) $ (68,473) ============ ============ ============
The accompanying notes are an integral part of these consolidated statements. 39 SHOPNOW.COM INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
---------------------------------------------------------------------------------------- Convertible Preferred Stock Common Stock Common ---------------------- ---------------------- Stock Subscription Deferred Shares Amount Shares Amount Warrants Receivable Compensation ----------- -------- ---------- --------- -------- ------------ ------------ Balances, December 31, 1996....... -- $ -- 1,995,722 $ 275 $ -- $ -- $ -- Net loss January 1, 1997 through February 25, 1997............. -- -- -- -- -- -- -- Conversion from S Corporation to C Corporation................. -- -- -- (1,252) -- -- -- Conversion of shareholder notes into Series A preferred stock......................... 699,612 350 -- -- -- -- -- Issuance of Series B preferred stock......................... 2,334,079 1,800 -- -- -- -- -- Issuance of common stock........ -- -- 600,000 90 -- -- -- Repurchase of common stock...... -- -- (10,000) (10) -- -- -- Conversion of shareholder notes into Series C preferred stock......................... 835,205 1,253 -- -- -- -- -- Conversion of shareholder notes into common stock............. -- -- 177,333 89 -- -- -- Net loss, February 26, 1997 through December 31, 1997..... -- -- -- -- -- -- -- ----------- -------- ---------- -------- -------- ----------- ------------ Balances, December 31, 1997....... 3,868,896 3,403 2,763,055 (808) -- -- -- Issuance of Series D preferred stock......................... 4,250,000 13,461 -- -- 673 -- -- Common stock, options and warrants issued for businesses acquired...................... -- -- 1,744,692 6,105 -- -- -- Issuance of Series E preferred stock and warrants to acquire common stock.................. 2,125,000 7,672 -- -- 328 -- -- Issuance of Series F preferred stock and warrants to acquire common stock.................. 2,056,000 10,534 -- -- 865 -- -- Exercise of common stock options....................... -- -- 32,499 25 -- -- -- Issuance of common stock in consideration for professional services...................... -- -- 62,327 125 -- -- -- Issuance of compensatory stock options....................... -- -- -- 1,112 -- -- (1,112) Compensation attributable to stock options vesting......... -- -- -- -- -- -- 182 Net loss........................ -- -- -- -- -- -- -- ----------- -------- ---------- -------- -------- ----------- ------------ Balances, December 31, 1998....... 12,299,896 35,070 4,602,573 6,559 1,866 -- (930) ------------------------------------------- Accumulated Other Total Comprehensive Accumulated Shareholders' Income Deficit Equity ------------- ----------- ------------- Balances, December 31, 1996....... $ -- $ (1,104) $ (829) Net loss January 1, 1997 through February 25, 1997............. -- (148) (148) Conversion from S Corporation to C Corporation................. -- 1,252 -- Conversion of shareholder notes into Series A preferred stock......................... -- -- 350 Issuance of Series B preferred stock......................... -- -- 1,800 Issuance of common stock........ -- -- 90 Repurchase of common stock...... -- -- (10) Conversion of shareholder notes into Series C preferred stock......................... -- -- 1,253 Conversion of shareholder notes into common stock............. -- -- 89 Net loss, February 26, 1997 through December 31, 1997..... -- (4,618) (4,618) ------------- ----------- ------------ Balances, December 31, 1997....... -- (4,618) (2,023) Issuance of Series D preferred stock......................... -- -- 14,134 Common stock, options and warrants issued for businesses acquired...................... -- -- 6,105 Issuance of Series E preferred stock and warrants to acquire common stock.................. -- -- 8,000 Issuance of Series F preferred stock and warrants to acquire common stock.................. -- -- 11,399 Exercise of common stock options....................... -- -- 25 Issuance of common stock in consideration for professional services...................... -- -- 125 Issuance of compensatory stock options....................... -- -- -- Compensation attributable to stock options vesting......... -- -- 182 Net loss........................ -- (24,745) (24,745) ------------- ----------- ------------ Balances, December 31, 1998....... -- (29,363) 13,202
40 SHOPNOW.COM INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
---------------------------------------------------------------------------------------- Convertible Preferred Stock Common Stock Common ---------------------- ---------------------- Stock Subscription Deferred Shares Amount Shares Amount Warrants Receivable Compensation ----------- -------- ---------- --------- -------- ------------ ------------ Issuances of Series F preferred stock and warrants to acquire common stock.................. 280,000 $ 1,400 -- $ -- $ -- $ -- $ -- Issuance of Series G preferred stock and warrants to acquire common stock.................. 5,014,286 33,200 -- -- 1,900 -- -- Issuance of Series H preferred stock and warrants to acquire common stock.................. 333,334 2,840 -- -- 160 -- -- Issuance of Series I preferred stock and warrants to acquire common stock.................. 2,100,000 16,621 -- -- 2,188 -- -- Exercise of Series C preferred stock warrants................ 161,545 220 -- -- -- -- -- Preferred stock converted to common stock upon closing of initial public offering....... (20,189,061) (89,351) 20,189,061 89,351 -- -- -- Common stock issued upon closing of initial public offering, net of issuance costs......... -- -- 8,337,500 91,084 -- -- -- Common stock issued for businesses acquired........... -- -- 8,039,363 116,345 -- -- -- Issuance of warrants for loan origination fees.............. -- -- -- -- 588 -- -- Issuance of options and warrants to marketing partners......... -- -- -- 46 2,041 -- -- Exercise of common stock options....................... -- -- 800,347 1,541 -- (390) -- Exercise of common stock warrants...................... -- -- 576,156 994 (483) -- -- Issuance of common stock in consideration for professional services...................... -- -- 7,000 4 -- -- -- Issuance of common stock in consideration for investing activities.................... -- -- 500,263 7,669 -- -- -- Repurchase of common stock...... -- -- (129,228) (46) -- -- -- Issuance of compensatory stock options....................... -- -- -- 12,345 -- -- (12,183) Compensation attributable to stock options vesting......... -- -- -- -- -- -- 6,400 Unrealized gain on investments................... -- -- -- -- -- -- -- Net loss........................ -- -- -- -- -- -- -- ----------- -------- ---------- -------- -------- ----------- ------------ Balances, December 31, 1999....... -- $ -- 42,923,035 $325,892 $ 8,260 $ (390) $ (6,713) =========== ======== ========== ======== ======== =========== ============ ------------------------------------------- Accumulated Other Total Comprehensive Accumulated Shareholders' Income Deficit Equity ------------- ----------- ------------- Issuances of Series F preferred stock and warrants to acquire common stock.................. $ -- $ -- $ 1,400 Issuance of Series G preferred stock and warrants to acquire common stock.................. -- -- 35,100 Issuance of Series H preferred stock and warrants to acquire common stock.................. -- -- 3,000 Issuance of Series I preferred stock and warrants to acquire common stock.................. -- -- 18,809 Exercise of Series C preferred stock warrants................ -- -- 220 Preferred stock converted to common stock upon closing of initial public offering....... -- -- -- Common stock issued upon closing of initial public offering, net of issuance costs......... -- -- 91,084 Common stock issued for businesses acquired........... -- -- 116,345 Issuance of warrants for loan origination fees.............. -- -- 588 Issuance of options and warrants to marketing partners......... -- -- 2,087 Exercise of common stock options....................... -- -- 1,151 Exercise of common stock warrants...................... -- -- 511 Issuance of common stock in consideration for professional services...................... -- -- 4 Issuance of common stock in consideration for investing activities.................... -- -- 7,669 Repurchase of common stock...... -- -- (46) Issuance of compensatory stock options....................... -- -- 162 Compensation attributable to stock options vesting......... -- -- 6,400 Unrealized gain on investments................... 7,470 -- 7,470 Net loss........................ -- (75,943) (75,943) ------------- ----------- ------------ Balances, December 31, 1999....... $ 7,470 $ (105,306) $ 229,213 ============= =========== ============
The accompanying notes are an integral part of these consolidated statements. 41 SHOPNOW.COM INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
------------------------------------------ For the Year Ended December 31, ------------------------------------------ 1997 1998 1999 ------------ ------------ ------------ Operating Activities: Net loss.............................................. $ (4,766) (24,745) $ (75,943) Adjustments to reconcile net loss to net cash used in operating activities - Unusual item - impairment of acquired technology...................................... -- 5,207 -- Depreciation and amortization..................... 277 1,602 13,180 Write down of long-term investments............... 34 -- -- Amortization of deferred compensation............. -- 182 6,562 Operating expenses paid in stock and warrants..... -- 125 2,041 Changes in operating assets and liabilities, excluding effect of businesses acquired: Accounts receivable............................. (51) 2,107 (3,389) Prepaid expenses and other current assets....... (189) (77) (4,640) Other assets.................................... -- -- (1,559) Unbilled services and customer deposits, net.... -- (3,713) (615) Accounts payable................................ 831 2,303 4,453 Accrued liabilities............................. 417 521 7,222 Deferred revenue................................ -- 535 4,676 ------------ ------------ ------------ Net cash used in operating activities................... (3,447) (15,953) (48,012) ------------ ------------ ------------ Investing Activities: Purchases of property and equipment................... (481) (2,189) (13,457) Purchase of short-term investments.................... -- (150) (101,734) Sale of short-term investments........................ -- -- 49,712 Sale of marketable equity securities.................. -- -- 112 Investments in equity securities and other assets..... (943) (147) (7,251) Acquisition of businesses, net of cash acquired of $2,850 in 1998 and $711 in 1999..................... (250) (2,851) (9,387) ------------ ------------ ------------ Net cash used in investing activities................... (1,674) (5,337) (82,005) ------------ ------------ ------------
42 SHOPNOW.COM INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (IN THOUSANDS)
------------------------------------------ For the Year Ended December 31, ------------------------------------------ 1997 1998 1999 ------------ ------------ ------------ Financing Activities: Borrowings under bank line of credit.................. $ 200 $ 38 $ 1,000 Principal payments under bank line of credit.......... (78) -- (1,238) Proceeds from convertible subordinated notes.......... 1,253 -- -- Proceeds from debt obligations........................ 2,562 3,700 12,410 Payments on debt obligations.......................... (242) (6,034) (7,544) Proceeds from sale of preferred stock and warrants, net of issuance costs............................... 1,800 33,034 33,429 Proceeds from sale of common stock, net of issuance costs............................................... -- 25 92,817 Common stock repurchased.............................. (10) -- (46) ------------ ------------ ------------ Net cash provided by financing activities............... 5,485 30,763 130,828 ------------ ------------ ------------ Net increase in cash and cash equivalents............... 364 9,473 811 Cash and cash equivalents at beginning of period........ 12 376 9,849 ------------ ------------ ------------ Cash and cash equivalents at end of period.............. $ 376 $ 9,849 $ 10,660 ============ ============ ============ Supplementary disclosure of cash flow information: Cash paid during the period for interest.............. $ 11 $ 232 $ 962 ============ ============ ============ Non-cash investing and financing activities: Conversion of note payable and convertible subordinated debt to preferred stock.............. $ 1,603 $ 500 $ -- ============ ============ ============ Conversion of note payable to common stock.......... $ 89 $ -- $ -- ============ ============ ============ Preferred stock issued as part of investment in marketable equity securities...................... -- -- 25,100 ============ ============ ============ Common stock, options and warrants issued and liabilities assumed as part of business and technology acquisitions...................................... $ 90 $ 6,105 $ 129,825 ============ ============ ============ Assets acquired under capital leases................ $ 125 $ 2,092 $ 4,607 ============ ============ ============
The accompanying notes are an integral part of these consolidated statements. 43 SHOPNOW.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 NOTE 1. ORGANIZATION AND BACKGROUND: THE COMPANY ShopNow.com Inc. (the Company), formerly TechWave, Inc., provides an end-to-end solution that enables businesses to engage in e-commerce with other businesses, merchants and shoppers. The Company's end-to-end solution consists of access to online marketplaces combined with a suite of e-commerce enabling products and services, referred to as merchant services. These merchant services include custom application and online store development and design, hosting and maintenance, sales and marketing services and transaction processing. The Company also maintains an online marketplace, referred to as the ShopNow marketplace, which aggregates merchants and shoppers over a distributed network of web sites. In January 2000, the Company launched a business-to-business portal and marketplace, located at b2bNow.com, which is designed to enable businesses to engage in online transactions with other businesses. In June, 1999 the Company ceased operating its BuySoftware.com business. Given the Company's continued involvement in certain retailing activities over the ShopNow marketplace, the results of BuySoftware.com have been reflected in continuing operations until the date operations ceased, as the disposal did not meet the criteria for discontinued operations under Accounting Principles Board (APB) No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". The Company is subject to the risks and challenges associated with other companies at a similar stage of development, including dependence on key management personnel, successful development and marketing of its products and services, the continued acceptance of the Internet as a medium for electronic commerce, competition from substitute products and services from companies with greater financial, technical management and marketing resources and risks associated with recent acquisitions. Further, during the period required to develop or enhance commercially viable products, services and sources of revenues, the Company may require additional funds that may not be readily available. INITIAL PUBLIC OFFERING On October 4, 1999, the Company closed its initial public offering (IPO) of 7,250,000 shares of common stock at $12.00 per share, for proceeds net of underwriters' fees and commissions of $80.9 million. At closing, all of the Company's issued and outstanding shares of convertible preferred stock were converted into shares of common stock on a one-for-one basis. On November 2, 1999, the underwriters of the IPO exercised their over-allotment option and sold an additional 1,087,500 shares at $12.00 per share, for proceeds net of underwriters' fees and commissions of $12.1 million. The combined net proceeds to the Company, less additional offering costs of approximately $1.9 million, were $91.1 million. In addition, a $1 million promissory note in connection with the Company's acquisition of GO Software, Inc. (GO) and a $4 million bridge loan with a financial institution plus accrued interest were repaid. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION The Company's consolidated financial statements include 100% of the assets, liabilities and results of operations of all subsidiaries in which the Company has a controlling ownership interest of greater than 50%. Equity investments in which the Company holds less than a 20% ownership interest are recorded at cost and are included in other assets, 44 SHOPNOW.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (CONTINUED) NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) net in the accompanying consolidated balance sheets. All significant intercompany transactions and balances have been eliminated. Pro forma basic and diluted net loss per share is computed based on the weighted average number of shares of common stock outstanding giving effect to the conversion of convertible preferred stock outstanding that automatically converted upon completion of the Company's initial public offering (using the if-converted method from the original issuance date) during the fourth quarter of 1999 (See Note 2). Pro forma diluted net loss per share excludes the impact of stock options and warrants as the effect of their inclusion would be antidilutive. 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, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION The Company derives substantially all of its revenues from the ShopNow marketplace and from providing merchant services to businesses. Revenues from the ShopNow marketplace are generated from advertising and merchandising paid by merchants, leads and orders delivered to merchants, as well as transaction processing and licensing fees. Advertising consists of the sale of impressions on one or more of the Company's network of web sites; merchandising consists of the sale of specific positions or category sponsorships on the sites. These agreements typically have a term of one to four months. Advertising and merchandising revenues are recognized ratably over the term of the applicable agreement. The Company generates transaction processing and licensing fees from its payment processing and fraud prevention products and services. In these cases, the merchant bears the full credit risk and the Company recognizes a transaction fee upon the consummation of the sale. In addition, the Company offers products directly to shoppers over the ShopNow marketplace. In these instances where the Company acts as merchant-of-record, the Company records as revenue the full sales price of the product sold and records the full cost of the product to the Company as cost of revenues, upon shipment of the product. Revenues generated from the Company's BuySoftware.com business are included in ShopNow marketplace and transaction processing revenues in the accompanying consolidated statements of operations through June 1999, at which point management ceased operations of BuySoftware.com. Revenues from merchant services are generated principally through development fees, hosting fees and sales and marketing services. Merchant services can be purchased as a complete end-to-end suite of services or separately. The Company recognizes revenues from development of custom applications and online stores and marketing projects on a percentage of completion basis over the period of development or the period of the marketing project. These projects generally range from two to five months. Hosting contracts typically have a term of one year, with fees charged on a monthly basis. The Company bears full credit risk with respect to these sales. Anticipated losses on these contracts are recorded when identified. To date, losses have not been significant. Contract costs include all direct labor, material, subcontract and other direct project costs and certain indirect costs related to contract performance. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements that may result in revision to costs and income, are recognized in the period in which the revisions are determined. Unbilled services typically represent amounts earned under the Company's 45 SHOPNOW.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (CONTINUED) NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) contracts not billed due to timing or contract terms, which usually consider passage of time, achievement of certain milestones or completion of the project. Where billings exceed revenues earned on contracts, the amounts are included in the accompanying consolidated balance sheets as customer deposits, as the amounts typically related to ancillary services, whereby the Company is acting in an agency capacity. Fee revenue from ancillary services provided by the merchant services division is recognized upon completion of the related job by the applicable third party vendor. Deferred revenue consists primarily of prepaid licensing fees which are being amortized over their contract life (see Note 13). CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. SHORT-TERM INVESTMENTS AND MARKETABLE EQUITY SECURITIES The Company classifies these securities as available for sale and are stated at fair value in accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities." This statement specifies that available for sale securities are reported at fair value with changes in unrealized gains and losses recorded directly to shareholders' equity, which are reflected in accumulated other comprehensive income in the accompanying consolidated balance sheets. Fair value is based on quoted market prices. The Company's short-term investments consist of corporate notes and bonds, commercial paper, municipal notes and bonds, auction preferreds and US government securities and are stated at cost, which approximates fair value. Marketable equity securities consist solely of investments in the common stock of publicly-traded companies and are recorded at fair value. Unrealized holding gains and losses, net of tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. Dividend and interest income are recognized as earned. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Assets purchased under capital leases are recorded at cost (based on the present value of future minimum lease payments discounted at the contractual interest rates). Depreciation is computed using the straight-line method over the assets' estimated useful lives of two to seven years, or in the case of leasehold improvements, three years or the life of the lease, whichever is shorter. Betterments are capitalized. Repairs and maintenance expenditures are expensed as incurred. GOODWILL AND OTHER INTANGIBLE ASSETS Intangible assets consist primarily of acquired technology, proprietary concepts, customer lists, domain names and goodwill related to acquisitions accounted for under the purchase method of accounting. Amortization of these purchased intangibles is provided on the straight-line basis over the respective useful lives of the assets, primarily three years. The Company identifies and records impairment losses on intangible and other assets when events and circumstances indicate that such assets might be impaired. The Company considers factors such as significant changes in the regulatory or business climate and projected future cash flows from the respective asset. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset (see Note 3). 46 SHOPNOW.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (CONTINUED) NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) COST-BASIS INVESTMENTS The Company's cost-based equity investments, which consist primarily of investments in the equity securities of certain early-stage technology companies, were approximately $43,000 and $14.6 million at December 31, 1998 and 1999, respectively, and are classified as other assets, net in the accompanying consolidated balance sheets. The Company monitors its cost-basis investments for impairment. There can be no assurance that the Company's investments in these early-stage technology companies will be realized. ADVERTISING COSTS The cost of advertising is expensed as incurred. For the years ended December 31, 1997, 1998 and 1999, the Company incurred advertising and direct marketing expenses of approximately $470,000, $5.7 million and $29.1 million, respectively. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred and consist primarily of salaries, supplies and contract services. The Company's accounting policy is to capitalize eligible computer software development costs upon the establishment of technological feasibility, which the Company has defined as a completion of a working model. For the years ended December 31, 1997, 1998 and 1999, the amount of eligible costs to be capitalized has not been significant, and accordingly, the Company has charged all software development costs to research and development in the accompanying consolidated statements of operations. STOCK COMPENSATION The Company has adopted the disclosure-only provisions of the SFAS No. 123, "Accounting for Stock-Based Compensation", and instead applies APB No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the market price of the Company's common stock over the stock option exercise price at the date of grant. Options and warrants issued to non-employees are accounted for using the fair value method of accounting as prescribed by SFAS No. 123. INCOME TAXES The shareholders of the Company elected to be treated as an S Corporation under the Internal Revenue Code until February 26, 1997. As a result, taxable income until that date was included in the taxable income of the individual shareholders, and no income tax provision was recorded. In addition, in accordance with Staff Accounting Bulletin Topic 4B, the Company has reclassified accumulated losses incurred prior to the date of conversion to C Corporation status from retained earnings to common stock. The Company terminated its S Corporation status on February 26, 1997 (Termination) and implemented SFAS No. 109, "Accounting for Income Taxes," upon becoming a taxable entity. Under SFAS No. 109, deferred tax assets and liabilities are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using the tax rates that will be in effect when the differences are expected to reverse. Deferred taxes were not recorded at Termination as the temporary differences between recognition of income and expense for financial reporting and tax purposes were not significant. 47 SHOPNOW.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (CONTINUED) NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) NET LOSS PER SHARE In accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Computation of Earnings Per Share," basic earnings per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net loss by the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of the shares of common stock issuable upon the conversion of the convertible preferred stock (using the if-converted method) and shares issuable upon the exercise of common stock options and warrants (using the treasury stock method); common equivalent shares are excluded from the calculation if their effect is antidilutive. The Company has not had any issuances or grants for nominal consideration as defined under Staff Accounting Bulletin 98. Diluted net loss per share for all periods shown does not include the effects of the convertible preferred stock and shares issuable upon the exercise of stock options and warrants as the effect of their inclusion is antidilutive during each period. STATEMENTS OF COMPREHENSIVE LOSS There were no reclassification adjustments as defined in SFAS 130, "Reporting Comprehensive Income" or income tax provision related to the unrealized gain on investments during the year ended December 31, 1999. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective for financial statements for years beginning after December 15, 1998. SOP 98-1 provides guidance over accounting for computer software developed or obtained for internal use including the requirement to capitalize specified costs and amortization of such costs. The implementation of SOP 98-1 did not have a material impact on the Company's financial position or results of operations. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up Activities." SOP 98-5, which is effective for fiscal years beginning after December 15, 1998, provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred. The implementation of SOP 98-5 did not have a material impact on the company's financial position or results of operations. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," to provide guidance on the recognition, presentation and disclosure of revenues in financial statements. The Company believes its revenue recognition practices are in conformity with the guidelines prescribed in SAB No. 101. RECLASSIFICATIONS Certain information reported in previous periods has been reclassified to conform to the current period presentation. NOTE 3. ACQUISITIONS: In January 1997, the Company formed a wholly owned subsidiary, TechWave Acquisition, Inc. (TechWave Acquisition). In January 1997, Web Solutions, Inc. (Web Solutions) and Intelligent Software Solutions, Inc. (Intelligent Software) 48 SHOPNOW.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (CONTINUED) NOTE 3. ACQUISITIONS: (CONTINUED) merged with and into TechWave Acquisition in exchange for 600,000 shares of the Company's common stock valued at approximately $90,000, a convertible note payable for $250,000 ($226,000 in principal and $24,000 in interest), and $25,000 in cash, aggregating a total purchase price of $341,000. The acquisition was accounted for in accordance with the purchase method of accounting. The excess purchase price was principally allocated to acquired technology, which is amortized over a five-year life. In November 1997, the unpaid principal balance of $89,000 was converted into 177,333 shares of common stock. Both Web Solutions and Intelligent Software were software development companies with core technologies that were incorporated into the Company's electronic software distribution products. Additionally, the sole shareholder of Web Solutions and Intelligent Software became an officer of the Company. In June 1998, the Company acquired e-Warehouse, Inc. and CyberTrust, Inc., wholly owned subsidiaries of a publicly traded Canadian company. The sellers had developed certain payment processing technologies that the Company had planned to utilize in their e-commerce offerings. Consideration for these acquisitions consisted of $4.0 million in cash and 422,710 shares of the Company's common stock (valued at $3.30 per share), with a total value of approximately $5.4 million. The acquisition was recorded using the purchase method of accounting. The Company never fully utilized the acquired technology and had determined that it had no alternative future use or value in the Company's transaction processing systems, as the Company's existing technology platform provided the enhanced functionality needed in the Company's business operations. Due to the impairment of the acquired technology, the Company wrote off all of the excess purchase price, except for value assigned to domain names, in the accompanying 1998 consolidated statement of operations. As a result of the impairment, the Company commenced legal proceedings in December 1998 against two of the executives associated with the acquired companies. In January 1999, the two executives filed a counterclaim against the Company. On August 10, 1999, all legal proceedings were settled, resulting in an insignificant charge to the Company. In August 1998, the Company completed its acquisition of The Internet Mall, which was doing business as ShopNow, Inc. (ShopNow). The Internet Mall, Inc. operated a shopping aggregation Web site and provided the Company with technology and merchant relationships to assist in the development of an online shopping portal. In connection with this acquisition, the Company issued 719,915 shares of common stock, valued at $3.30 per share, and warrants to purchase common stock for a total purchase price of approximately $2.6 million. The acquisition was accounted for using the purchase method of accounting. Of the total excess purchase price of $2.6 million, approximately $1.5 million was allocated to customer lists and domain names, which are amortized over a three-year life, with the remainder being allocated to acquired technology, workforce and goodwill, which are amortized over three-year lives. In September 1998, the Company entered into a purchase and merger agreement with Media Assets, Inc. (doing business as The Haggin Group). The Haggin Group is a creative design and direct marketing firm with offices in California. The Company paid The Haggin Group consideration including $300,000 in cash, a promissory note for $1.0 million, 600,000 shares of the Company's common stock, valued at $3.30 per share, and options to acquire common stock for a total purchase price of approximately $3.3 million. The terms of the promissory note require payments, by the Company, of eight equal quarterly installments of approximately $113,000 on the first day of each quarter commencing January 1, 1999 until fully paid on October 1, 2000. The acquisition was accounted for using the purchase method of accounting. The excess purchase price of approximately $1.7 million was allocated to customer lists and domain names and is being amortized over a three-year life. In connection with this acquisition, three employees were granted a total of 1.2 million options at exercise prices between $2.00 and $3.00 per share to acquire the Company's common stock. The vesting of these options was dependent upon the achievement of certain 49 SHOPNOW.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (CONTINUED) NOTE 3. ACQUISITIONS: (CONTINUED) performance measures related to business unit revenue and customer growth as defined in the stock option agreements. The performance measures initially established were well beyond the historical financial results achieved during prior periods. As such, during the period these options were outstanding, the thresholds established to trigger vesting were not considered achievable and were not achieved. As no measurement date for the options occurred and since the price of the options was fixed, the number of shares to be ultimately issued was not known. Since these thresholds were not considered achievable, these options were cancelled in May of 1999. The three employees were granted fixed-price options to purchase 405,000 shares of the Company's common stock with time vesting provisions not dependent upon performance. These options had the same strike prices and vesting terms as the original grants. As the grant of the new options created a new measurement date, the Company recorded $1.9 million of deferred compensation for the difference between the strike price and the underlying fair market value of the common stock at May 1999, which was determined to be $7.22 per share. The Company also recognized a compensation charge of $831,000 for the immediately vested portion of these grants in the accompanying consolidated December 31, 1999 financial statements. In June 1999, the Company acquired GO Software, Inc. (GO). GO develops and markets transaction processing software for personal computers that can function on a stand-alone basis or can interface with core corporate accounting systems. The Company paid GO $4.7 million in cash, issued a $1 million promissory note bearing interest at 10%, and issued 1,123,751 shares of common stock, valued at $8.54 per share, for a total purchase price of $15.4 million. The acquisition was accounted for using the purchase method of accounting. Of the excess purchase price of approximately $14.4 million, $13.8 million was allocated to acquired technology and $556,000 was allocated to goodwill, which are both being amortized over a three-year life. The note bore interest at 10% and was repaid in full upon completion of the Company's IPO. Also in June 1999, the Company acquired CardSecure, Inc. (CardSecure) for a purchase price of approximately $3.5 million. CardSecure is a developer of e-commerce enabled Web sites. The acquisition was accounted for using the purchase method of accounting. The excess purchase price of approximately $3.5 million was allocated to acquired technology and is being amortized over a three-year life (see Note 3). On November 12, 1999, the Company acquired SpeedyClick, Corp. (SpeedyClick), a California corporation, for $55.6 million of cash, common stock and common stock options. SpeedyClick, a privately held company, maintains an Internet web site that focuses on entertainment and interactivity. Upon effectiveness of the acquisition, a total of 3,799,237 shares of common stock valued at $13.31 per share were issued to the owners of SpeedyClick. Options to purchase SpeedyClick common stock were assumed by the Company and converted into 157,537 options to purchase the Company's common stock. The Company also paid cash consideration of $3.0 million to the owners of SpeedyClick. The Company accounted for this transaction as a purchase. Of the $55.6 million in consideration paid, approximately $27.9 was allocated to proprietary concepts, $14.7 million to customer lists and $13.0 million to goodwill. These intangible assets are being amortized over a three-year life. On December 3, 1999, the Company acquired Cortix, Inc. (Cortix), an Arizona corporation doing business as 20-20Consumer.com, for $14.4 million of cash and common stock. Cortix, a privately held company, is an operator of comparison shopping services including online reviews and ratings for commerce-oriented businesses, merchants and products. Upon effectiveness of the acquisition, 711,435 shares of common stock valued at $18.81 per share were issued to the owners of Cortix. The Company also paid cash consideration of $1.0 million to the owners of Cortix. The Company accounted for this transaction as a purchase. Of the $14.4 million in consideration paid, approximately $11.4 million was allocated to acquired technology, $1.6 million to customer lists and $1.3 million to goodwill. These intangible assets are being amortized over a three-year life. 50 SHOPNOW.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (CONTINUED) NOTE 3. ACQUISITIONS: (CONTINUED) On December 17, 1999, the Company acquired WebCentric Inc., (WebCentric) a Kansas corporation doing business as bottomdollar.com, for $40.2 million of common stock, common stock options and including approximately $1.4 million of cash. WebCentric, a privately held company, develops e-commerce integration technology and applications, including a comparison shopping engine that allows consumers to search and compare the products and services of several leading Internet merchants. Upon effectiveness of the acquisition, a total of 2,161,904 shares of common stock valued at $16.89 per share were issued to the owners of WebCentric. In addition, the Company issued replacement stock options to purchase an aggregate of 121,544 shares of the Company's common stock to certain employees and owners of WebCentric. The Company accounted for this transaction as a purchase. Of the $40.2 million in consideration paid, approximately $31.8 million was allocated to acquired technology, $3.3 million to customer lists and $4.6 million to goodwill. These intangible assets are being amortized over a three-year life. In January 2000, the Company entered into a definitive agreement to acquire Ubarter.com, Inc. (Ubarter), for approximately $45 million of common stock, common stock options and common stock warrants. Ubarter, a publicly traded company, is an e-commerce company specializing in online business-to-business barter exchange. The acquisition is expected to close in the second quarter of 2000 subject to the Company's effectiveness of a registration statement on Form S-4 with the Securities and Exchange Commission and the approval of the shareholders of Ubarter. UNAUDITED PRO FORMA COMBINED RESULTS The following summarizes the unaudited pro forma results of the Company's operations for the years ended December 31, 1997, 1998 and 1999, assuming the Media Assets, Inc., and The Internet Mall, Inc. transactions occurred as of January 1, 1997 and the GO, CardSecure, SpeedyClick, Cortix and WebCentric transactions occurred as of January 1, 1998. Pro forma information for the e-Warehouse, Inc. and CyberTrust, Inc. transactions is not presented, as it is not considered meaningful. The pro forma results are presented for the purposes of additional analysis only and do not purport to present the results of operations that would have occurred for the periods presented or that may occur in the future.
------------------------------- Year Ended December 31, ------------------------------- 1997 1998 1999 -------- -------- --------- (in thousands, except per share amounts) Revenues.................................................... $ 6,426 $ 14,202 $ 40,144 Net loss.................................................... $(4,917) $(61,542) $(114,209) Net loss per share.......................................... $ (0.98) $ (4.88) $ (5.79)
51 SHOPNOW.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (CONTINUED) NOTE 4. SHORT-TERM INVESTMENTS: Short-term investments are summarized as follows (in thousands):
------------------- December 31, ------------------- 1998 1999 -------- -------- Auction preferreds.......................................... $ -- $14,647 Municipal notes and bonds................................... -- 13,453 Commercial paper............................................ -- 11,452 Corporate notes and bonds................................... -- 6,298 U.S. government securities.................................. -- 6,172 Certificate of deposit...................................... 150 150 ---- ------- Total short-term investments................................ $150 $52,172 ==== =======
Included in the U.S. government securities category is $2.6 million pledged as a letter of credit for certain of the Company's office facilities. NOTE 5. PROPERTY AND EQUIPMENT: Property and equipment consists of the following (in thousands):
------------------- December 31, ------------------- 1998 1999 -------- -------- Equipment................................................... $ 3,313 $11,065 Software.................................................... 759 10,645 Furniture and fixtures...................................... 568 1,618 Leasehold improvements...................................... 548 817 ------- ------- 5,188 24,145 Less - Accumulated depreciation and amortization............ (1,003) (4,760) ------- ------- Property and equipment, net................................. $ 4,185 $19,385 ======= =======
Depreciation expense for the years ended December 31, 1997, 1998 and 1999 was approximately $186,000, $816,000 and $3.6 million, respectively. Property and equipment shown above include assets under capital leases of approximately $2.2 million and $6.9 million at December 31, 1998 and 1999, with corresponding accumulated amortization of approximately $270,000 and $1.0 million at December 31, 1998 and 1999, respectively. 52 SHOPNOW.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (CONTINUED) NOTE 6. OTHER INTANGIBLE ASSETS: Other intangible assets consist of the following (in thousands):
------------------- December 31, ------------------- 1998 1999 -------- -------- Acquired technology......................................... $ 840 $ 61,297 Proprietary concept......................................... -- 27,910 Customer lists.............................................. 1,978 22,297 Domain names................................................ 1,533 1,775 Other....................................................... 386 402 ------ -------- 4,737 113,681 Less - Accumulated amortization............................. (793) (8,968) ------ -------- $3,944 $104,713 ====== ========
NOTE 7. INVESTMENTS IN MARKETABLE EQUITY SECURITIES: At December 31, 1999, the Company held 476,410 shares of 24/7 Media and 85,122 shares of FreeShop.com, Inc. (FreeShop), both of which are publicly traded companies subject to the reporting requirements of the Securities and Exchange Commission. During the fourth quarter of 1999, the Company sold 110,000 of its original 195,122 shares of FreeShop for a recognized gain of $2.4 million. The Company's cost basis in these investments was $200,000 and $23.4 million as of December 31, 1998 and 1999, respectively, resulting in net unrealized holding gains of zero and $7.5 million, for the years ended December 31, 1998 and 1999, respectively. NOTE 8. ACCRUED LIABILITIES: Accrued liabilities consists of the following (in thousands):
------------------- December 31, ------------------- 1998 1999 -------- -------- Accrued compensation and benefits........................... $ 576 $4,422 Accrued marketing expenses.................................. -- 2,145 Other accrued liabilities................................... 556 2,211 ------ ------ $1,132 $8,778 ====== ======
NOTE 9. LINE OF CREDIT: The Company had a line of credit with a financial institution with a maximum balance of $300,000. The line of credit bore interest at prime plus 2% (9.75% at December 31, 1998), with interest payable monthly. The line of credit expired and the principal balance was paid in February 1999. The line of credit was secured by assets of the Company. 53 SHOPNOW.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (CONTINUED) NOTE 9. LINE OF CREDIT: (CONTINUED) In March 1999, the Company entered into a loan and security agreement (agreement) with a financial institution for a term loan and line of credit. In May 1999, the agreement was amended and restated allowing the Company to borrow up to $8.5 million at any one time, consisting of a $3.5 million term loan (term loan), a $4.0 million bridge loan (bridge loan) and a line of credit of up to $2.5 million, initially capped at $1.0 million until the bridge loan was repaid. The line of credit bears interest at the financial institution's base rate plus 2%, is secured by substantially all assets of the Company and was amended in January 2000 to expire on March 31, 2001. The term loan bears interest at 12%, is secured by substantially all assets of the Company and matures in March 2002. The bridge loan bore interest at 12% and was repaid in October 1999 after the closing of the Company's initial public offering. In conjunction with the agreement, the Company issued warrants to acquire 72,000 shares of common stock at an exercise price of $6.25 per share. The warrants are exercisable immediately and expire in March 2006. In May 1999 in connection with the modification, the Company issued additional warrants to acquire 70,000 shares of common stock at an exercise price of $7.00 per share. The warrants are exercisable immediately and expire in June 2006. NOTE 10. NOTES AND LEASES PAYABLE: Notes and leases payable consist of the following (in thousands):
------------------- December 31, ------------------- 1998 1999 -------- -------- Convertible note payable to shareholder, interest at applicable short-term federal rate, quarterly principal and interest payments totaling $113,000; final payment due in October 2000. The note is convertible to common stock at $8.00 per share........................................ $ 859 $ 437 Term note payable bearing interest at 12% per year, principal and interest payments payable monthly, final payment due in March 2002................................. -- 3,086 Capital lease obligations and other notes payable, interest, and principal payable monthly, interest at rates from 6% to 18% with maturity dates between 2000 and 2005.......... 2,111 10,451 ------- ------- 2,970 13,974 Less - current portion...................................... (1,133) (8,565) ------- ------- $ 1,837 $ 5,409 ======= =======
In September 1997, the Company issued 9% Subordinated Demand Notes totaling $500,000 to each of two shareholders. In January 1998, the principal amount of these Demand Notes was converted to 125,000 shares of Series D preferred stock and interest of approximately $13,000 was paid in cash. In November 1997, the Company completed a bridge financing with individual investors and executed Promissory Notes with principal totaling $1.8 million. The interest on this principal was 12% per year, increasing by 1% per year each 30 days to a maximum of 18% per year. In connection with the closing of the Company's Series D equity placement in January 1998, the $1.8 million plus interest of approximately $61,000 was paid in full. The placement agent and the holders of the Promissory Notes also received warrants to purchase 177,500 and 62,125 shares of the Company's common stock, respectively, at $1.50 per share. The warrants are exercisable immediately and expire in October 2000. In October 1998, the Company completed a bridge financing with individual investors and executed Promissory notes with principal totaling $3.7 million. The interest on this principal was 13% per year. In connection with the 54 SHOPNOW.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (CONTINUED) NOTE 10. NOTES AND LEASES PAYABLE: (CONTINUED) Company's Series F equity placement in December 1998, the $3.7 million plus interest of approximately $12,000 was paid in full. The placement agent and the holders of the promissory notes also received 129,500 and 129,500 warrants, respectively, to purchase a total of 259,000 shares of the Company's common stock at $4.00 per share. The warrants are exercisable immediately and expire in October 2001. Notes and leases payable mature as follows for the periods ending December 31, 1999 (in thousands): 2000........................................................ $ 8,565 2001........................................................ 4,115 2002........................................................ 1,204 2003........................................................ 82 2004........................................................ 6 Thereafter.................................................. 2 ------- $13,974 =======
Based on the borrowing rates currently available to the Company for loans with similar terms and average maturities, the fair market value of long-term debt approximates the carrying amount at December 31, 1999. NOTE 11. COMMITMENTS: The Company is obligated under capital and operating leases for various equipment leases and its office facilities. The leases expire through 2011. Future minimum lease payments under these leases are as follows for the period ending December 31, 1999 (in thousands):
-------------------- Capital Operating Leases Leases -------- --------- 2000........................................................ $ 7,498 $ 2,968 2001........................................................ 3,064 6,219 2002........................................................ 925 5,694 2003........................................................ 98 5,609 2004........................................................ 9 5,453 Thereafter.................................................. 2 32,785 ------- ------- 11,596 $58,728 ======= Less - Amounts representing interest........................ (1,200) ------- Net present value of minimum lease payment.................. $10,396 =======
In 1999, the Company issued 62,400 warrants to purchase common stock at $6.25 per share to two financial institutions in conjunction with certain leases included above. The warrants are exercisable immediately and expire between June 2004 and April 2006. Rental expense for the years ended December 31, 1997, 1998 and 1999 was approximately $127,000, $225,000 and $1.3 million, respectively. 55 SHOPNOW.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (CONTINUED) NOTE 11. COMMITMENTS: (CONTINUED) The Company has commitments under various business agreements to purchase advertising totaling approximately $6.0 million in 2000, decreasing to $1.0 million in 2004. NOTE 12. INCOME TAXES: The Company did not provide any current or deferred United States federal, state or foreign income tax provision or benefit for any of the periods presented because it has experienced operating losses since inception, and has historically provided full valuation allowances on deferred tax assets because of uncertainty regarding their realizability. In December 1999, the Company's valuation allowance was reduced to zero due to the increase in deferred tax liabilities recognized from business acquisitions, which as of December 31, 1999, exceed the amount of deferred tax assets recognized by the Company. Deferred tax assets consist primarily of net operating loss carryforwards, stock-compensation expense not recognized for tax purposes and deferred revenue recognized immediately for tax purposes during 1999. Deferred tax liabilities consist primarily of intangible assets not recognized for tax purposes and accelerated tax depreciation deductions exceeding the amounts recognized by the Company in its consolidated financial statements. The difference between the expected income tax rate of 38% (federal statutory rate of 34% plus a blend of state income tax rates, net of the federal benefit) and the tax provision of zero recorded by the Company is primarily due to the Company's full valuation allowance against its deferred tax assets through the end of 1999. At December 31, 1999, the Company had net operating loss carryforwards of approximately $76.4 million related to U.S. federal, foreign and state jurisdictions. Utilization of net operating loss carryforwards are subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended. Our ability to use net operating losses incurred prior to July 1999 is limited to an aggregate of approximately $14.3 million per year due to sales of Series D and Series E convertible preferred stock to third parties in April 1998 and the sale of Series I convertible preferred stock to Chase Manhattan Bank in July 1999, which resulted in ownership changes. These carryforwards will begin to expire at various times commencing in 2012. 56 SHOPNOW.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (CONTINUED) NOTE 12. INCOME TAXES: (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred taxes were as follows (in thousands):
------------------- December 31, ------------------- 1998 1999 -------- -------- Deferred tax assets: Net operating loss carryforwards.......................... $ 7,500 $ 29,021 Stock-based compensation.................................. 62 2,730 Deferred revenue.......................................... -- 1,889 Other..................................................... 138 311 Valuation allowance for deferred tax assets............... (6,400) -- ------- -------- Total deferred assets....................................... 1,300 33,951 ------- -------- Deferred tax liabilities: Intangible assets......................................... (1,281) (38,398) Property and equipment.................................... (19) (64) ------- -------- Total deferred liabilities.................................. (1,300) (38,462) ------- -------- Net deferred tax liabilities................................ $ -- $ (4,511) ======= ========
NOTE 13. SHAREHOLDERS' EQUITY: CONVERTIBLE PREFERRED STOCK At December 31, 1999, the Company had authorized 200,000,000 shares of common stock and 5,000,000 shares of convertible preferred stock. Shares of convertible preferred stock may be issued from time to time in one or more series, with designations, preferences and limitations established by the Company's board of directors. As of 57 SHOPNOW.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (CONTINUED) NOTE 13. SHAREHOLDERS' EQUITY: (CONTINUED) December 31, 1999, the Company had designated nine series of convertible preferred stock (designated Series A through I). Amounts outstanding were as follows:
----------------------- December 31, ----------------------- 1998 1999 ---------- ---------- (dollars in thousands) Series A preferred stock: Issued 699,612 shares in 1997, aggregate liquidation preference $350,000................. $ 350 $ -- Series B preferred stock: Issued 2,334,079 shares in 1997, aggregate liquidation preference $1,800,000............... 1,800 -- Series C preferred stock: Issued 996,748 shares in 1997, aggregate liquidation preference $1,473,000............... 1,253 -- Series D preferred stock: Issued 4,250,000 shares in 1998, aggregate liquidation preference $17,000,000.............. 13,461 -- Series E preferred stock: Issued 2,125,000 shares in 1998, aggregate liquidation preference $8,500,000............... 7,672 -- Series F preferred stock: Issued 2,056,000 shares in 1998 and 2,336,000 in 1999, aggregate liquidation preference $12,850,000............................................... 10,534 -- --------- --------- $ 35,070 $ -- ========= =========
Shareholders of convertible preferred stock have the right to one vote for each share of common stock into which the preferred stock could be converted. In the event of liquidation, preferred shareholders are entitled to a per-share distribution in preference to common shareholders equal to the original issue price. In the event the funds are insufficient to make a complete distribution to the preferred shareholders, then all of the funds available shall be distributed ratably based on their respective liquidation preferences among the holders of preferred stock. All series of the Company's outstanding preferred stock were converted into common stock on a one-for-one basis upon completion of the Company's IPO during the fourth quarter of 1999. During the period from January 23, 1998 through April 15, 1998, the Company completed a $25.5 million private equity placement. The Company issued 4.25 million shares of Series D and 2.125 million shares of Series E preferred stock each at $4.00 per share, for a total of 6.375 million shares. In conjunction with this sale, the Company issued 637,500 warrants to purchase common stock at $5.00 per share. The warrants are currently exercisable and expire on their third anniversary. In addition, the Company issued to the placement agent 625,000 warrants to purchase common stock at $4.40 per share. The warrants are exercisable immediately and expire on their third anniversary. During the fourth quarter of 1998 and the first quarter of 1999, the Company completed a $14.6 million private equity placement. The Company issued 2,336,000 shares of Series F preferred stock at $6.25 per share. In conjunction with this sale, the Company issued 233,600 warrants to purchase common stock at $7.50 per share. The warrants are exercisable on the first anniversary of their issuance and expire on their third anniversary. In addition, the Company issued to the placement agent 233,600 warrants to purchase common stock at $6.25 per share. The warrants are exercisable immediately and expire on their third anniversary. As a condition to the commencement of the Series D private equity placement described above, the holders of the Series A, Series B, and Series C stock agreed to an amended and restated Articles of Incorporation that amended and 58 SHOPNOW.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (CONTINUED) NOTE 13. SHAREHOLDERS' EQUITY: (CONTINUED) deleted certain rights of the Series A, Series B, and Series C stock, including redemption and preferential dividend rights. In March and April 1999, the Company completed a $5 million private equity placement. The Company issued 714,286 shares of Series G preferred stock at $7.00 per share and 35,715 warrants to purchase common stock at $7.50 per share. The warrants are exercisable immediately and expire on their third anniversary. In April 1999, the Company entered into a cross promotion agreement and equity exchange agreement with 24/7 Media. As a part of the equity exchange agreement, 24/7 Media acquired 4.3 million shares of the Company's Series G preferred stock at $7.00 per share and 860,000 warrants to acquire common stock at $7.00 per share in exchange for consideration valued at $30.1 million. The warrants are exercisable immediately and expire on their third anniversary. The purchase price consists of three parts: $5.0 million in cash, 466,683 shares of 24/7 Media's common stock, and the right to acquire 24/7 Media's interest in CardSecure. In June, 1999, the Company acquired 24/7 Media's interest in CardSecure and also acquired the remaining minority interest from CardSecure's founders and received 9,727 additional shares of 24/7 Media's common stock by issuing 243,036 shares of the Company's common stock valued at $8.54 per share. In May 1999, the Company completed a $3 million private equity placement. The Company issued 333,334 shares of Series H preferred stock at $9.00 per share and 50,000 warrants to purchase common stock at $9.00 per share. The warrants are exercisable immediately and expire on their third anniversary. In July 1999 the Company closed an $18.9 million private equity placement with a financial institution pursuant to the terms of a stock purchase agreement which had been entered into on June 17, 1999. The Company issued 2,100,000 shares of Series I preferred stock at $9.00 per share and 555,556 warrants to purchase common stock at $9.00 per share. The warrants are exercisable immediately and expire on their third anniversary. The Series I preferred stock contains substantially the same rights and preferences as the previous series of preferred stock. In conjunction with the Series I preferred stock, the Company entered into an agreement with the financial institution and received $6.1 million in cash, which represents prepaid licensing fees. These prepaid fees are being recognized as revenue over a 27-month period on a straight-line basis, which represents the term of the agreement. STOCK OPTION PLANS The Company adopted a combined incentive and nonqualified stock option plan (the Plan) to provide incentive to employees, directors, consultants and advisors. The Company originally reserved 5,000,000 shares of common stock for issuance under the Plan. During 1999, the Company amended the Plan and increased the shares reserved for issuance under the Plan to 8,000,000. The Company has granted options to purchase 2,331,733 shares to Company executives outside the Plan. In December 1999, the Company adopted a nonexecutive officer stock option plan (the NOE Plan) to provide incentive to certain employees and consultants. The Company reserved 1,000,000 shares of common stock for issuance under the NOE Plan, which also allows for automatic increases in the number of shares issuable based on certain events, up to a maximum number of 4,000,000 shares. In December 1999, in connection with our acquisition of SpeedyClick, Corp., the Company assumed the SpeedyClick 1999 Stock Incentive Plan (the SpeedyClick Plan). The SpeedyClick Plan was designed to provide incentive to employees, directors, consultants and advisors. The Company has reserved 157,537 shares of common stock for issuance under the SpeedyClick Plan. There are 375,000 shares of common stock reserved for issuance under the SpeedyClick Plan, however the Company does not intend to make further grants of options under this Plan. 59 SHOPNOW.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (CONTINUED) NOTE 13. SHAREHOLDERS' EQUITY: (CONTINUED) Options under the Plan, the NOE Plan, the SpeedyClick Plan and options granted outside of the Plan (the Plans) generally expire 10 years from the date of grant. The Board of Directors determines the terms and conditions of options granted under the Plans, including the exercise price. Options are generally granted at fair market value on the date of grant and generally vest ratably over a three-year period from the date of grant. Under APB No. 25, the Company records compensation expense over the vesting period for the difference between the exercise price and the deemed fair market value for financial reporting purposes of stock options granted. Prior to the Company's IPO, the fair value of common stock had been based on factors including, but not limited to, preferred stock sales, milestones achieved in the development of the Company, comparisons to competitive public companies and general market conditions. Subsequent to the IPO, fair value has been determined using the Company's closing stock price as quoted in the public market. In conjunction with grants made in 1997, 1998 and 1999, the Company recorded zero, $182,000 and $6.6 million as stock compensation expense in the accompanying December 31, 1997, 1998 and 1999 consolidated statements of operations, respectively. The Company has adopted the disclosure-only provisions of SFAS No. 123. Had compensation expense been recognized on stock options issued based on the fair value of the options at the date of grant and recognized over the vesting period, the Company's net loss would have been increased to the pro forma amounts indicated below:
------------------------------ December 31, ------------------------------ 1997 1998 1999 -------- -------- -------- Net loss: As reported............................................... $(4,766) $(24,745) $(75,943) Pro forma................................................. (4,766) (25,067) (83,443) Basic and diluted net loss per share: As reported............................................... $ (1.83) $ (7.01) $ (5.80) Pro forma................................................. (1.83) (7.10) (6.37)
The fair value of each option is estimated using the Black-Scholes option pricing model that takes into account: (1) the fair value stock price at the grant date, (2) the exercise price, (3) estimated lives ranging from two to three years, (4) no dividends, (5) risk-free interest rates ranging from 5.3% to 6.5% and (6) volatility ranging from 0% through June 18, 1999, 72.0% subsequent to June 18, 1999 through September 30, 1999, and 88.3% subsequent to September 30, 1999. The initial impact on pro forma net loss may not be representative of compensation expense in future years when the effect of the amortization of multiple awards would be reflected in results from operations. 60 SHOPNOW.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (CONTINUED) NOTE 13. SHAREHOLDERS' EQUITY: (CONTINUED) A summary of activity related to stock option grants under the Plans follows:
------------------------------------------------------------------- December 31, ------------------------------------------------------------------- 1997 1998 1999 -------------------- -------------------- --------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price --------- -------- --------- -------- ---------- -------- Outstanding at beginning of period........ 145,500 $0.47 1,793,515 $0.54 4,333,566 $1.91 Granted................................. 1,813,482 0.55 3,087,379 2.60 7,409,430 6.83 Exercised............................... -- -- (27,499) 0.77 (672,004) 2.09 Canceled................................ (165,467) 0.60 (519,829) 2.28 (758,009) 4.06 --------- --------- ---------- Outstanding at end of period.............. 1,793,515 0.54 4,333,566 1.91 10,312,983 5.28 ========= ========= ========== Exercisable at the end of the period...... 436,653 0.68 1,681,026 1.06 3,231,952 2.17 ========= ========= ==========
The following information is provided for all stock options outstanding and exercisable at December 31, 1999:
----------------------------------------------------------------------- Outstanding Exercisable ------------------------------------------ -------------------------- Weighted Average Weighted Remaining Weighted Number of Average Contractual Number of Average Exercise Price Range Options Exercise Price Life (Years) Options Exercise Price - -------------------- ---------- -------------- ------------ --------- -------------- $0.00 to $2.24...................... 2,993,280 $ 1.07 6.9 2,190,418 $ 0.97 $2.25 to $6.73...................... 2,513,008 3.81 8.8 826,637 3.79 $6.74 to $8.96...................... 1,159,460 7.00 9.3 144,733 7.00 $8.97 to $11.21..................... 2,292,946 9.58 9.6 54,678 9.04 $11.22 to $17.93.................... 1,078,289 12.97 9.8 10,236 13.41 $17.94 to $22.42.................... 276,000 21.25 10.0 5,250 21.25 ---------- ------ ---- --------- ------ 10,312,983 $ 6.08 8.6 3,231,952 $ 2.17 ========== ====== ==== ========= ======
During the fourth quarter of 1999, the contingent performance criteria relating to a stock option grant made outside of the Plan for 310,000 shares of the Company's common stock with an exercise price of $4.00 were satisfied. Accordingly, a stock-based compensation charge of approximately $3.3 million was recognized in the accompanying December 31, 1999 consolidated statement of operations. At December 31, 1999, 1,554,974 shares of common stock were available for future grants under the Plans. Also, 11,867,957 shares of common stock were authorized but unissued relating to outstanding and available stock option grants under the Plans. WARRANTS AND OPTIONS ISSUED TO BUSINESS PARTNERS On April 29, 1999, pursuant to a distribution and marketing agreement with a telecommunications company, the Company issued warrants to purchase 100,000 shares of the Company's common stock at $10 per share. The warrants are exercisable immediately and expire in April 2002. Simultaneously, the Company entered into a put 61 SHOPNOW.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (CONTINUED) NOTE 13. SHAREHOLDERS' EQUITY: (CONTINUED) agreement, which allows the telecommunications company to put the shares back to the Company for $25.00 per share during the period from June 2001 to August 2001. The number of shares subject to the put warrant declines over time as the Company generates revenue under the marketing and distribution agreement. In accordance with EITF 96-13, the Company recorded the fair value of the put warrant in the accompanying consolidated balance sheet as of December 31, 1999. On May 19, 1999, the Company entered into a distribution agreement with a software manufacturer. As part of this agreement, the Company issued warrants to purchase 100,000 shares of common stock at $9.00 per share, options to purchase 300,000 shares of common stock at $4.80 per share and 200,000 shares of common stock valued at $9.00 per share. During the third and fourth quarters of 1999, the Company granted warrants to purchase 183,782 shares of the Company's common stock to certain marketing partners at exercise prices ranging from $9.50 to $18.94. These warrants were immediately exercisable when granted and expire between 1 and 5 years from the date of grant. EMPLOYEE STOCK PURCHASE PLAN During 1999, the Company's Board of Directors and shareholders approved and adopted an employee stock purchase plan (the ESPP). A total of 2,000,000 shares of common stock have been reserved for issuance under the ESPP, which allows for future increases. During two six-month purchase periods each year, eligible employees may withhold up to 10% of their salary, plus commissions, to purchase common stock at a price equal to 85% of the lesser of the fair market value of the Company's common stock on the first or the last day of the applicable six month purchase period. The ESPP will continue for a term of 10 years, unless terminated earlier by the Company's Board of Directors. As of December 31, 1999, no shares had been sold to employees under the ESPP. The first sale of shares to employees is scheduled to occur on April 30, 2000. The following shares of common stock were reserved at December 31, 1999: Convertible preferred stock................................. -- Stock options............................................... 11,867,957 Common stock warrants....................................... 3,806,281 Employee stock purchase plan................................ 2,000,000 ---------- 17,674,238 ==========
NOTE 14. SEGMENT INFORMATION: The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," during the first quarter of 1998. SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about products and services and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available, evaluated regularly by the chief operating decision makers, or a decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision making group is comprised of the chief executive officer and various executive vice presidents and general managers of the Company. The Company has identified three distinct reportable segments: merchant services, the ShopNow 62 SHOPNOW.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (CONTINUED) NOTE 14. SEGMENT INFORMATION: (CONTINUED) marketplace and transaction processing and retail product sales through the BuySoftware.com Web site. While the decision making group evaluates results in a number of different ways, the line of business management structure is the primary basis for which it assesses financial performance and allocates resources. The accounting policies of the line of business operating segments are the same as those described in the summary of significant accounting policies. The following table represents the Company's segment information for the years ended December 31, 1997, 1998 and 1999 (in thousands):
------------------------------ December 31, ------------------------------ 1997 1998 1999 -------- -------- -------- Revenues from unaffiliated customers: ShopNow marketplace and transaction processing (excluding BuySoftware.com).......................................... $ 35 $ 280 $ 16,094 Merchant services (excluding BuySoftware.com)............... 500 2,416 10,938 BuySoftware.com............................................. 69 4,458 9,923 ------- -------- -------- 604 7,154 36,955 ------- -------- -------- Cost of revenues: ShopNow marketplace and transaction processing (excluding BuySoftware.com).......................................... 35 142 9,016 Merchant services (excluding BuySoftware.com)............... 356 1,255 7,123 BuySoftware.com............................................. 124 4,452 11,190 ------- -------- -------- 515 5,849 27,329 ------- -------- -------- Gross profit: ShopNow marketplace and transaction processing (excluding BuySoftware.com).......................................... -- 138 7,078 Merchant services (excluding BuySoftware.com)............... 144 1,161 3,815 BuySoftware.com............................................. (55) 6 (1,267) ------- -------- -------- $ 89 $ 1,305 $ 9,626 ======= ======== ======== Profit reconciliation: Gross profit for reportable segments........................ $ 89 $ 1,305 $ 9,626 Operating expenses.......................................... (4,691) (26,221) (88,320) Nonoperating expenses, net.................................. (164) 171 2,751 ------- -------- -------- Net loss.................................................... $(4,766) $(24,745) $(75,943) ======= ======== ========
The Company does not track assets by operating segments. Consequently is it not practicable to show assets by operating segments. NOTE 15. RELATED PARTY TRANSACTIONS: During 1999, the Company purchased approximately $3.5 million in marketing and advertising from 24/7 Media, a significant shareholder of the Company. Also during 1999, the Company recognized approximately $539,000 in merchant services revenues from Art Gallary Live (AGL), in which the Company also owns a minority investment. 63 SHOPNOW.COM INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (CONTINUED) NOTE 16. SUBSEQUENT EVENTS: On January 18, 2000, the Company acquired AXC Corporation, (AXC) a Washington corporation, for $16.0 million of total consideration, including common stock, common stock options, approximately $1.5 million of cash and $3.7 million in deferred tax liabilities. AXC, a privately held company, provides e-commerce consulting services to businesses. Upon effectiveness of the acquisition, a total of 540,296 shares of common stock valued at $17.60 per share were issued to the owners of AXC. In addition, the Company issued replacement stock options to purchase an aggregate of 72,089 shares of the Company's common stock to certain employees and owners of AXC. The Company accounted for this transaction as a purchase. Of the $16.0 million in consideration paid, approximately $7.2 million was allocated to assembled workforce, $4.9 million to customer lists and $3.8 million to goodwill. These intangible assets are being amortized over a three-year life. On January 13, 2000, the Company, through its wholly owned subsidiary 3037952 Nova Scotia Company, a Nova Scotia Company, acquired Pronet Enterprises Ltd., a Canadian company, for approximately $3.2 million in cash and $9.1 million in common stock and common stock options. Pronet, a privately held company, operates a business-to-business portal and marketplace that aggregates businesses that seek to transact with one another. Upon effectiveness of the acquisition, a total of 162,508 shares of common stock, valued at $17.60 per share, were issued to the shareholders Pronet. In addition, the Company issued options to purchase 351,666 shares of common stock to the two principals of Pronet. The Company accounted for this transaction as a purchase. Allocations of the excess purchase price of this acquisition has not yet been determined. All intangible assets acquired in the purchase are expected to be amortized over a three-year estimated useful life. 64 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Our board of directors has selected Arthur Andersen LLP to serve as independent public accountants. Arthur Andersen LLP has served as our independent public accountants since August 1998. On August 7, 1998, we dismissed Ernst & Young LLP as our independent accountants. Ernst & Young LLP's report on our consolidated financial statements for the two years ended December 31, 1997 does not cover our consolidated financial statements included in this annual report. Ernst & Young LLP's reports on the financial statements for the years ended December 31, 1996 and 1997 did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. The decision to change independent accountants was approved by the board of directors. During the years ended December 31, 1996 and 1997 and through August 1998, there were no reportable events, as defined in regulations of the Securities and Exchange Commission, or disagreements with Ernst & Young LLP on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure. Prior to retaining Arthur Andersen LLP, we had not consulted with Arthur Andersen LLP regarding accounting principles. PART III ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT Information called for by Part III, Item 10, is included in our Proxy Statement relating to our annual meeting of shareholders to be held May 22, 2000, and is incorporated herein by reference. The information appears in the Proxy Statement under the captions "Election of Directors" and "Executive Officers." The Proxy Statement will be filed within 120 days of December 31, 1999, our fiscal year end. ITEM 11. EXECUTIVE COMPENSATION. Information called for by Part III, Item 11, is included in our Proxy Statement relating to our annual meeting of shareholders to be held on May 22, 2000, and is incorporated herein by reference. The information appears in the Proxy Statement under the caption "Executive Compensation." The Proxy Statement will be filed within 120 days of December 31, 1999, our fiscal year end. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information called for by Part III, Item 12, is included in our Proxy Statement relating to our annual meeting of shareholders to be held on May 22, 2000, and is incorporated herein by reference. The information appears in the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management." The Proxy Statement will be filed within 120 days of December 31, 1999, our fiscal year end. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information called for by Part III, Item 13, is included in our Proxy Statement relating to our annual meeting of shareholders to be held on May 22, 2000 and is herein incorporated by reference. The information appears in the Proxy Statement under the caption "Certain Relationships and Related Transactions." The Proxy Statement will be filed within 120 days of December 31, 1999, our fiscal year end. 65 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following documents are filed as part of this report:
Page -------- ShopNow.com Inc. Report of Independent Public Accountants.................. 36 Consolidated Balance Sheets............................... 37 Consolidated Statements of Operations..................... 38 Consolidated Statements of Comprehensive Loss............. 39 Consolidated Statements of Shareholders' Equity........... 40 Consolidated Statements of Cash Flows..................... 42 Notes to Consolidated Financial Statements................ 44 Schedule II -- Valuation and Qualifying Accounts..........
REPORTS ON FORM 8-K On November 24, 1999, we filed a Form 8-K, as amended by Form 8-K/A on December 3, 1999, reporting the acquisition of SpeedyClick, Corp. On December 29, 1999, we filed a Form 8-K, as amended by Form 8-K/A on January 7, 2000, reporting the acquisition of WebCentric, Inc. On December 30, 1999, the Company filed a Form 8-K under Item 5 reporting a Letter of Intent into which we entered to acquire Ubarter.com Inc. 66 EXHIBITS
NUMBER DESCRIPTION - ------ ----------- 3.1 ++ Amended and Restated Articles of Incorporation of the registrant. 3.2 ++ Amended and Restated Bylaws of the registrant. 4.1 ++ Second Amended and Restated Registration Rights Agreement dated as of November 30, 1998 4.2 ++ Amendment No. 1 to Second Amended and Restated Registration Rights Agreement dated as of June 15, 1999. 4.3 ++ Amendment No. 2 to Second Amended and Restated Registration Rights Agreement dated as of June 16, 1999. 10.1 ++ Amended and Restated 1999 Employee Stock Purchase Plan and form of agreement thereunder. 10.2 ++ Amended and Restated 1996 Combined Incentive and Nonqualified Stock Option Plan and form of agreements thereunder. 10.3 * Amended and Restated 1999 Nonofficer Employee Stock Option Plan and form of agreements thereunder. 10.4 + ++ Electronic Distributor Agreement dated as of May 19, 1999, between Corel Corporation and the registrant. 10.5 + ++ Addendum No. 1 Project Agreement to Strategic Alliance Agreement between HNC Software and the registrant, dated May 4, 1999. 10.6 + ++ Distributor/Marketing Agreement dated as of April 29, 1999, between Quest Communications Corporation and the registrant. 10.7 ++ Strategic Alliance Agreement dated as of May 4, 1999, between HNC Software Inc. and the registrant. 10.8 ++ Consortium Membership Agreement dated as of May 4, 1999, between HNC Software and the registrant. 10.9 ++ Cross Promotion Agreement dated April 5, 1999, between 24/7 Media, Inc. and the registrant. 10.10 ++ Loan and Security Agreement dated as of March 4, 1999, between Transamerica Business Credit Corporation and the registrant. 10.11 ++ Letter of Intent Agreement dated March 24, 1999, between the ZERON Group and the registrant. 10.12 ++ Employment Agreement effective as of July 1, 1999, between Dwayne M. Walker and the registrant. 10.13 ++ Corporate Master Agreement effective as of February 10, 1999, between Vignette Corporation and the registrant. 10.14 + ++ Agreement dated July 7, 1999, between About.com, Inc. and the registrant. 10.15 + ++ Agreement effective as of July 12, 1999, between Chase Manhattan Capital, L.P. and the registrant. 10.16 # Agreement and Plan of Merger dated as of November 10, 1999, among Racer Acquisition, Inc., SpeedyClick, Corp., the Principal Shareholders of SpeedyClick, Corp. and the registrant. 10.17 # Employment Agreement, dated as of November 12, 1999, between Farid Tabibzadeh and the registrant. 10.18 # Employment Agreement, dated as of November 12, 1999, between Shahab Emrani and the registrant. 10.20 ## Agreement and Plan of Merger dated as of December 16, 1999, among Chiefs Acquisition, Inc., WebCentric, Inc., the Stockholders of WebCentric, Inc. and the registrant. 10.21 ### Letter of Intent, dated December 20, 1999, between Ubarter.com Inc., Steven White, New Horizons L.P. and the registrant. 10.22 #### Office Building Lease, dated September 21, 1999, between CEP Investors XII LLC and the registrant.
67
NUMBER DESCRIPTION - ------ ----------- 10.23 *# Office Lease, dated December 13, 1999, between Benaroya Capital Company, LLC and the registrant. 10.24 *# Promissory Note, dated September 28, 1999, from Alan Koslow to the registrant. 10.25 * Agreement and Plan of Merger dated January 20, 2000 between Ubarter.com Inc., Shamu Acquisition, Inc. and the registrant. 21.1 * List of Subsidiaries 23.1 * Consent of Arthur Andersen LLP, Independent Accountants. 27.1 * Financial Data Schedule.
- ------------------------ * Filed herewith + Portions of these exhibits have been omitted based upon a request for confidential treatment. The omitted portions of the exhibits have been filed separately with the Securities and Exchange Commission. ++ Incorporated by reference to the Registration Statement on Form S-1 (No. 333-80981) filed by the registrant on September 28, 1999, as amended. # Incorporated by reference to the Current Report on Form 8-K (File No. 000-26707) filed by the registrant on November 24, 1999, as amended. ## Incorporated by reference to the Current Report on Form 8-K (File No. 000-26707) filed by the registrant on December 29, 1999, as amended. ### Incorporated by reference to the Current Report on Form 8-K (File No. 000-26707) filed by the registrant on December 30, 1999. #### Incorporated by reference to Quarterly Report on Form 10-Q (File No. 000-26707) filed by the registrant on November 9, 1999. ##### Incorporated by reference to Registration Statement on Form S-8 (File No. 333-92533) filed by the registrant on December 10, 1999. *# Incorporated by reference to the Registration Statement on Form S-1 (File No. 333-95085) filed by the registrant on January 20, 2000, as amended.
68 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SHOPNOW.COM INC. (REGISTRANT) By: /s/ DWAYNE M. WALKER ----------------------------------------- Dwayne M. Walker Chief Executive Officer
Dated: February 10, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- Chief Executive Officer and /s/ DWAYNE M. WALKER Chairman of the Board ------------------------------------------- (Principal Executive February 10, 2000 Dwayne M. Walker Officer) Executive Vice President, Chief Financial Officer, /s/ ALAN D. KOSLOW General Counsel and ------------------------------------------- Secretary (Principal February 10, 2000 Alan D. Koslow Financial and Accounting Officer) /s/ JACOB I. FRIESEL ------------------------------------------- Director February 10, 2000 Jacob I. Friesel /s/ DAVID M. LONSDALE ------------------------------------------- Director February 10, 2000 David M. Lonsdale /s/ BRET R. MAXWELL ------------------------------------------- Director February 10, 2000 Bret R. Maxwell /s/ MARK C. MCCLURE ------------------------------------------- Director February 10, 2000 Mark C. McClure /s/ JOHN R. SNEDEGAR ------------------------------------------- Director February 10, 2000 John R. Snedegar /s/ MARK H. TERBEEK ------------------------------------------- Director February 10, 2000 Mark H. Terbeek /s/ EYTAN J. LOMBROSO ------------------------------------------- Director February 10, 2000 Eytan J. Lombroso
SHOPNOW.COM INC. SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS ACCOUNTS RECEIVABLE ALLOWANCE FOR DOUBTFUL ACCOUNTS (IN THOUSANDS)
Balance at Charged to costs Balance at Description beginning of period and expenses Deductions(1) end of period ----------- ------------------- ---------------- ------------- ------------- Year ended December 31, 1999.................... $ 230 $ 678 $ (617) $ 291 ================= =============== ============= ============ Year ended December 31, 1998.................... $ 23 $ 591 $ (384) $ 230 ================= =============== ============= ============ Year ended December 31, 1997.................... $ 3 $ 20 $ -- $ 23 ================= =============== ============= ============
- ------------------------ (1) Write-offs, net of bad debt recovery. INDEX TO EXHIBITS
NUMBER DESCRIPTION - ------ ----------- 3.1 ++ Amended and Restated Articles of Incorporation of the registrant. 3.2 ++ Amended and Restated Bylaws of the registrant. 4.1 ++ Second Amended and Restated Registration Rights Agreement dated as of November 30, 1998 4.2 ++ Amendment No. 1 to Second Amended and Restated Registration Rights Agreement dated as of June 15, 1999. 4.3 ++ Amendment No. 2 to Second Amended and Restated Registration Rights Agreement dated as of June 16, 1999. 10.1 ++ Amended and Restated 1999 Employee Stock Purchase Plan and form of agreement thereunder. 10.2 ++ Amended and Restated 1996 Combined Incentive and Nonqualified Stock Option Plan and form of agreements thereunder. 10.3 * Amended and Restated 1999 Nonofficer Employee Stock Option Plan and form of agreements thereunder. 10.4 + ++ Electronic Distributor Agreement dated as of May 19, 1999, between Corel Corporation and the registrant. 10.5 + ++ Addendum No. 1 Project Agreement to Strategic Alliance Agreement between HNC Software and the registrant, dated May 4, 1999. 10.6 + ++ Distributor/Marketing Agreement dated as of April 29, 1999, between Quest Communications Corporation and the registrant. 10.7 ++ Strategic Alliance Agreement dated as of May 4, 1999, between HNC Software Inc. and the registrant. 10.8 ++ Consortium Membership Agreement dated as of May 4, 1999, between HNC Software and the registrant. 10.9 ++ Cross Promotion Agreement dated April 5, 1999, between 24/7 Media, Inc. and the registrant. 10.10 ++ Loan and Security Agreement dated as of March 4, 1999, between Transamerica Business Credit Corporation and the registrant. 10.11 ++ Letter of Intent Agreement dated March 24, 1999, between the ZERON Group and the registrant. 10.12 ++ Employment Agreement effective as of July 1, 1999, between Dwayne M. Walker and the registrant. 10.13 ++ Corporate Master Agreement effective as of February 10, 1999, between Vignette Corporation and the registrant. 10.14 + ++ Agreement dated July 7, 1999, between About.com, Inc. and the registrant. 10.15 + ++ Agreement effective as of July 12, 1999, between Chase Manhattan Capital, L.P. and the registrant. 10.16 # Agreement and Plan of Merger dated as of November 10, 1999, among Racer Acquisition, Inc., SpeedyClick, Corp., the Principal Shareholders of SpeedyClick, Corp. and the registrant. 10.17 # Employment Agreement, dated as of November 12, 1999, between Farid Tabibzadeh and the registrant. 10.18 # Employment Agreement, dated as of November 12, 1999, between Shahab Emrani and the registrant. 10.20 ## Agreement and Plan of Merger dated as of December 16, 1999, among Chiefs Acquisition, Inc., WebCentric, Inc., the Stockholders of WebCentric, Inc. and the registrant. 10.21 ### Letter of Intent, dated December 20, 1999, between Ubarter.com Inc., Steven White, New Horizons L.P. and the registrant. 10.22 #### Office Building Lease, dated September 21, 1999, between CEP Investors XII LLC and the registrant. 10.23 *# Office Lease, dated December 13, 1999, between Benaroya Capital Company, LLC and the registrant. 10.24 *# Promissory Note, dated September 28, 1999, from Alan Koslow to the registrant. 10.25 * Agreement and Plan of Merger dated January 20, 2000 between Ubarter.com Inc., Shamu Acquisition, Inc. and the registrant.
NUMBER DESCRIPTION - ------ ----------- 21.1 * List of Subsidiaries 23.1 * Consent of Arthur Andersen LLP, Independent Accountants. 27.1 * Financial Data Schedule.
- ------------------------ * Filed herewith + Portions of these exhibits have been omitted based upon a request for confidential treatment. The omitted portions of the exhibits have been filed separately with the Securities and Exchange Commission. ++ Incorporated by reference to the Registration Statement on Form S-1 (No. 333-80981) filed by the registrant on September 28, 1999, as amended. # Incorporated by reference to the Current Report on Form 8-K (File No. 000-26707) filed by the registrant on November 24, 1999, as amended. ## Incorporated by reference to the Current Report on Form 8-K (File No. 000-26707) filed by the registrant on December 29, 1999, as amended. ### Incorporated by reference to the Current Report on Form 8-K (File No. 000-26707) filed by the registrant on December 30, 1999. #### Incorporated by reference to Quarterly Report on Form 10-Q (File No. 000-26707) filed by the registrant on November 9, 1999. ##### Incorporated by reference to Registration Statement on Form S-8 (File No. 333-92533) filed by the registrant on December 10, 1999. *# Incorporated by reference to the Registration Statement on Form S-1 (File No. 333-95085) filed by the registrant on January 20, 2000, as amended.
EX-10.3 2 EXHIBIT 10.3 SHOPNOW.COM INC. AMENDED AND RESTATED 1999 NONOFFICER EMPLOYEE STOCK OPTION PLAN 1. PURPOSES OF THE PLAN. The purposes of this 1999 Nonofficer Employee Stock Option Plan are: - to attract and retain the best available personnel for positions of substantial responsibility, - to provide additional incentive to certain Employees and Consultants, and - to promote the success of the Company's business. Awards granted under the Plan may be Stock Awards and Nonstatutory Stock Options only. 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan or one or more senior executive officers authorized by the Board to grant Awards, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the requirements relating to the administration of stock option plans under U. S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Awards are, or will be, granted under the Plan. (c) "Award" means an award or grant made pursuant to the Plan, including, without limitation, awards or grants of Stock Awards and Options, or any combination of the foregoing. (d) "Board" means the Board of Directors of the Company. (e) "Code" means the Internal Revenue Code of 1986, as amended. (f) "Committee" means a committee of Directors appointed by the Board in accordance with Section 4 of the Plan. (g) "Common Stock" means the common stock of the Company. (h) "Company" means ShopNow.com Inc., a Washington corporation. - 1 - (i) "Consultant" means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity. (j) "Director" means a member of the Board. (k) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code. (l) "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (m) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (n) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (o) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (p) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (q) "NOTICE OF GRANT" means a written or electronic notice evidencing certain terms and conditions of an individual Award grant. The Notice of Grant is part of the Option or Stock Award Agreement. - 2 - (r) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (s) "OPTION" means a Nonstatutory Stock Option granted pursuant to the Plan. (t) "OPTION AGREEMENT" means an agreement between the Company and a Participant evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (u) "OPTIONED STOCK" means the Common Stock subject to an Option. (v) "PARENT" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (w) "PARTICIPANT" means the holder of an outstanding Award granted under the Plan. (x) "PLAN" means this 1999 Nonofficer Employee Stock Option Plan. (y) "SERVICE PROVIDER" means an Employee or Consultant. (z) "SHARE" means a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan. (aa) "STOCK AWARD" means shares of Common Stock or units denominated in Common Stock granted under Section 11, the rights of ownership of which may be subject to restrictions prescribed by the Administrator. (bb) "STOCK AWARD AGREEMENT" means an agreement between the Company and a Participant evidencing the terms and conditions of an individual Award grant. The Stock Award Agreement is subject to the terms and conditions of the Plan. (cc) "SUBSIDIARY" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13 of the Plan, the maximum number of Shares which are available for issuance under the Plan is (a) 2,500,000 Shares; plus (b) an automatic increase to be added on the first day of the fiscal quarter beginning on January 1, 2000 equal to 10,000 Shares multiplied by the number of individuals who began employment or services at the Company, a Parent or a Subsidiary in the preceding fiscal quarter in connection with the Company's acquisition of any corporation or business entity in such quarter; plus - 3 - (c) an automatic increase to be added on the first day of each month beginning on or after March 1, 2000 equal to 10,000 Shares multiplied by the number of individuals who began employment or services at the Company, a Parent or a Subsidiary in the immediately preceding month; provided, however, that the maximum number of Shares which may be issued under the Plan may not exceed 4,000,000 Shares. The Shares may be authorized, but unissued, or reacquired Common Stock. No more than 30% of the Shares authorized for issuance under the Plan may be issued to officers who are not subject to Section 16 of the Exchange Act. Any Shares that have been made subject to an Award that cease to be subject to the Award (other than by reason of exercise or payment of the Award to the extent it is exercised for or settled in vested and nonforfeitable Shares) shall again be available for issuance in connection with future grants of Awards under the Plan. 4. ADMINISTRATION OF THE PLAN. (a) Procedure. (i) MULTIPLE ADMINISTRATIVE BODIES. The Plan may be administered by different Committees with respect to different groups of Service Providers. In addition, to the extent consistent with applicable law, the Board may authorize one or more senior executive officers to grant Awards to specified classes of Service Providers, within the limits specifically prescribed by the Board. (ii) OTHER ADMINISTRATION. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan, and in the case of a Committee or executive officer, subject to the specific duties delegated by the Board to such Committee or officer, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Awards may be granted hereunder; (iii) to determine the number of shares of Common Stock to be covered by each Award granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder. Such terms and conditions include, but are - 4 - not limited to, the exercise price, the time or times when Awards may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan; (vii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (viii) to modify or amend each Award (subject to Section 16(b) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; (ix) to allow Participants to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or the grant of a Stock Award that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; (x) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously granted by the Administrator; (xi) to make all other determinations deemed necessary or advisable for administering the Plan. (c) EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's decisions, determinations and interpretations shall be final and binding on all Participants and any other holders of Awards. 5. ELIGIBILITY. Awards may be granted to Service Providers selected by the Administrator who are not, at the time the Award is granted, Officers or Directors of the Company. 6. LIMITATIONS. (a) Neither the Plan nor any Award shall confer upon a Participant any right with respect to continuing the Participant's relationship as a Service Provider with the Company, nor shall they interfere in any way with the Participant's right or the Company's right to terminate such relationship at any time, with or without cause. - 5 - 7. TERM OF PLAN. The Plan shall become effective upon its adoption by the Board. The Plan shall have no fixed expiration date. 8. TERM OF OPTION. The term of each Option shall be stated in the Option Agreement or, if not stated in the Option Agreement, shall be ten (10) years from the date of grant. 9. OPTION EXERCISE PRICE AND CONSIDERATION. (a) EXERCISE PRICE. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator. (b) WAITING PERIOD AND EXERCISE DATES. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions that must be satisfied before the Option may be exercised. (c) FORM OF CONSIDERATION. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) to the extent permitted by the Plan Administrator in the Option Agreement, other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Participant for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (iv) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (v) any combination of the foregoing methods of payment; or (vi) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. EXERCISE OF OPTION. (a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. - 6 - An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Participant or, if requested by the Participant, in the name of the Participant and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13 of the Plan. Exercising an Option in any manner for vested and nonforfeitable Shares shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If a Participant ceases to be a Service Provider, other than upon the Participant's death or Disability, the Participant may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Participant's termination. If, on the date of termination, the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Participant does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) DISABILITY OF PARTICIPANT. If a Participant ceases to be a Service Provider as a result of the Participant's Disability, the Participant may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Participant's termination. If, on the date of termination, the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Participant does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) DEATH OF PARTICIPANT. If a Participant dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Option - 7 - Agreement), by the Participant's estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested on the date of death. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Participant's termination. If, at the time of death, the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Participant's estate or, if none, by the person(s) entitled to exercise the Option under the Participant's will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) BUYOUT PROVISIONS. The Administrator may at any time offer to buy out for a payment in cash or Shares an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Participant at the time that such offer is made. 11. Stock Awards. (a) The Administrator is authorized to make Awards of Common Stock or Awards denominated in units of Common Stock on such terms and conditions and subject to such restrictions, if any (which may be based on continuous service with the Company or the achievement of performance goals), as the Administrator shall determine, in its sole discretion, which terms, conditions and restrictions shall be set forth in the instrument evidencing the Award. The terms, conditions and restrictions that the Administrator shall have the power to determine shall include, without limitation, the manner in which Shares subject to Stock Awards are held during the periods they are subject to restrictions and the circumstances under which forfeiture of the Stock Award shall occur by reason of termination of the Participant's employment or service relationship. (b) Upon the satisfaction of any terms, conditions and restrictions prescribed in respect to a Stock Award, or upon the Participant's release from any terms, conditions and restrictions of a Stock Award, as determined by the Administrator, the Company shall release, as soon as practicable, to the Participant or, in the case of the Participant's death, to the personal representative of the Participant's estate or as the appropriate court directs, the appropriate number of Shares. (c) Notwithstanding any other provisions of the Plan, the Administrator may, in its sole discretion, waive the forfeiture period and any other terms, conditions or restrictions on any Stock Award under such circumstances and subject to such terms and conditions as the Administrator shall deem appropriate 12. NON-TRANSFERABILITY OF AWARDS. Unless determined otherwise by the Administrator, an Award may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Participant, only by the Participant. If the Administrator - 8 - makes an Award transferable, such Award shall contain such additional terms and conditions as the Administrator deems appropriate. 13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR ASSET SALE. (a) CHANGES IN CAPITALIZATION. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Award, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Shares have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Award, as well as the price per share of Common Stock covered by each such outstanding Award, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Award. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Participant as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for a Participant to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option or forfeiture provision applicable to any Award shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action. To the extent a repurchase option or forfeiture provision applicable to a Stock Award has not been waived by the Administrator, the Stock Award shall be forfeited automatically immediately prior to the consummation of the proposed action. (c) MERGER OR ASSET SALE. Unless otherwise described in the instrument evidencing the Award, in the event of a merger of the Company with or into another corporation, or the sale of all or substantially all of the assets of the Company, each outstanding Option shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, the Participant shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall - 9 - notify the Participant in writing or electronically that the Option shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. Unless otherwise described in the instrument evidencing the Award, in the event of a merger of the Company with or into another corporation, or the sale of all or substantially all of the assets of the Company, the vesting of Shares subject to Stock Awards shall accelerate, and the repurchase and forfeiture provisions to which such Shares are subject shall lapse, if and to the same extent that the vesting of outstanding Options accelerates in connection with such merger or sale. If Options are to be assumed, continued or substituted by a successor corporation or a Parent or Subsidiary thereof without acceleration upon the occurrence of a merger or sale, the forfeiture provisions to which such Stock Awards are subject shall continue with respect to shares of the successor corporation or a Parent or Subsidiary thereof that may be issued in exchange for such shares. 14. ACQUIRED COMPANY AWARDS. Notwithstanding anything in the Plan to the contrary, the Administrator may grant Awards under the Plan in substitution for awards issued under other plans, or assume under the Plan awards issued under other plans, if the other plans are or were plans of other acquired entities ("Acquired Entities") (or the parent of the Acquired Entity) and the new Award is substituted, or the old award is assumed, by reason of a merger, consolidation, acquisition of property or stock, reorganization or liquidation (the "Acquisition Transaction"). In the event that a written agreement pursuant to which the Acquisition Transaction is completed is approved by the Board and said agreement sets forth the terms and conditions of the substitution for or assumption of outstanding awards of the Acquired Entity, said terms and conditions shall be deemed to be the action of the Administrator, and the persons holding such awards shall be deemed to be Participants. 15. DATE OF GRANT. The date of grant of an Award shall be, for all purposes, the date on which the Administrator makes the determination granting such Award, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Participant within a reasonable time after the date of such grant. 16. AMENDMENT AND TERMINATION OF THE PLAN. - 10 - (a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter, suspend or terminate the Plan. (b) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Participant, unless mutually agreed otherwise between the Participant and the Administrator, which agreement must be in writing and signed by the Participant and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Awards granted under the Plan prior to the date of such termination. 17. CONDITIONS UPON ISSUANCE OF SHARES. (a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to an Award unless the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 18. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 19. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. ADOPTED BY THE BOARD ON DECEMBER 8, 1999. AMENDED BY THE BOARD ON JANUARY 13, 2000 TO ADD STOCK AWARDS AND SECTION 14. PLAN FURTHER AMENDED BY THE BOARD ON FEBRUARY 10, 2000 TO INCREASE THE NUMBER OF SHARES AVAILABLE FOR ISSUANCE (ALTHOUGH THE AGGREGATE NUMBER OF SHARES AVAILABLE REMAINED AT 4,000,000 SHARES). - 11 - EX-10.25 3 EXHIBIT 10.25 AGREEMENT AND PLAN OF MERGER AMONG SHOPNOW.COM INC. SHAMU ACQUISITION, INC. AND UBARTER.COM INC. DATED AS OF JANUARY 20, 2000 CONTENTS
ARTICLE I -THE MERGER.....................................................................................1 1.1 The Merger..............................................................................1 1.2 The Closing.............................................................................2 1.3 Effective Date and Time.................................................................2 1.4 Articles of Incorporation of the Surviving Corporation..................................2 1.5 Bylaws of the Surviving Corporation.....................................................2 1.6 Directors and Officers..................................................................3 1.7 Conversion of Shares....................................................................3 1.7.1 Exchange Ratio...............................................................3 1.7.2 Exchange of Certificates.....................................................6 1.7.3 No Fractional Shares.........................................................7 1.7.4 No Further Transfers.........................................................7 1.8 Amendment to Provide for Alternative Merger Structures..................................7 1.9 Option Grants...........................................................................8 ARTICLE II -REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................................................8 2.1 Organization............................................................................9 2.2 Enforceability..........................................................................9 2.3 Capitalization..........................................................................9 2.4 Subsidiaries and Affiliates.............................................................11 2.5 No Approvals; No Conflicts..............................................................11 2.6 SEC Documents; Financial Statements.....................................................12 2.7 Absence of Certain Changes or Events....................................................14 2.8 Taxes...................................................................................15 2.9 Property................................................................................18 2.10 Contracts...............................................................................19 2.10.1 Material Contracts...........................................................19 2.10.2 Required Consents............................................................20 2.11 Claims and Legal Proceedings............................................................21 2.12 Labor and Employment Matters............................................................21 2.13 Employee Benefit Plans..................................................................22 2.13.1 Employee Benefit Plan Listing................................................22 2.13.2 Documents Provided...........................................................22 2.13.3 Compliance...................................................................23 2.13.4 Qualification................................................................24 2.13.5 Contributions and Premium Payments...........................................24 2.13.6 Related Employers............................................................24 2.13.7 Certain Pension Plans........................................................24 -i- 2.13.8 Post-Termination Benefits....................................................24 2.13.9 Parachute Payments...........................................................25 2.13.10 Suits, Claims and Investigations.............................................25 2.13.11 Payments Resulting from Transactions.........................................25 2.13.12 Definitions..................................................................25 2.14 Intellectual Property...................................................................26 2.14.1 General......................................................................26 2.14.2 Company Technology...........................................................27 2.14.3 Third Party Technology.......................................................27 2.14.4 Trademarks...................................................................28 2.14.5 Intellectual Property Rights.................................................28 2.14.6 Maintenance of Rights........................................................28 2.14.7 Third Party Claims...........................................................29 2.14.8 Infringement by the Company..................................................29 2.14.9 Confidentiality..............................................................29 2.14.10 Warranty Against Defects.....................................................30 2.14.11 Domain Names.................................................................30 2.14.12 Year 2000....................................................................30 2.14.13 Participating Developers.....................................................31 2.15 Corporate Books and Records.............................................................31 2.16 Licenses, Permits, Authorizations, etc..................................................32 2.17 Compliance With Laws....................................................................32 2.18 Insurance...............................................................................32 2.19 Brokers or Finders......................................................................33 2.20 Absence of Questionable Payments........................................................33 2.21 Bank Accounts...........................................................................33 2.22 Customers and Suppliers.................................................................34 2.23 Accounts Receivable.....................................................................34 2.24 Creditors' List.........................................................................34 2.25 Insider Interests.......................................................................34 2.26 Compliance With Environmental Laws......................................................35 2.27 Information Supplied by the Company.....................................................35 2.28 Full Disclosure.........................................................................36 2.29 Hart-Scott-Rodino.......................................................................36 3.1 Organization............................................................................37 3.2 Enforceability..........................................................................37 3.3 Securities..............................................................................37 3.4 No Approvals or Notices Required; No Conflicts With Instruments.........................37 3.5 Information Supplied by ShopNow.com or Merger Sub.......................................38 3.6 Full Disclosure.........................................................................38 3.7 Capitalization..........................................................................39 -ii- 3.8 SEC Documents; Financial Statements.....................................................39 3.9 Compliance With Laws....................................................................40 3.10 Tax Matters.............................................................................40 ARTICLE IV -CONDITIONS PRECEDENT TO OBLIGATIONS OF SHOPNOW.COM AND MERGER SUB.............................41 4.1 Accuracy of Representations and Warranties..............................................41 4.2 Performance of Agreements...............................................................41 4.3 Opinion of Counsel for the Company......................................................42 4.4 Compliance Certificate..................................................................42 4.5 Material Adverse Change.................................................................42 4.6 Approvals and Consents..................................................................42 4.7 Proceedings and Documents; Secretary's Certificate......................................42 4.8 Non-U.S. Real Property Holding Corporation Affidavit....................................43 4.9 Compliance With Laws....................................................................43 4.10 Legal Proceedings.......................................................................43 4.11 Noncompetition Arrangements.............................................................43 4.12 Termination of Certain Agreements.......................................................43 4.13 Exercise or Termination of Stock Purchase Rights; Conversion of Convertible Securities..44 4.14 Company Option Plan.....................................................................44 4.15 Consents to Merger......................................................................44 4.16 Resignations............................................................................44 4.17 Tax Clearance Certificates..............................................................45 4.18 Releases of Liens.......................................................................45 4.19 Stockholder Approval....................................................................45 4.20 Affiliate Letters.......................................................................45 4.21 Voting Agreements.......................................................................45 4.22 S-4.....................................................................................45 4.23 Agreements With Certain Stockholders of the Company.....................................45 4.24 Employment and Consulting Agreements....................................................46 4.25 Lock-Up Agreements......................................................................46 4.26 Tax Opinion.............................................................................46 4.27 No Dissenters Rights....................................................................46 4.28 Board Actions...........................................................................46 ARTICLE V -CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY.............................................47 5.1 Accuracy of Representations and Warranties..............................................47 5.2 Performance of Agreements...............................................................47 5.3 Compliance Certificate..................................................................47 5.4 Legal Proceedings.......................................................................47 -iii- 5.5 Material Adverse Change.................................................................48 5.6 Approvals and Consents..................................................................48 5.7 Compliance With Laws....................................................................48 5.8 Opinion of Counsel......................................................................48 5.9 S-4.....................................................................................48 5.10 Tax Opinion.............................................................................48 ARTICLE VI -COVENANTS.....................................................................................49 6.1 Conduct of Business by the Company Pending the Merger...................................49 6.2 Access to Information; Confidentiality..................................................51 6.3 No Alternative Transactions.............................................................51 6.4 Notification of Certain Matters.........................................................52 6.5 Further Action; Commercially Reasonable Efforts.........................................53 6.6 Publicity...............................................................................53 6.7 Bring-Down Capitalization Schedule......................................................54 6.8 Execution of All Operative Documents....................................................54 6.9 Stockholder Approval....................................................................54 6.10 Preparation of S-4......................................................................54 6.11 ShopNow.com Common Stock................................................................55 6.12 Retirement of Indebtedness..............................................................55 ARTICLE VII -TERMINATION, AMENDMENT AND WAIVER............................................................55 7.1 Termination.............................................................................55 7.2 Effect of Termination...................................................................56 ARTICLE VIII -GENERAL.....................................................................................56 8.1 Survival................................................................................56 8.2 Tax Matters - Reorganization Treatment..................................................57 8.3 Expenses................................................................................57 8.4 Notices.................................................................................57 8.5 Severability............................................................................58 8.6 Entire Agreement........................................................................59 8.7 Assignment..............................................................................59 8.8 Parties in Interest.....................................................................59 8.9 Governing Law; Venue....................................................................59 8.10 Headings................................................................................59 8.11 Counterparts............................................................................60 8.12 Waiver of Jury Trial....................................................................60 8.13 Amendment...............................................................................60 8.14 Waiver..................................................................................60
-iv- EXHIBITS
2 -- Company Disclosure Memorandum 4.3 -- Form of Opinion of Counsel for the Company 4.8 -- FIRPTA Affidavit 4.11 -- Form of Confidentiality, Invention Assignment and Non-Raiding Agreement 4.20 -- Form of Affiliate Letter 4.21 -- Form of Voting Agreement 4.24A -- Form of Employment Agreement 4.24B -- Form of Consulting Agreement 4.25A -- Form of Lock-Up Agreement between ShopNow.com and White 4.25B -- Form of Lock-Up Agreement between ShopNow.com and New Horizons, LP 5.8 -- Form of Opinion of Perkins Coie
-v- AGREEMENT AND PLAN OF MERGER Agreement and Plan of Merger ("AGREEMENT") dated as of January 20, 2000, by and among ShopNow.com Inc., a Washington corporation ("ShopNow.com"), Shamu Acquisition, Inc., a Washington corporation and wholly owned subsidiary of ShopNow.com ("MERGER SUB") and Ubarter.com Inc., a Nevada corporation (the "COMPANY"). RECITALS A. The Company ShopNow.com and Merger Sub believe it advisable and in their respective best interests to effect a merger of the Company and Merger Sub pursuant to this Agreement (the "MERGER"). B. The Board of Directors of the Company have approved this Agreement and the Merger as required by applicable law. C. The Boards of Directors of ShopNow.com and Merger Sub have approved this Agreement and the Merger as required by applicable law. D. It is intended that the Merger will qualify as a reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended (the "CODE"). AGREEMENT In consideration of the terms hereof, the parties hereto agree as follows: ARTICLE I - THE MERGER 1.1 THE MERGER Upon the terms and subject to the conditions hereof, (a) at the Effective Time (as defined in Section 1.3) the separate existence of the Company shall cease and the Company shall be merged with and into Merger Sub (Merger Sub as the surviving corporation after the Merger is sometimes referred to herein as the "SURVIVING CORPORATION") and (b) from and after the Effective Time, the Merger shall have all the effects of a merger under the laws of the state of Washington and the state of Nevada and other applicable law. -1- 1.2 THE CLOSING Subject to the terms and conditions of this Agreement, the closing of the Merger (the "CLOSING") shall take place on the earliest practicable business day (the "CLOSING DATE") after the satisfaction or waiver of the conditions set forth in Articles IV and V at 10 a.m. local time at the offices of Perkins Coie LLP, 1201 Third Avenue, 48th Floor, Seattle, Washington, or such other date, time or location as ShopNow.com and the Company shall agree. 1.3 EFFECTIVE DATE AND TIME On the Closing Date and subject to the terms and conditions hereof, articles of merger and a certificate of merger (the "ARTICLES OF MERGER"), complying with the applicable provisions of the Washington Business Corporation Act ("WASHINGTON LAW") and the Nevada General Corporation Law ("NEVADA LAW") and in such form and executed in such manner as required by Washington Law and Nevada Law, shall be delivered for filing with the Secretary of State of the state of Washington (the "WASHINGTON SECRETARY") and the Secretary of State of the state of Nevada (the "NEVADA SECRETARY"). The Merger shall become effective on the date (the "EFFECTIVE DATE") and at the time (the "EFFECTIVE TIME") of filing of the Articles of Merger or at such other time as may be specified in the Articles of Merger as filed. If the Washington Secretary or the Nevada Secretary requires any changes in the Articles of Merger as a condition to filing or issuing its certificate to the effect that the Merger is effective, ShopNow.com, Merger Sub and the Company will execute any necessary revisions incorporating such changes, provided such changes are not inconsistent with and do not result in any material change in the terms of this Agreement. 1.4 ARTICLES OF INCORPORATION OF THE SURVIVING CORPORATION At the Effective Time, the Articles of Incorporation of Merger Sub shall be the Articles of Incorporation of the Surviving Corporation; provided, however, that Article I thereof shall be amended to read as follows: "The name of this corporation is Ubarter.com Inc." Thereafter, the Articles of Incorporation of the Surviving Corporation may be amended in accordance with their terms and as provided by law. 1.5 BYLAWS OF THE SURVIVING CORPORATION At the Effective Time, the Bylaws of Merger Sub as in effect immediately prior to the Effective Time shall become the Bylaws of the Surviving Corporation. Thereafter, the Bylaws may be amended or repealed in accordance with their terms and the Articles of Incorporation of the Surviving Corporation and as provided by law. -2- 1.6 DIRECTORS AND OFFICERS At the Effective Time, the directors and officers of the Company shall resign and the directors of Merger Sub shall continue in office as the directors of the Surviving Corporation and the officers of Merger Sub shall continue in office as the officers of the Surviving Corporation, and such directors and officers shall hold office in accordance with and subject to the Articles of Incorporation and Bylaws of the Surviving Corporation. 1.7 CONVERSION OF SHARES 1.7.1 EXCHANGE RATIO As of the Effective Time, by virtue of the Merger and without any action on the part of the holders thereof: (a) All shares of any class of capital stock of the Company held by the Company as treasury shares shall be canceled. (b) Each issued and outstanding share of common stock, par value $.001 per share, of the Company (the "COMPANY COMMON STOCK") that is issued and outstanding immediately prior to the Effective Time shall be converted into the right to receive from ShopNow.com a number of shares of ShopNow.com common stock, par value $.001 per share (the "ShopNow.com COMMON STOCK"), determined by dividing (a) the ShopNow.com Base Shares (as defined below) by (b) the Fully Diluted Common Stock Number (as defined below). The quotient derived in Section 1.7.1(b) shall be rounded to three decimal points and shall be referred to herein as the "EXCHANGE RATIO." The "ShopNow.com BASE SHARES" shall mean the total number of shares of ShopNow.com Common Stock to be issued in the Merger, which shall be equal to the number of shares determined by dividing (a) $44,900,000 by (b) $17.31 (the "BASE PRICE"). The "FULLY DILUTED COMMON STOCK NUMBER" shall mean the total number of shares of Company Common Stock outstanding immediately prior to the Effective Time on a fully diluted basis, as set forth on SCHEDULE 2.3 to the Company Disclosure Memorandum, which calculation assumes (x) the exercise on a cash or cashless basis, as the case may be, of all outstanding rights, warrants or options, vested or unvested, to acquire Company Common Stock, regardless of restrictions on exercise or conversion and (y) the conversion of all outstanding securities and notes convertible at any time into Company Common Stock (such rights, warrants, notes, options and convertible securities referenced in clauses (x) and (y) being referred to herein as "STOCK PURCHASE RIGHTS"); provided, however, that the term "Fully Diluted Common Stock Number" shall not include (i) the convertible note referenced in that certain letter -3- agreement dated December 9, 1999 between Momentous Inc. Pension and Trust ("MOMENTOUS") and the Company (the "MOMENTOUS NOTE"), (ii) that certain Convertible Promissory Note in favor of Alpine Capital LLC ("ALPINE CAPITAL") dated August 27, 1999 (the "ALPINE CAPITAL NOTE"), (iii) that certain Convertible Promissory Note, dated December 22, 1999 (the "ShopNow.com Note"), and any (iv) options granted pursuant to that stock option agreement dated July 26, 1999, between Astra Ventures LLC ("ASTRA Ventures") and the Company that are unexercised as of the Effective Time, provided that such options terminate as of the Effective Time by their terms or by later agreement of Astra Ventures. The shares of ShopNow.com Common Stock so issued shall be referred to herein as the "CLOSING SHARES." The number of shares of ShopNow.com Common Stock to be issued at the Closing to each stockholder under this Section 1.7.1(b) shall be calculated by aggregating all shares of Company Common Stock held by each such stockholder, so that such number of shares of ShopNow.com Common Stock to be issued shall be equal to the number of shares of Company Common Stock held by such stockholder multiplied by the Exchange Ratio, with fractional shares rounded up to the nearest whole number pursuant to Section 1.7.3 hereof. (c) The aggregate number of Closing Shares shall be subject to adjustment as follows: (i) In the event that any Company Liability (as defined below) exists as of the date that is immediately prior to the Closing Date, the aggregate number of Closing Shares shall be reduced by that number of shares of ShopNow.com Common Stock determined by dividing the dollar amount of the Company Liability by the Base Price. "COMPANY LIABILITY" shall mean all liabilities, debts or obligations, contingent or otherwise, existing as of the Closing Date immediately prior to the Effective Time, the value of which shall not exceed the value of the ShopNow.com Base Shares (as measured by multiplying the Base Price by the number of ShopNow.com Base Shares), including without limitation, all outstanding liability to (1) Astra Ventures, (2) employees of the Company based on change of control provisions in such employees' respective employment agreements, (3) Alpine Capital, (4) Bob Bagga, as an earn-out under a Share Purchase Agreement among Bob Bagga, International Barter Corp. and Barter Business Exchange Inc., dated February 28, 1999 and promissory note dated March 2, 1999 (the "BBE PURCHASE AGREEMENT AND NOTE"), (5) Momentous and (6) various lessors, lenders and vendors created in connection with the execution of miscellaneous leases and other agreements; provided, however, that Company Liability shall not include, in each case existing at the Closing, (x) any outstanding indebtedness and accrued interest payable to ShopNow.com pursuant to the ShopNow.com Note, (y) any payables or accrued expenses incurred in the ordinary course of business (provided such payables and accrued expenses do not exceed in the -4- aggregate $225,000) and (z) any non-cash or barter trade dollar liabilities. Any outstanding liability referenced in (1) through (6) above shall be deemed a Company Liability in the event such liability is retired or paid off prior to the Effective Time. The dollar amount of Company Liability shall be reduced by any amounts received by the Company from option holders or warrant holders as a result of the cash exercise of stock options or warrants between the date hereof and the Effective Date. The Company shall cause to be prepared and delivered to ShopNow.com, on the date that is two days immediately prior to the Closing Date, a schedule, certified by the Company's Chief Financial Officer and in form and substance satisfactory to ShopNow.com, as to the dollar amount of the Company Liability, which schedule shall include a break down of the dollar amounts of each liability, debt and obligation comprising the Company Liability. (ii) In the event ShopNow.com reasonably determines between the date hereof and March 1, 2000 as a result of its financial due diligence investigation and tax assessment of the Company that the Company and its subsidiaries, taken as a whole, have liabilities or obligations (whether absolute, accrued or contingent) that are not (a) accrued or reserved against in the Company Balance Sheet (as defined in Section 2.6) or reflected in the notes thereto, (b) disclosed in the financial statements of the Company filed as a part of the Company SEC Documents (as defined in Section 2.6) or (c) disclosed in the Company Disclosure Memorandum (as defined in the preamble to Article II) (an "UNDISCLOSED LIABILITY"), then the aggregate number of Closing Shares shall be reduced by that number of shares of ShopNow.com Common Stock determined by dividing the aggregate dollar amount of such Undisclosed Liabilities (up to $1,000,000) by the Base Price. In the event that ShopNow.com's accountants and the Company's accountants disagree as to whether a liability or obligation is an Undisclosed Liability (a "DISPUTED LIABILITY"), then ShopNow.com and the Company shall cause such accountants to promptly choose an independent financial expert mutually agreeable to the Company's accountants and ShopNow.com's accountants, and such independent financial expert shall determine whether the Disputed Liability is an Undisclosed Liability. The fees of such independent financial expert shall be paid by ShopNow.com, provided, however, that if such independent financial expert determines that the Disputed Liability is an Undisclosed Liability, the amount of such fees shall reduce the number of Closing Shares by treating such amount as if it were an Undisclosed Liability. Undisclosed payables and expenses incurred in the ordinary course of business shall not be deemed Undisclosed Liabilities, provided that such payables and expenses do not exceed $225,000. (d) Holders of shares of Company Common Stock who have complied with all the requirements for perfecting dissenters' rights, as required under -5- Nevada Law, shall be entitled to their rights under Nevada Law with respect to such shares (the "DISSENTING Shares"). Notwithstanding the foregoing, if any holder of Dissenting Shares shall effectively withdraw or lose (through failure to perfect or otherwise) the right to dissent, then, as of the later of the Effective Time and the occurrence of such event, such holder's shares shall automatically be converted into and represent the right to receive the shares of ShopNow.com Common Stock to which such holder is then entitled under this Agreement and Nevada Law, without interest thereon and upon surrender of the certificate representing such shares. Notwithstanding any provision of this Agreement to the contrary, any Dissenting Shares held by a Shareholder who has perfected dissenters' rights for such shares in accordance with Nevada Law shall not be converted into ShopNow Common Stock pursuant to this Section 1.7.1. 1.7.2 EXCHANGE OF CERTIFICATES (a) As soon as practicable after the Effective Time, ShopNow.com shall cause Continental Stock Transfer & Trust (the "EXCHANGE AGENT") to mail to each holder of record of Company Common Stock as of the Effective Time (i) a letter of transmittal (which shall be in customary form and specify that delivery shall be effected, and risk of loss and title to the certificates of Company Common Stock shall pass, only upon delivery of such certificates to the Exchange Agent) and (ii) instructions for use in effecting the surrender of such certificates in exchange for certificates representing ShopNow.com Common Stock. Upon surrender of a certificate of Company Common Stock for cancellation to the Exchange Agent, together with a duly executed letter of transmittal and such other documents as the Exchange Agent shall require, the holder of such certificate shall be entitled to receive in exchange therefor the number of whole shares of ShopNow.com Common Stock to which the holder of Company Common Stock is entitled pursuant to Section 1.7.1 hereof. The certificate so surrendered shall forthwith be canceled. Notwithstanding any other provision of this Agreement, until holders of certificates of Company Common Stock have surrendered them for exchange as provided herein, (i) no dividends or other distributions shall be paid with respect to any shares represented by such certificates, and (ii) without regard to when such certificates are surrendered for exchange as provided herein, no interest shall be paid on any dividends or other distributions. Upon surrender of a certificate of Company Common Stock, there shall be paid to the holder of such certificate the amount of any dividends or other distributions which theretofore became payable, but which were not paid by reason of the foregoing, with respect to the number of whole shares of ShopNow.com Common Stock represented by the certificate or certificates issued upon such surrender. If any certificate for ShopNow.com Common Stock is to be issued in a name other than in which the certificate of Company Common Stock surrendered in exchange therefore is -6- registered, it shall be a condition of such exchange that the person requesting such exchange pay any transfer or other taxes required by reason of the issuance of certificates for such shares of ShopNow.com Common Stock in a name other than that of the registered holder of the certificate surrendered, or establish to the satisfaction of the Surviving Corporation that such tax has been paid or is not applicable. In connection with its undertakings pursuant to this Section 1.7.2, the Exchange Agent shall be entitled to withhold any income taxes as required by the Code. (b) The shares of ShopNow.com Common Stock that each stockholder shall be entitled to receive pursuant to the Merger shall be deemed to have been issued at the Effective Time, and no interest shall accrue on any of the Closing Shares. 1.7.3 NO FRACTIONAL SHARES No certificates or scrip representing fractional shares of ShopNow.com Common Stock shall be issued by virtue of the Merger. The aggregate number of shares of ShopNow.com Common Stock a stockholder is entitled to receive pursuant to Section 1.7.1(b) shall be rounded to the nearest whole number of shares, with .5 being rounded up. 1.7.4 NO FURTHER TRANSFERS After the Effective Time, there shall be no transfers of any shares of Company Common Stock on the stock transfer books of the Surviving Corporation. Any ShopNow.com Common Stock made available to the Exchange Agent and not exchanged for certificates of Company Common Stock within one year after the Effective Time and any dividends and distributions held by the Exchange Agent for payment or delivery to the holders of unsurrendered certificates representing Company Common Stock and unclaimed at the end of such one year period shall be redelivered or repaid by the Exchange Agent to ShopNow.com, after which time any holder of certificates of Company Common Stock who has not theretofore delivered or surrendered such certificates to the Exchange Agent, subject to applicable law, shall look as a general creditor only to ShopNow.com for payment of the ShopNow.com Common Stock and any such dividends or distributions. Notwithstanding any provision of this Agreement, none of ShopNow.com, the Exchange Agent, the Surviving Corporation or any other party hereto shall be liable to any holder of Company Common Stock for any ShopNow.com Common Stock or dividends or distributions delivered to a public official pursuant to applicable abandoned property, escheat or similar law. -7- 1.8 AMENDMENT TO PROVIDE FOR ALTERNATIVE MERGER STRUCTURES If at any time prior to the Closing Date, ShopNow.com elects to have the Company be the Surviving Corporation or elects to have the Company merge directly into ShopNow.com or to have a different subsidiary of ShopNow.com merge with the Company in a forward or reverse triangular merger, the parties shall promptly enter into an amendment to this Agreement to so provide, so long as such action does not result in a breach of a representation or warranty set forth in Article II, or the inability to satisfy any of the conditions set forth in Articles IV and V hereof. 1.9 OPTION GRANTS No later than thirty days after the Effective Time, ShopNow.com will act to grant nonqualified stock options (the "NEW OPTIONS") under its Amended and Restated 1999 Non-Officer Stock Option Plan, or such other plan having substantially similar terms as ShopNow.com shall determine in its sole discretion, to acquire an aggregate of 600,000 shares of ShopNow.com Common Stock in the numbers specified and to the members of the management of the Company immediately prior to the Effective Time (the "MANAGEMENT MEMBERS") and to employees of the Company immediately prior to the Effective Time (the "RETAINED EMPLOYEES"), who have been offered and accepted employment with ShopNow.com or the Surviving Corporation and commence employment with ShopNow.com or the Surviving Corporation after the Effective Time (with the allocation of such grants among such Management Members and Retained Employees to be mutually acceptable to ShopNow.com and Liad Meidar and Steven White, except that 250,000 of such New Options shall be allocated to Liad Meidar). Such New Options shall have an exercise price of $15.58 per share. One-third of the New Options shall be vested upon the one-year anniversary of the Closing Date, and the remaining balance of the New Options shall vest on a quarterly basis over a period of two years following the one-year anniversary of the Closing Date. ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as is otherwise set forth with appropriate Section references in the Company Disclosure Memorandum attached as EXHIBIT 2 (the "COMPANY DISCLOSURE MEMORANDUM"), each of which exceptions shall specifically identify or cross-reference the provision of this Article II to which such exception relates, and in order to induce ShopNow.com and Merger Sub to enter into and perform this Agreement and the other agreements and documents attached hereto as exhibits that are required to be completed and/or executed pursuant to this Agreement (collectively, the "OPERATIVE DOCUMENTS"), the Company represents and warrants to ShopNow.com and Merger Sub -8- as of the date of this Agreement and as of the Closing Date as follows in this Article II. For the purposes of Sections 2.7 through 2.29 of this Article II, the term "Company" shall refer to the Company and all of its subsidiaries. 2.1 ORGANIZATION The Company is a corporation duly organized and validly existing under the laws of the state of Nevada. The Company's subsidiaries are duly organized and validly existing under the laws of the jurisdictions in which they are organized. The Company has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement and the Operative Documents delivered by the Company or to which the Company is a party, and to consummate, subject to the approval of the Merger by the stockholders of the Company, the transactions contemplated hereby and thereby. The Company and its subsidiaries are duly qualified and licensed as a foreign corporations to do business and are in good standing in each jurisdiction in which the character of the properties occupied, owned or held under lease or the nature of the business conducted by the Company and its subsidiaries makes such qualification or licensing necessary, except where the failure to be so qualified or licensed would not have a material adverse effect on the financial condition, property, business or results of operations of the Company and its subsidiaries, taken as a whole. 2.2 ENFORCEABILITY All corporate action on the part of the Company and its directors and stockholders necessary for the authorization, execution, delivery and performance of this Agreement and the Operative Documents delivered by the Company or to which the Company is a party, the consummation of the Merger, and the performance of all the Company's obligations under this Agreement and the Operative Documents delivered by the Company or to which the Company is a party, has been taken, subject to the approval of the Merger by the stockholders of the Company. This Agreement and each of the Operative Documents to which the Company is a party, has been duly executed and delivered by the Company and this Agreement is, and each of the Operative Documents delivered by the Company or to which the Company is a party is, a legal, valid and binding obligation of the Company, enforceable against it in accordance with its terms. -9- 2.3 CAPITALIZATION (a) The authorized capital stock of the Company consists of 25,000,000 shares of Company Common Stock, par value $.001 per share and 10,000,000 shares of Preferred Stock, none of which shares of Preferred Stock are issued and outstanding. (b) The issued and outstanding capital stock of the Company consists solely of 6,077,253 shares of Company Common Stock (collectively, the "OUTSTANDING SHARES"). The Outstanding Shares are, and immediately prior to the Closing will be, duly authorized and validly issued, fully paid and nonassessable, and issued in compliance with all applicable federal and state securities laws. True and correct copies of the stock records of the Company showing all issuances of capital stock of the Company since inception have been delivered to ShopNow.com or its counsel. (c) As of the date of this Agreement and as of the Closing Date, and except as contemplated by this Agreement, there are no outstanding rights of first refusal or offer, preemptive rights, Stock Purchase Rights or other agreements, either directly or indirectly, for the purchase or acquisition from the Company or any stockholder of any shares of Company Common Stock or any securities convertible into or exchangeable for shares of Company Common Stock other than (i) options to purchase up to (A) 679,000 shares of Company Common Stock that have been granted under the Company's 1998 Stock Option Plan (the "COMPANY OPTION PLAN"), (B) 630,000 shares of Company Common Stock that have been granted pursuant to a stock option agreement dated July 26, 1999, between Astra Ventures and the Company, (C) 40,000 shares of Company Common Stock that have been granted pursuant to a stock option agreement between Kevin Andersen and the Company, (ii) 1,333,333 shares of Company Common Stock issuable upon conversion of that certain Convertible Promissory Note dated August 27, 1999 in favor of Alpine Capital LLC (the "ALPINE CAPITAL NOTE"), (iii) 183,333 shares of Company Common Stock issuable upon exercise of that certain warrant dated August 27, 1999 issued to Alpine Capital LLC (the "ALPINE CAPITAL WARRANT"), (iv) 706,000 shares of Company Common Stock issuable upon exercise of outstanding E Warrants and (v) shares of Company Common Stock issuable upon conversion of the Momentous Note. Set forth on SCHEDULE 2.3 to the Company Disclosure Memorandum is a spreadsheet accurately reflecting the number of options and other Stock Purchase Rights outstanding, the grant or issue dates, vesting schedules and exercise or conversion prices thereof and, in each case, the identities of the holders and an indication of their relationships to the Company (if any exist other than a security holder). The Company has delivered to ShopNow.com or its counsel true and correct copies of the Company Option Plan, all stock option agreements, board resolutions and exercise documentation relating to options granted thereunder and granted to Astra Ventures and Kevin Anderson and all agreements with -10- respect to Stock Purchase Rights. SCHEDULE 2.3 to the Company Disclosure Memorandum also identifies all options, warrants or other Stock Purchase Rights that have been offered in connection with any employee or consulting agreement but that, as of the date hereof, have not been issued or granted. (d) Except as contemplated by this Agreement, the Company is not a party or subject to any agreement or understanding and there is no agreement or understanding between any Persons (as defined in Section 2.5) that affects or relates to the voting or giving of written consents with respect to any securities of the Company or the voting by any director of the Company. No stockholder or any affiliate thereof is indebted to the Company, and the Company is not indebted to any stockholder or any affiliate thereof. The Company is not under any contractual or other obligation to register any of its presently outstanding securities or any of its securities that may hereafter be issued. (e) All rights of refusal, co-sale rights and registration rights granted by the Company with respect to the Company Common Stock or Stock Purchase Rights of the Company are described on SCHEDULE 2.3 to the Company Disclosure Memorandum. (f) All options, Stock Purchase Rights and shares of Company Common Stock have been granted or issued at fair market value, as determined by the Company's Board of Directors at the date of grant or issuance. 2.4 SUBSIDIARIES AND AFFILIATES The Company does not own, directly or indirectly, any ownership, equity, or voting interest in, any corporation, partnership, joint venture or other entity, and has no agreement or commitment to purchase any such interest. 2.5 NO APPROVALS; NO CONFLICTS The execution, delivery and performance of this Agreement and the Operative Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby will not (a) constitute a violation (with or without the giving of notice or lapse of time, or both) of any provision of law or any judgment, decree, order, regulation or rule of any court or other governmental authority applicable to the Company; (b) require any consent, approval or authorization of, or declaration, filing or registration with, any person, corporation, partnership, joint venture, association, organization, other entity or governmental or regulatory authority (a -11- "PERSON"), except for (i) approval by the stockholders of the Company, (ii) the filing of all documents necessary to consummate the Merger with the Washington Secretary and the Nevada Secretary, (iii) the filing of a premerger notification report and all other required documents by ShopNow.com and the Company, and the expiration of all applicable waiting periods, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR ACT"), and (iv) any filings with the Securities and Exchange Commission (the "SEC") including such reports and information as may be required under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), the Securities Act and the rules and regulations promulgated by the SEC under the Exchange Act or the Securities Act and the declaration of the effectiveness of the S-4 (as defined in Section 2.27) by the SEC; (c) result in a default under (with or without the giving of notice or lapse of time, or both), or acceleration or termination of, or the creation in any party of the right to accelerate, terminate, modify or cancel, any agreement, lease, note or other restriction, encumbrance, obligation or liability to which the Company is a party or by which it is bound or to which its assets are subject; (d) result in the creation of any liens, mortgages, pledges, deeds of trust, security interests, charges, encumbrances or other adverse claims of interest of any kind (each, an "ENCUMBRANCE") upon any assets of the Company or the Outstanding Shares; (e) conflict with or result in a breach of or constitute a default under any provision of the Company's Articles of Incorporation or Bylaws, or (f) invalidate or adversely affect any permit, license or authorization or status used in the conduct of the Company's business. 2.6 SEC DOCUMENTS; FINANCIAL STATEMENTS (a) The Company has filed all forms, reports and documents required to be filed by it with the SEC since June 8, 1998 (the date the Company first became a reporting Company under the Exchange Act) through the date of this Agreement (collectively, the "COMPANY SEC DOCUMENTS"). As of their respective filing dates, the Company SEC Documents complied in all material respects with the requirements of the Exchange Act or the Securities Act, as the case may be, and the rules and regulations of the SEC thereunder applicable to such Company SEC Documents, and none of the Company SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were -12- made, not misleading. As of their respective filing dates, the financial statements of the Company included in the Company SEC Documents (the "COMPANY FINANCIAL STATEMENTS") complied as to form in all material respects with all applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto and were prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied (except as may be indicated in the notes thereto) and fairly presented, in all material respects, the consolidated financial position of the Company and its subsidiaries as at the dates thereof and the results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal, recurring audit adjustments not material in scope or amount). There has been no change in the Company's accounting policies or the methods of making accounting estimates or changes in estimates that are material to the Company Financial Statements, except as described in the notes thereto. The balance sheet of the Company as of September 30, 1999 is herein referred to as the "COMPANY BALANCE SHEET". (b) The Company has delivered to ShopNow.com copies of the Company's unaudited consolidated balance sheet as of September 30, 1999, and income statement and statement of cash flows for the period ended September 30, 1999. Such financial statements: (i) are in accordance with the books and records of the Company; (ii) fairly present in all material respects the Company's financial condition at the date therein indicated and the results of operations for the period therein indicated and the results of operations for the period therein specified; and (iii) have been prepared in accordance with GAAP applied on a consistent basis (except for the absence of any footnotes required by GAAP). (c) The Company has heretofore furnished to ShopNow.com a complete and correct copy of any amendments or modifications, which have not yet been filed with the SEC but which are required to be filed, to agreements, documents or other instruments which previously had been filed by the Company with the SEC pursuant to the Securities Act or the Exchange Act. (d) The Company and its subsidiaries, taken as a whole, have no liabilities or obligations (whether absolute, accrued or contingent) except (i) liabilities, obligations or contingencies that are accrued or reserved against in the Company Balance Sheet or reflected in the notes thereto or disclosed in the financial statements of the Company filed as a part of the Company SEC Documents, (ii) liabilities, obligations or contingencies that would not have a material adverse effect on the business, operations, prospects or financial condition of the Company, or (iii) additional liabilities, obligations or contingencies reserved against since the date of the Company Balance -13- Sheet that (x) have arisen in the ordinary course of business and (y) are accrued or reserved against on the books and records of the Company and its subsidiaries. (e) Except as disclosed in the Company SEC Documents as filed and amended before the date hereof and as contemplated by this Agreement, since September 30, 1999, no material adverse change in the business, financial condition, results of operations or prospects of Company has occurred. 2.7 ABSENCE OF CERTAIN CHANGES OR EVENTS Except for transactions specifically contemplated in this Agreement, since the date of the Company Balance Sheet, neither the Company nor any of its officers or directors in their representative capacities on behalf of the Company have: (a) taken any action or entered into or agreed to enter into any transaction, agreement or commitment other than in the ordinary course of business; (b) forgiven or canceled any indebtedness or waived any claims or rights of material value (including, without limitation, any indebtedness owing by any stockholder, officer, director, employee or affiliate of the Company); (c) granted any increase in the compensation of directors, officers, employees or consultants; (d) suffered any change having a material adverse effect on the Company's business operations, assets, liabilities (absolute, accrued, contingent or otherwise), condition (financial or otherwise) or prospects; (e) borrowed or agreed to borrow any funds, incurred or become subject to, whether directly or by way of assumption or guarantee or otherwise, any obligations or liabilities (absolute, accrued, contingent or otherwise) in excess of $10,000 individually or in excess of $20,000 in the aggregate, except liabilities and obligations that are incurred in the ordinary course of business and consistent with past practice, or increased, or experienced any change in any assumptions underlying or methods of calculating, any bad debt, contingency or other reserves; (f) paid, discharged or satisfied any material claims, liabilities or obligations (absolute, accrued, contingent or otherwise) other than the payment, discharge or satisfaction in the ordinary course of business and consistent with past practice of claims, liabilities and obligations reflected or reserved against in the Company Balance Sheet or incurred in the ordinary course of business and consistent with past practice since the date of the Company Balance Sheet, or prepaid any -14- obligation having a fixed maturity of more than 90 days from the date such obligation was issued or incurred; (g) knowingly permitted or allowed any of its property or assets (real, personal or mixed, tangible or intangible) to be subjected to any Encumbrance; (h) purchased or sold, transferred or otherwise disposed of any of its material properties or assets (real, personal or mixed, tangible or intangible); (i) disposed of or permitted to lapse any rights to the use of any trademark, trade name, patent or copyright, or disposed of or disclosed to any Person without obtaining an appropriate confidentiality agreement from any such Person any trade secret, formula, process or know-how not theretofore a matter of public knowledge; (j) made any single capital expenditure or commitment in excess of $10,000 for additions to property, plant, equipment or intangible capital assets or otherwise or made aggregate capital expenditures in excess of $20,000 for additions to property, plant, equipment or intangible capital assets or otherwise; (k) made any change in accounting methods or practices or internal control procedure; (l) issued any capital stock or other securities, or declared, paid or set aside for payment any dividend or other distribution in respect of its capital stock, or redeemed, purchased or otherwise acquired, directly or indirectly, any shares of capital stock or other securities of the Company, or otherwise permitted the withdrawal by any of the holders of Company Common Stock of any cash or other assets (real, personal or mixed, tangible or intangible), in compensation, indebtedness or otherwise, other than payments of compensation in the ordinary course of business and consistent with past practice; (m) paid, loaned or advanced any amount to, or sold, transferred or leased any properties or assets (real, personal or mixed, tangible or intangible) to any of the stockholders or any of the Company's officers, directors or employees or any affiliate of any of the stockholders of the Company or of the Company's officers, directors or employees, except compensation paid to officers and employees at rates not exceeding the rates of compensation paid during the fiscal year last ended and except for advances for travel and other business-related expenses; or (n) agreed, whether in writing or otherwise, to take any action described in this Section 2.7. -15- 2.8 TAXES (a) (i) All Tax Returns (as defined below) required to be filed by or on behalf of the Company have been timely filed and all such Tax Returns were (at the time they were filed) and are true, correct and complete in all respects; (ii) all Taxes (as defined below) of the Company (whether or not reflected on any Tax Return) have been fully and timely paid; (iii) no waivers of statutes of limitation have been given or requested with respect to the Company in connection with any Tax Returns covering the Company with respect to any Taxes payable by it; (iv) no taxing authority in a jurisdiction where the Company does not file Tax Returns has made a claim, assertion or threat to the Company that the Company is or may be subject to taxation by such jurisdiction, and the Company has never been subject to state taxes (other than payroll taxes that were fully and timely withheld and paid) in any state other than Washington; (v) the Company has duly and timely withheld from employee salaries, wages and other compensation and paid over to the appropriate governmental authority all amounts required to be so withheld and paid over for all periods under all applicable laws; (vi) there are no liens with respect to Taxes on any of the Company's property or assets other than liens for current Taxes not yet payable; (vii) there are no Tax rulings, requests for rulings, or closing agreements relating to the Company that could affect the liability for Taxes or the amount of taxable income of the Company for any period (or portion of a period) after the date hereof; and (viii) any adjustment of Taxes of the Company made by the IRS (as defined below) in any examination that is required to be reported to the appropriate state, local or foreign taxing authorities has been reported, and any additional Taxes due with respect thereto have been paid. (b) Neither the Company nor any other Person on behalf of the Company (i) has filed a consent pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by the Company; (ii) has executed or entered into a closing agreement pursuant to Section 7121 of the Code or any predecessor provision thereof or any similar provision of state, local or foreign law; or (iii) has agreed to or is required to make any adjustments pursuant to Section 481(a) of the Code or any similar provision of state, local or foreign law by reason of a change in accounting method initiated by the Company or has notice that a governmental authority has proposed any such adjustment or change in accounting method. (c) There is no outstanding dispute or claim concerning any Tax liability of the Company, nor to the knowledge of the Company is any such claim or dispute pending. SCHEDULE 2.8 to the Company Disclosure Memorandum lists all Tax Returns filed with respect to the Company for taxable periods ended on or after the Company's -16- inception or the inception of any predecessor that have been audited, and indicates those Tax Returns that currently are the subject of audit. The Company has delivered to ShopNow.com correct and complete copies of all Tax Returns, examination reports and statements of deficiencies assessed against or agreed to by the Company since the Company's inception. (d) The Company has not been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. (e) The Company is not a party to any Tax allocation or sharing agreement. The Company (i) has not been a member of a Tax Group (as defined below) filing a consolidated income Tax Return under Section 1501 of the Code (or any similar provision of state, local or foreign law) and (ii) does not have any liability for Taxes of any Person under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local or foreign law) or by operation of law or as a transferee or successor by contract or otherwise. (f) The unpaid Taxes of the Company (i) did not, as of December 31, 1999, exceed the reserve for Tax liability set forth on the face (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) of the Company Balance Sheet and (ii) do not exceed that reserve as adjusted for the passage of time and operations in the ordinary course of business through the Closing Date. (g) The aggregate net income tax losses (including net operating losses) of the Company have exceeded its taxable income for all periods and there has been no ownership change, as defined in Section 382(g) of the Code (or any comparable provision of state or local or foreign law), with respect to the Company during or after any taxable period in which the Company incurred a net operating loss. The Company has no liability for unpaid income taxes. (including any liability for penalties or interest with respect to such taxes). The Company has never owed income taxes for any tax year (including the portion of the tax year ending on the date hereof). (h) All options that the Company has treated as incentive stock options under Section 421 of the Code meet the requirements of Section 422 of the Code. As used in this Agreement, the following terms shall have the following meanings: "TAXES" means all foreign, federal, state, county or local taxes, charges, fees, levies, imposts, duties and other assessments, including, but not limited to, any income, -17- alternative minimum or add-on, estimated, gross income, gross receipts, sales, use, transfer, transactions, intangibles, ad valorem, value-added, franchise, registration, title, license, capital, paid-up capital, profits, withholding, payroll, employment, excise, severance, stamp, occupation, premium, real property, recording, personal property, federal highway use, commercial rent, environmental (including, but not limited to, taxes under Section 59A of the Code) or windfall profit tax, custom, duty or other tax, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest, penalties or additions to tax; and "TAX" means any of the foregoing Taxes. "TAX GROUP" means any federal, state, local or foreign consolidated, affiliated, combined, unitary or other similar group of which the Company is now or was formerly a member. "TAX RETURNS" means any return, declaration, report, claim or refund, information return, statement or other similar document relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. 2.9 PROPERTY (a) The Company owns no real property other than the leasehold interests described on SCHEDULE 2.9(a) to the Company Disclosure Memorandum (the "REAL PROPERTY"). The Company has delivered to ShopNow.com or its counsel true and complete copies of all written leases, subleases, rental agreements, contracts of sale, tenancies or licenses relating to the Real Property and written summaries of the terms of any oral leases, subleases, rental agreements, contracts of sale, tenancies or licenses to which the Real Property is subject. (b) SCHEDULE 2.9(b) to the Company Disclosure Memorandum contains a complete and accurate list of each item of personal property having a value in excess of $10,000 that is owned, leased, rented or used by the Company (the "PERSONAL PROPERTY"); provided that such list need not describe the Technology or the IP Rights (as defined in Sections 2.14.2 and 2.14.5, respectively), listed on SCHEDULE 2.14 to the Company Disclosure Memorandum. The Company has delivered to ShopNow.com true and complete copies of all leases, subleases, rental agreements, contracts of sale, tenancies or licenses to which the Personal Property is subject. The gross value of the Company's assets (including the assets of Cascade Trade Association) at the time of the Company's reincorporation as a Nevada corporation did not exceed $500,000. (c) The Real Property and the Personal Property include all the properties and assets (whether real, personal or mixed, tangible or intangible) (other than, in the -18- case of the Personal Property, property rights with an individual value of less than $10,000 and the Technology and IP Rights) reflected in the Company Balance Sheet. The Real Property and the Personal Property include all material property used in the business of the Company, other than the Technology and IP Rights. The Company's offices and other structures and its Personal Property are in good operating condition and repair, normal wear and tear excepted, are adequate for the uses to which they are being put, and, to the Company's knowledge, comply in all material respects with applicable safety and other laws and regulations. (d) The Company's leasehold interest in each parcel of the Real Property is free and clear of all Encumbrances. To the Company's knowledge, each lease of any portion of the Real Property is valid, binding and enforceable in accordance with its terms against the parties thereto and against any other Person with an interest in such Real Property, the Company has performed in all material respects all obligations imposed on it thereunder, and neither the Company nor, to the knowledge of the Company, any other party thereto is in default thereunder, nor is there any event that with notice or lapse of time, or both, would constitute a default thereunder by the Company or, to the knowledge of the Company, by any other party. The Company has not granted any lease, sublease, tenancy or license of, or entered into any rental agreement or contract of sale with respect to, any portion of the Real Property. (e) The Personal Property is free and clear of all Encumbrances, and, other than leased Personal Property that is so noted on the list supplied pursuant to Section 2.9(b), the Company owns such Personal Property. To the Company's knowledge, each lease, license, rental agreement, contract of sale or other agreement to which the Personal Property is subject is valid, binding and enforceable in accordance with its terms against the parties thereto, the Company has performed in all material respects all obligations imposed on it thereunder, and neither the Company nor, to the knowledge of the Company, any other party thereto is in default thereunder, nor is there any event that with notice or lapse of time, or both, would constitute a default by the Company or, to the knowledge of the Company, any other party thereunder. The Company has not granted any lease, sublease, tenancy or license of any portion of the Personal Property, except in the ordinary course of business. 2.10 CONTRACTS 2.10.1 MATERIAL CONTRACTS As of the date of this Agreement, all of the Company's "material contracts" as such term is defined under Item 601 of Regulation S-K, have been filed under the Exchange Act. Except to the extent that such agreements have expired by their own -19- terms, each agreement disclosed by the Company under the Exchange Act is in full force and effect, except where the failure to be in full force and effect would not have a material adverse affect on the business condition of the Company. None of the parties to any of such agreements have terminated, except when such agreements have expired under their own terms. The Company has provided to ShopNow.com lease documents for any real or personal property in which the amount of payments that the Company is required to make on an annual basis exceeds $20,000 and that have not been filed as an exhibit to any Company SEC Documents. Except as set forth on SCHEDULE 2.10.1 to the Company Disclosure Memorandum and the Company SEC Documents, the Company has no (a) contracts with directors, officers, stockholders, employees, agents, consultants, advisors, salespeople, sales representatives, distributors or dealers that cannot be canceled by the Company within 30 days' notice without liability, penalty or premium, any agreement or arrangement providing for the payment of any bonus or commission based on sales or earnings, or any compensation agreement or arrangement affecting or relating to former employees of the Company; (b) employment agreement, whether express or implied, or any other agreement for services that contains severance or termination pay liabilities or obligations; (c) noncompetition agreement or other arrangement that would prevent the Company from carrying on its business anywhere in the world; (d) notice that any party to any material contract intends to cancel, terminate or refuse to renew such contract (if such contract is renewable) or materially modify such contract; (e) material dispute with any of its suppliers, material customers, distributors, OEM resellers, licensors or licensees; (f) product distribution agreement, development agreement or license agreement as licensor or licensee (except for standard nonexclusive software licenses granted to end-user customers in the ordinary course of business, the form of which has been provided to ShopNow.com, or standard licenses purchased by the Company for off-the-shelf software); (g) joint venture contract or arrangement or any other agreement that involves a sharing of profits with other persons; -20- (h) instrument evidencing indebtedness for borrowed money by way of a direct loan, sale of debt securities, purchase money obligation, conditional sale or guarantee, or otherwise, except for trade indebtedness incurred in the ordinary course of business, and except as disclosed in the Company Financial Statements; and (i) agreements or commitments to provide indemnification, except as provided in the Company's Articles of Incorporation, Bylaws and under Nevada Law. 2.10.2 REQUIRED CONSENTS The execution and delivery of this Agreement and the performance of the obligations of the Company hereunder will not constitute a default under any material contracts or agreements to which the Company is currently a party or by which the Company currently is bound and do not require the consent or waiver of any other party to any such contract or agreement, except for those consents and/or waivers listed on SCHEDULE 2.10.2 to the Company Disclosure Memorandum, all of which will be obtained on or prior to the Closing. 2.11 CLAIMS AND LEGAL PROCEEDINGS Except as set forth on SCHEDULE 2.11 and SCHEDULE 2.14 to the Company Disclosure Memorandum, there are no claims, actions, suits, arbitrations, mediations, investigations or proceedings pending or, to the knowledge of the Company, threatened against the Company before or by any court or governmental or nongovernmental department, commission, board, bureau, agency or instrumentality, or any other Person. To the knowledge of the Company, except as set forth on SCHEDULE 2.11 and SCHEDULE 2.14 to the Company Disclosure Memorandum, there is no valid basis for any claim, action, suit, arbitration, proceeding or investigation before or by any Person. There are no outstanding or unsatisfied judgments, orders, decrees or stipulations to which the Company is a party. SCHEDULE 2.11 to the Company Disclosure Memorandum sets forth a description of any material disputes that have been settled or resolved by litigation or arbitration since the Company's inception. 2.12 LABOR AND EMPLOYMENT MATTERS There are no material labor disputes, employee grievances or disciplinary actions pending or, to the knowledge of the Company, threatened against or involving the Company or any of its present or former employees. The Company has complied in all material respects with all provisions of law relating to employment and employment practices, terms and conditions of employment, wages and hours. The Company is not engaged in any unfair labor practice and has no liability for any arrears of wages or Taxes or penalties for failure to comply with any such provisions of law. -21- There is no labor strike, dispute, slowdown or stoppage pending or, to the knowledge of the Company, threatened against or affecting the Company, and the Company has not experienced any work stoppage or other labor difficulty since its incorporation. No collective bargaining agreement is binding on the Company. The Company has no knowledge of any organizational efforts presently being made or threatened by or on behalf of any labor union with respect to employees of the Company. Each employee, officer and consultant of the Company has executed a nondisclosure agreement in the form provided to ShopNow.com. To the knowledge of the Company, no employee (or person performing similar functions) of the Company is in violation of any such agreement or any employment agreement, noncompetition agreement, patent disclosure agreement, invention assignment agreement, proprietary information agreement or other contract or agreement relating to the relationship of such employee with the Company or any other party. SCHEDULE 2.12 to the Company Disclosure Memorandum lists (a) the names and current compensation amounts of all directors and officers of the Company; (b) the wage rates for non-salaried and non-officer salaried employees of the Company by classification, and all union contracts (if any); (c) all group insurance programs in effect for employees of the Company; and (d) the names and current compensation packages of all independent contractors and consultants of the Company. The Company is not in default with respect to any of its obligations referred to in clause (b) above and has no, and will not incur any, obligation or liability for severance or back pay owed through or by virtue of the Merger. Except as disclosed on SCHEDULE 2.12 to the Company Disclosure Memorandum, all employees of the Company are employed on an "at will" basis, and are eligible to work and are lawfully employed in the United States. 2.13 EMPLOYEE BENEFIT PLANS 2.13.1 EMPLOYEE BENEFIT PLAN LISTING SCHEDULE 2.13.1 to the Company Disclosure Memorandum contains a complete and accurate list of all Employee Benefit Plans (as defined below). The Company does not have any agreement, arrangement, commitment or obligation to create, enter into or contribute to any additional Employee Benefit Plan or to modify any existing Employee Benefit Plan. There has been no amendment, interpretation or other announcement or communication (written or oral) by the Company (or any other Person) relating to, or change in participation or coverage under, any Employee Benefit Plan that, either alone or together with other such occurrences or events, could materially increase the expense of maintaining the Employee Benefit Plans above the level of expense incurred with respect thereto for the most recent fiscal -22- year included in the Company Financial Statements. The terms of each Employee Benefit Plan permit the Company to amend or terminate such Employee Benefit Plan at any time and for any reason without penalty or material expense. 2.13.2 DOCUMENTS PROVIDED The Company has delivered to ShopNow.com true, correct and complete copies (or, in the case of unwritten Employee Benefit Plans, descriptions) of all Employee Benefit Plans (and all amendments thereto), along with, to the extent applicable to the particular Employee Benefit Plan, copies of the following: (a) the last three annual reports (Form 5500 series) filed with respect to such Employee Benefit Plan; (b) all summary plan descriptions, summaries of material modifications and material employee manuals and communications filed or distributed with respect to such Employee Benefit Plan during the last three years; (c) all contracts and agreements (and any amendments thereto) relating to such Employee Benefit Plan, including, without limitation, all trust agreements, investment management agreements, annuity contracts, insurance contracts, bonds, indemnification agreements and service provider agreements; (d) all written communications relating to the amendment, creation or termination of such Employee Benefit Plan, or an increase or decrease in benefits, acceleration of payments or vesting or other events that could result in liability to the Company sent or received during the last three years; (e) all correspondence to or from any governmental entity or agency relating to such Employee Benefit Plan sent or received during the last three years; (f) all COBRA (as defined below) and HIPAA (as defined below) forms and notices currently in use; and (g) all coverage and nondiscrimination tests performed with respect to such Employee Benefit Plan for the last three years. 2.13.3 COMPLIANCE With respect to each Employee Benefit Plan: (a) such Employee Benefit Plan is, and at all times since inception has been, maintained, administered, operated and funded in all respects in accordance with its terms and in material compliance with all applicable requirements of all applicable laws, statutes, orders, rules and regulations, including, without limitation, ERISA (as defined below), COBRA, HIPAA and the Code; (b) the Company, each fiduciary of such Employee Benefit Plan and all other Persons have, at all times, properly performed all obligations in all material respects, whether arising by operation of law or by contract, required to be performed by any of them in connection with such Employee Benefit Plan; (c) all reports, Tax Returns, information returns and other information and returns relating to such Employee Benefit Plan required to be filed with any governmental entity or agency have been accurately completed and timely and properly filed; (d) all notices, statements, reports -23- and other disclosure required to be given or made to participants in such Employee Benefit Plan or their beneficiaries have been accurately completed and timely and properly disclosed or provided; (e) neither the Company nor any fiduciary of such Employee Benefit Plan has engaged in any transaction or acted or failed to act in a manner that violates the fiduciary requirements of ERISA or any other applicable law; (f) no transaction or event has occurred or is threatened or about to occur (including, without limitation, any of the transactions contemplated in or by this Agreement or any of the other Operative Documents) that constitutes or could constitute a "prohibited transaction," as defined in Section 4975 of the Code or Section 406 or 407 of ERISA; and (g) the Company has not incurred, and there exists no condition or set of circumstances in connection with which the Company, ShopNow.com, Merger Sub or any of their affiliates could incur, directly or indirectly, any material liability or expense (except for routine contributions and benefit payments) under ERISA, the Code or any other applicable law, statute, order, rule or regulation with respect to such Employee Benefit Plan or pursuant to any indemnification or similar agreement related to such Employee Benefit Plan. 2.13.4 QUALIFICATION No Employee Benefit Plan is intended to be qualified under Section 401(a) 2.13.5 CONTRIBUTIONS AND PREMIUM PAYMENTS All contributions, premiums and other payments due or required to be paid to (or with respect to) each Employee Benefit Plan have been timely paid, or, if not yet due, have been fully reserved for, and specifically identified in, the Closing Balance Sheet. 2.13.6 RELATED EMPLOYERS The Company is not, and has never been, a member of (a) a controlled group of corporations, within the meaning of Section 414(b) of the Code, (b) a group of trades or businesses under common control, within the meaning of Section 414(c) of the Code, (c) an affiliated service group, within the meaning of Section 414(m) of the Code, or (d) any other group of Persons treated as a single employer under Section 414(o) of the Code. 2.13.7 CERTAIN PENSION PLANS The Company does not maintain or contribute to, and has never maintained or contributed to (or been obligated to contribute to), any multiemployer plan as defined in Section 3(37) or Section 4001(a)(3) of ERISA or 414(f) of the Code, any multiple -24- employer plan within the meaning of Section 4063 or 4064 of ERISA or Section 413(c) of the Code or any employee benefit plan, fund, program, contract or arrangement that is subject to Section 412 of the Code, Section 302 of ERISA or Title IV of ERISA. 2.13.8 POST-TERMINATION BENEFITS Neither the Company nor any Employee Benefit Plan provides or has any obligation to provide (or contribute toward the cost of) post-employment or post-termination benefits of any kind, including, without limitation, death and medical benefits, with respect to any current or former officer, employee, agent, director or independent contractor of the Company, other than (a) continuation coverage mandated by Sections 601 through 608 of ERISA and Section 4980B(f) of the Code, and (b) deferred compensation that is accrued as a current liability on the Closing Balance Sheet. 2.13.9 PARACHUTE PAYMENTS The Company has not made any payments, is not obligated to make any payments and is not a party to any agreement that could obligate it to make any payments that would not be deductible under Section 280G of the Code (or any similar provision of state, local or foreign law). 2.13.10 SUITS, CLAIMS AND INVESTIGATIONS There are no actions, suits or claims (other than routine claims for benefits) pending or, to the knowledge of the Company, threatened with respect to (or against the assets of) any Employee Benefit Plan, nor, to the knowledge of the Company, is there a basis for any such action, suit or claim. No Employee Benefit Plan is currently under investigation, audit or review, directly or indirectly, by the IRS, the DOL (as defined below) or any other governmental entity or agency, and, to the knowledge of the Company, no such action is contemplated or under consideration by the IRS, the DOL or any other governmental entity or agency. 2.13.11 PAYMENTS RESULTING FROM TRANSACTIONS Except as set forth on Schedule 2.13.11 to the Company Disclosure Memorandum, either the execution and delivery of this Agreement or the other Operative Documents nor the consummation of the transactions contemplated in (or by) this Agreement or the other Operative Documents (either alone or together with any other transaction or event) will (a) entitle any individual to severance pay, unemployment compensation or any other payment from the Company, -25- ShopNow.com, Merger Sub, any of their affiliates or any Employee Benefit Plan, (b) increase the amount of compensation due to any individual, (c) result in any benefit or right becoming established or increased, or accelerate the time of payment or vesting of any benefit, under any Employee Benefit Plan, or (d) require the Company, ShopNow.com, Merger Sub or any of their affiliates to transfer or set aside any assets to fund or otherwise provide for any benefits for any individual. 2.13.12 DEFINITIONS As used in this Agreement, the following terms shall have the following meanings: (a) "COBRA" means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. (b) "DOL" means the United States Department of Labor. (c) "EMPLOYEE BENEFIT PLAN" means any retirement, pension, profit sharing, deferred compensation, stock bonus, savings, bonus, incentive, cafeteria, medical, dental, vision, hospitalization, life insurance, accidental death and dismemberment, medical expense reimbursement, dependent care assistance, tuition reimbursement, disability, sick pay, holiday, vacation, severance, change of control, stock purchase, stock option, stock appreciation rights, fringe benefit or other employee benefit plan, fund, policy, program, contract, arrangement or payroll practice (including, without limitation, any "employee benefit plan," as defined in Section 3(3) of ERISA) or any employment, consulting or personal services contract, whether written or oral, qualified or nonqualified, or funded or unfunded, (i) sponsored, maintained or contributed to by the Company or to which the Company is a party, (ii) covering or benefiting any current or former officer, employee, agent, director or independent contractor of the Company (or any dependent or beneficiary of any such individual), or (iii) with respect to which the Company has (or could have) any obligation or liability. (d) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (e) "HIPAA" means the Health Insurance Portability and Accountability Act of 1997, as amended. (f) "IRS" means the United States Internal Revenue Service. -26- 2.14 INTELLECTUAL PROPERTY 2.14.1 GENERAL The Company owns or is licensed and has all rights that are required to conduct its business as now conducted and as proposed to be conducted in and to the following: (a) all products, tools, computer programs, specifications, source code, object code, graphics, devices, techniques, algorithms, methods, processes, procedures, packaging, trade dress, formulae, drawings, designs, improvements, discoveries, concepts, user interfaces, development and other tools, content, inventions (whether or not patentable or copyrightable and whether or not reduced to practice), designs, logos, themes, know-how, concepts and other technology that are now, or during the two years prior to the date of this Agreement have been, or currently are proposed to be, developed, produced, used, marketed or sold by the Company (collectively, the "TECHNOLOGY-RELATED ASSETS"); and (b) all intellectual property and other proprietary rights in the Technology-Related Assets, including, without limitation, all trade names, trademarks, domain names, service marks, logos, brand names and other identifiers, trade secrets, copyrights and domestic and foreign letters patent, and the registrations, applications, renewals, extensions and continuations (in whole or in part) thereof, all goodwill associated therewith and all rights and causes of action for infringement, misappropriation, misuse, dilution or unfair trade practices associated therewith. 2.14.2 COMPANY TECHNOLOGY SCHEDULE 2.14.2 to the Company Disclosure Memorandum sets forth a list of all products and tools developed, produced, used, marketed or sold by the Company during the two years prior to the date of this Agreement, together with all prior versions, predecessors or precursors to such products or tools (collectively, the "PRODUCTS"). Except for the Third Party Technologies (as defined in Section 2.14.3 hereof), the Company owns all right, title and interest in and to the following (collectively, the "TECHNOLOGY"), free and clear of all Encumbrances: (a) the Products, together with any and all codes, techniques, software tools, formats, designs, user interfaces, content related thereto; (b) any and all updates, enhancements, corrections, modifications, improvements and new releases related to the items set forth in clause (a) above; (c) any and all technology and work in progress related to the items set forth in clauses (a) and (b) above; and (d) all inventions, discoveries, processes, designs, trade secrets, know-how and other confidential or proprietary information related to the items set forth in clauses (a), (b), and (c) above. The Technology, excluding the Third Party Technologies (as defined below), is sometimes referred to herein as the "COMPANY TECHNOLOGY." -27- 2.14.3 THIRD PARTY TECHNOLOGY SCHEDULE 2.14.3 to the Company Disclosure Memorandum sets forth a list of all Technology used in the Company's business for which the Company does not own all right, title and interest (collectively, the "THIRD PARTY TECHNOLOGIES"), and all license agreements or other contracts pursuant to which the Company has the right to use (in the manner used by the Company, or intended or necessary for use with the Company Technology) the Third Party Technologies (the "THIRD PARTY LICENSES"), indicating, with respect to each of the Third Party Technologies listed therein, the owner thereof and the Third Party License applicable thereto. The Company has the lawful right to use (free of any material restriction) (a) all Third Party Technology that is incorporated in or used in the development or production of the Company Technology and (b) all other Third Party Technology necessary for the conduct of the Company's business as now conducted and as proposed to be conducted. To the Company's knowledge, all Third Party Licenses are valid, binding and in full force and effect; the Company and, to the knowledge of the Company, each other party thereto has performed in all material respects his, her or its obligations thereunder; and neither the Company nor, to the knowledge of the Company, any other party thereto is in material default thereunder, nor to knowledge of the Company has there occurred any event or circumstance that with notice or lapse of time or both would constitute a default or event of default on the part of the Company or, to the knowledge of the Company, any other party thereto or give to any other party thereto the right to terminate or modify any Third Party License. The Company has not received notice that any party to any Third Party License intends to cancel, terminate or refuse to renew such Third Party License or to exercise or decline to exercise any option or right thereunder. 2.14.4 TRADEMARKS SCHEDULE 2.14.4 to the Company Disclosure Memorandum sets forth a list of all trademarks, trade names, brand names, service marks, logos or other identifiers for the Products or otherwise used by the Company in its business (the "MARKS"). The Company has full legal and beneficial ownership, free and clear of any Encumbrances, of all rights conferred by use of the Marks in connection with the Products or otherwise in the Company's business and, as to those Marks that have been registered in the United States Patent and Trademark Office, by federal registration of the Marks. 2.14.5 INTELLECTUAL PROPERTY RIGHTS SCHEDULE 2.14.5 to the Company Disclosure Memorandum sets forth all patents, patent applications, copyright registrations (and applications therefor) and trademark registrations (and applications therefor) (collectively, the "IP REGISTRATIONS") associated -28- with the Company Technology and the Marks. The Company owns all right, title and interest, free and clear of any Encumbrances, in and to the IP Registrations, together with any other rights in or to any copyrights (registered or unregistered), rights in the Marks (registered or unregistered), trade secret rights and other intellectual property rights (including, without limitation, rights of enforcement) contained or embodied in the Company Technology and the Marks (collectively, the "IP RIGHTS"). 2.14.6 MAINTENANCE OF RIGHTS Except as set forth on SCHEDULE 2.14.6 to the Company Disclosure Memorandum, the Company has not conducted its business, and has not used or enforced (or, to the knowledge of the Company, failed to use or enforce) the IP Rights, in a manner that would result in the abandonment, cancellation or unenforceability of any item of the IP Rights or the IP Registrations, and the Company has not taken (or, to the knowledge of the Company, failed to take) any action that would result in the forfeiture or relinquishment of any IP Rights or IP Registrations. Except as set forth in SCHEDULE 2.14.6 to the Company Disclosure Memorandum, the Company has not granted to any third party any rights or permissions to use any of the Technology or the IP Rights. To the knowledge of the Company, except pursuant to reasonably prudent safeguards, (a) no third party has received any confidential information relating to the Technology or the IP Rights and (b) the Company is not under any contractual or other obligation to disclose to any third party any Company Technology. 2.14.7 THIRD PARTY CLAIMS Except as set forth on SCHEDULE 2.14.7 to the Company Disclosure Memorandum, (a) the Company has not received any notice or claim (whether written, oral or otherwise) challenging the Company's ownership or rights in the Company Technology or the IP Rights or claiming that any other person or entity has any legal or beneficial ownership with respect thereto; (b) all the IP Rights are legally valid and enforceable without any material qualification, limitation or restriction on their use, and the Company has not received any notice or claim (whether written, oral or otherwise) challenging the validity or enforceability of any of the IP Rights; and (c) to the knowledge of the Company, no other person or entity is infringing or misappropriating any part of the IP Rights or otherwise making any unauthorized use of the Company Technology. 2.14.8 INFRINGEMENT BY THE COMPANY Except as set forth on SCHEDULE 2.14.8 to the Company Disclosure Memorandum, (a) the use of any of the Technology in the Company's business as now -29- conducted and as currently planned to be conducted does not and will not infringe, violate or interfere with or constitute an appropriation of any right, title or interest (including, without limitation, any patent, copyright or trade secret right) held by any other person or entity, and there have been no claims made with respect thereto; (b) the use of any of the Marks and other IP Rights in the Company's business will not infringe, violate or interfere with or constitute an appropriation of any right, title or interest (including, without limitation, any patent, copyright, trademark or trade secret right) held by any other person or entity, and there have been no claims made with respect thereto; and (c) the Company has not received any notice or claim (whether written, oral or otherwise) regarding any infringement, misappropriation, misuse, abuse or other interference with any third party intellectual property or proprietary rights (including, without limitation, infringement of any patent, copyright, trademark or trade secret right of any third party) by the Company, the Technology or the Marks or other IP Rights, or claiming that any other entity has any claim of infringement with respect thereto. 2.14.9 CONFIDENTIALITY Except as set forth on SCHEDULE 2.14.9 to the Company Disclosure Memorandum, (a) the Company has not disclosed any source code regarding the Technology to any person or entity other than an employee or consultant of the Company who is under a written nondisclosure agreement; (b) the Company has at all times maintained and diligently enforced commercially reasonable procedures to protect all confidential information relating to the Technology; (c) neither the Company nor any escrow agent is under any contractual or other obligation to disclose the source code or any other proprietary information included in or relating to the Technology; and (d) the Company has not deposited any source code relating to the Technology into any source code escrows or similar arrangements. If, as disclosed on SCHEDULE 2.14.9 to the Company Disclosure Memorandum, the Company has deposited any source code to the Technology into source code escrows or similar arrangements, no event has occurred that has or could reasonably form the basis for a release of such source code from such escrows or arrangements. 2.14.10 WARRANTY AGAINST DEFECTS Except as set forth in SCHEDULE 2.14.10 to the Company Disclosure Memorandum, the Technology is free from known material defects and substantially conforms to the applicable specifications, documentation and samples of such Technology. -30- 2.14.11 DOMAIN NAMES SCHEDULE 2.14.11 to the Company Disclosure Memorandum sets forth a list of all Internet domain names used by the Company in its business (collectively, the "DOMAIN NAMES"). The Company has, and at the Effective Time the Surviving Corporation will have, a valid registration and all material rights (free of any material restriction) in and to the Domain Names, including, without limitation, all rights necessary to continue to conduct the Company's business as it is currently conducted and proposed to be conducted following the Effective Time. 2.14.12 YEAR 2000 Each hardware, software and firmware product used by the Company in its business (collectively, the "SOFTWARE") accurately processes date data (including, but not limited to, calculating, comparing and sequencing) from, into and between the twentieth and twenty-first centuries, including, without limitation, leap year calculations, without a material decrease in the functionality of the Software. The Software is designed to be used prior to, during and after the calendar year 2000 A.D. and will operate during each such time period without material error relating to date data, specifically including any error relating to, or the product of, date data that represents or references different centuries or more than one century. Without limiting the generality of the foregoing, the Software (a) will not abnormally end or provide invalid or incorrect results as a result of date data, specifically including date data that represents or references different centuries or more than one century; (b) has been designed to ensure material year 2000 compatibility, including, but not limited to, date data century recognition, calculations that accommodate same century and multi-century formulas and date values, and date data interface values that reflect the century; and (c) includes "YEAR 2000 CAPABILITIES," meaning that the Software (i) will manage and manipulate data involving dates, including single century formulas and multicentury formulas, and will not cause an abnormally ending scenario within the application or generate incorrect values or invalid results involving such dates; (ii) provides that all date-related user interface functionalities and data fields include the indication of century; and (iii) provides that all date-related data interface functionalities include the indication of century. 2.14.13 PARTICIPATING DEVELOPERS SCHEDULE 2.14.13 to the Company Disclosure Memorandum contains a complete list of all Participating Developers (as defined below), specifying for each relationship between the Participating Developer and the Company (e.g., employee, contractor, etc.), all dates during which the relationship was in effect and a list of any documents -31- or other items relating to such relationship. The Company has furnished to ShopNow.com or its counsel full and complete copies of such documents and other items identified in SCHEDULE 2.14.13. "PARTICIPATING DEVELOPER" means any person or entity that has, at any time and in any way, participated or contributed to the Development of any IP Rights or any of the Company Technology. "DEVELOPMENT" means create, author, design, engineer, invent, modify, discover, reduce to practice or develop. Each Participating Developer has signed a nondisclosure agreement in the form provided to ShopNow.com, and such agreement transfers to the named transferee any and all right, title and interest which the named Participating Developer may have or acquire in and to the IP Rights and the Technology. 2.15 CORPORATE BOOKS AND RECORDS The Company has furnished to ShopNow.com or its representatives for their examination true and complete copies of (a) the Articles of Incorporation and Bylaws of the Company as currently in effect, including all amendments thereto, (b) the minute books of the Company, and (c) the stock transfer books of the Company. Such minutes reflect all meetings of the Company's stockholders, Board of Directors and any committees thereof since the Company's inception, and such minutes accurately reflect in all material respects the events of and actions taken at such meetings. Such stock transfer books accurately reflect all issuances and transfers of shares of capital stock of the Company since its inception. 2.16 LICENSES, PERMITS, AUTHORIZATIONS, ETC. Except as identified on SCHEDULE 2.16 to the Company Disclosure Memorandum, the Company has received all currently required material governmental approvals, authorizations, consents, licenses, orders, registrations and permits of all agencies, whether federal, state, local or foreign (the "PERMITS"). The Company is in compliance in all material respects with the terms of all Permits, and all the Permits are valid and in full force and effect, and no proceeding is pending, or to the knowledge of the Company, threatened, the object of which is to revoke, limit or otherwise affect any of the Permits. The Company has not received any notifications of any asserted present failure by it to have obtained any Permit, or any past and unremedied failure to obtain such items. 2.17 COMPLIANCE WITH LAWS Except as described on SCHEDULE 2.17 to the Company Disclosure Memorandum, the business and operations of the Company have been conducted in compliance in all material respects with all federal, state, local and foreign laws, rules, -32- regulations, ordinances, decrees and orders applicable to it, to its employees or to the Real Property and the Personal Property, including, without limitation, all such laws, rules, regulations, ordinances, decrees and orders relating to intellectual property protection, antitrust matters, consumer protection, currency exchange, environmental protection, equal employment opportunity, health and occupational safety, pension and employee benefit matters, securities and investor protection matters, labor and employment matters and trading-with-the-enemy matters, except where the failure to so conduct its business and operations would not be reasonably likely to have a material adverse effect on the business or financial condition of the Company and its subsidiaries, taken as a whole. The Company has not received any notification of any asserted present or past unremedied failure by the Company to comply with any of such laws, rules, regulations, ordinances, decrees or orders. 2.18 INSURANCE The Company Disclosure Memorandum sets forth a true and correct list of all insurance policies maintained by the Company and includes the policy number, amount of coverage and contact information for each such policy. The Company maintains commercially reasonable levels of (a) insurance on its property (including leased premises) that insures against loss or damage by fire or other casualty and (b) insurance against liabilities, claims and risks of a nature and in such amounts as are normal and customary in the Company's industry for companies of similar size and financial condition. All insurance policies of the Company are in full force and effect, all premiums with respect thereto covering all periods up to and including the date this representation is made have been paid, and no notice of cancellation or termination has been received with respect to any such policy or binder. Such policies or binders are sufficient for compliance with all requirements of law currently applicable to the Company and of all agreements to which the Company is a party, will remain in full force and effect through the respective expiration dates of such policies or binders without the payment of additional premiums, and will not in any way be affected by, or terminate or lapse by reason of, the transactions contemplated by this Agreement. The Company has not been refused any insurance with respect to its assets or operations, nor has its coverage been limited, by any insurance carrier to which it has applied for any such insurance or with which it has carried insurance. 2.19 BROKERS OR FINDERS The Company has not incurred, and will not incur, directly or indirectly, as a result of any action taken by or on behalf of the Company, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with the Merger, this Agreement or any transaction contemplated hereby. -33- 2.20 ABSENCE OF QUESTIONABLE PAYMENTS Neither the Company nor, to the Company's knowledge, any director, officer, agent, employee or other Person acting on behalf of the Company has used any Company funds for improper or unlawful contributions, payments, gifts or entertainment, or made any improper or unlawful expenditures relating to political activity to domestic or foreign government officials or others. The Company has reasonable financial controls to prevent such improper or unlawful contributions, payments, gifts, entertainment or expenditures. Neither the Company nor, to the Company's knowledge, any current director, officer, agent, employee or other Person acting on behalf of the Company has accepted or received any improper or unlawful contributions, payments, gifts or expenditures. The Company has at all times complied, and is in compliance, in all respects with the Foreign Corrupt Practices Act and all foreign laws and regulations relating to prevention of corrupt practices and similar matters. 2.21 BANK ACCOUNTS SCHEDULE 2.21 to the Company Disclosure Memorandum sets forth the names and locations of all banks, trust companies, savings and loan associations and other financial institutions at which the Company maintains safe deposit boxes or accounts of any nature and the names of all Persons authorized to draw thereon, make withdrawals therefrom or have access to such safe deposit boxes or accounts. 2.22 CUSTOMERS AND SUPPLIERS SCHEDULE 2.22 to the Company Disclosure Memorandum sets forth (a) a complete and accurate list of the customers of the Company accounting for 5% or more of the Company's revenues during the fiscal year last ended and the period ended December 31, 1999, showing the approximate total revenues from each such customer during the fiscal year last ended and the period ended December 31, 1999 and (b) a complete and accurate list of the suppliers of the Company from whom the Company has purchased 5% or more of the goods or services purchased by the Company in the fiscal year last ended and the period ended December 31, 1999. The Company has not received any notice from its customers or suppliers that would cause it, in its reasonable judgment, to expect any material modification to its relationship with any customer or supplier named on such SCHEDULE 2.22 to the Company Disclosure Memorandum. -34- 2.23 ACCOUNTS RECEIVABLE All accounts receivable of the Company reflected in the Company Balance Sheet ("ACCOUNTS"), or existing at the Effective Time, represent sales actually made in the ordinary course of business and were recorded in the Company's books consistent with the presentation applied in the Company Financial Statements for the year ended March 31, 1999. Except as described on SCHEDULE 2.23 to the Company Disclosure Memorandum, the bad debt reserves and sales return allowances reflected in the Company Balance Sheet are adequate. Set forth on SCHEDULE 2.23 to the Company Disclosure Memorandum are a full and complete list and aging study of all Accounts. To the knowledge of the Company, all Accounts existing and remaining unpaid at the Effective Time will be collectible by the Surviving Corporation in the ordinary course of business, consistent with past practice. 2.24 CREDITORS' LIST SCHEDULE 2.24 to the Company Disclosure Memorandum sets forth a full, complete and accurate list of all creditors of Company, with the amount payable to each such creditor as of the date hereof. 2.25 INSIDER INTERESTS Except as set forth on SCHEDULE 2.25 to the Company Disclosure Memorandum, no stockholder or officer or director of the Company has any interest (other than as a stockholder of the Company) (a) in any Real Property, Personal Property, Technology or IP Rights used in or directly pertaining to the business of the Company, including, without limitation, inventions, patents, trademarks or trade names, or (b) in any agreement, contract, arrangement or obligation relating to the Company, its present or prospective business or its operations. Except as set forth on SCHEDULE 2.25 to the Company Disclosure Memorandum or as contemplated by this Agreement, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, stockholders, affiliates or any affiliate thereof. The Company and its officers and directors have no interest, either directly or indirectly, in any entity, including, without limitation, any corporation, partnership, joint venture, proprietorship, firm, licensee, business or association (whether as an employee, officer, director, stockholder, agent, independent contractor, security holder, creditor, consultant or otherwise), other than ownership of capital stock comprising less than 1% of any publicly held company, that presently (i) provides any services, produces and/or sells any products or product lines, or engages in any activity that is the same, similar to or competitive with any activity or business in which the Company is now engaged or proposes to engage; (ii) is a supplier, customer or creditor; or (iii) has any -35- direct or indirect interest in any asset or property (real or personal, tangible or intangible) of the Company or any property (real or personal, tangible or intangible) that is necessary or desirable for the present or currently anticipated future conduct of the Company's business. 2.26 COMPLIANCE WITH ENVIRONMENTAL LAWS Neither the Company nor, to the knowledge of the Company, any other Person (including, without limitation, any previous owner, lessee or sublessee) has treated, stored or disposed of any material amounts of petroleum products, hazardous waste, hazardous substances, pollutants or contaminants on the Real Property, or any real property previously owned, leased, subleased or used by the Company in the operation of its business, in violation of any applicable foreign, federal, state or local statutes, regulations or ordinances, or common law, in each case as in existence at or prior to the Closing. To the knowledge of the Company, there have been no releases of any material amounts of petroleum, petroleum products, hazardous waste, hazardous substances, pollutants or contaminants on, at or from any assets or properties, including, without limitation, the Real Property, owned, leased, subleased or used by the Company in the operation of its business during the time such assets or properties were owned, leased, subleased or used by the Company (or, to the knowledge of the Company, prior to such time), including, without limitation, any releases of any material amounts of petroleum, petroleum products, hazardous waste, hazardous substances, pollutants or contaminants in violation of any law. 2.27 INFORMATION SUPPLIED BY THE COMPANY None of the information supplied or to be supplied by the Company or its subsidiaries, auditors, attorneys, financial advisors or other consultants or advisors for inclusion in (i) the registration statement on Form S-4, and any amendment thereto, to be filed under the Securities Act with the SEC by ShopNow.com in connection with the issuance of the ShopNow.com Common Stock in or as a result of the Merger (the "S-4"), or (ii) the proxy statement and any amendment or supplement thereto to be distributed in connection with Company's meetings of stockholders to vote upon this Agreement and the transactions contemplated hereby (the "PROXY STATEMENT" and, together with the prospectus included in the S-4, the "PROXY STATEMENT/PROSPECTUS") will, in the case of the Proxy Statement and any amendment or supplement thereto, at the time of the mailing of the Proxy Statement and any amendment or supplement thereto, and at the time of the meeting of stockholders of the Company to vote upon this Agreement and the transactions contemplated hereby, or, in the case of the S-4, as amended or supplemented, at the time it becomes effective and at the time of any post-effective amendment thereto and at the time of the meeting of stockholders of the -36- Company, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they are made, not misleading or necessary to correct any statement in any earlier filing with the SEC of such Proxy Statement/Prospectus or any amendment or supplement thereto or any earlier communication (including the Proxy Statement/Prospectus) to stockholders of the Company with respect to the transactions contemplated by this Agreement. 2.28 FULL DISCLOSURE Neither this Agreement or the Operative Documents (including, but not limited to, the Company Financial Statements and all information in the Company Disclosure Memorandum and the other Exhibits hereto) contains any untrue statement by the Company of a material fact or omits to state a material fact necessary in order to make the statements so made or information so delivered not misleading. 2.29 HART-SCOTT-RODINO The Company is its own ultimate parent entity as defined under the rules and regulations promulgated under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HART-SCOTT-RODINO ACT"). The Company is not a $10 million person as defined thereunder. The Company is not "engaged in manufacturing" for purposes of the Hart-Scott-Rodino Act. ARTICLE III - REPRESENTATIONS AND WARRANTIES OF SHOPNOW.COM AND MERGER SUB In order to induce the Company to enter into and perform this Agreement and the Operative Documents, ShopNow.com and Merger Sub jointly and severally represent and warrant to the Company as follows in this Article III: 3.1 ORGANIZATION ShopNow.com is a corporation duly organized and validly existing under the laws of the state of Washington. Merger Sub is a corporation duly organized and validly existing under the laws of the state of Washington. Each of ShopNow.com and Merger Sub has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement and the Operative Documents to which it is a party and to consummate the transactions contemplated hereby and thereby. All the issued and outstanding shares of capital stock of Merger Sub are held of record and beneficially by ShopNow.com. -37- 3.2 ENFORCEABILITY All corporate action on the part of ShopNow.com and Merger Sub and their respective officers, directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement and the Operative Documents, the consummation of the Merger and the performance of all their respective obligations under this Agreement and the Operative Documents has been taken or will be taken prior to the Effective Time. This Agreement and each of the Operative Documents has been duly executed and delivered by each of ShopNow.com and Merger Sub, as applicable, and this Agreement and each of the Operative Documents is a legal, valid and binding obligation of each of ShopNow.com and Merger Sub, as applicable, enforceable against each of them in accordance with its terms. 3.3 SECURITIES The Closing Shares to be issued pursuant to this Agreement have been, or will be prior to the Effective Time, duly authorized for issuance, and such Closing Shares, when issued and delivered pursuant to this Agreement, shall be validly issued, fully paid and nonassessable. 3.4 NO APPROVALS OR NOTICES REQUIRED; NO CONFLICTS WITH INSTRUMENTS The execution, delivery and performance of this Agreement and the Operative Documents by Merger Sub and ShopNow.com, as applicable, and the consummation by them of the transactions contemplated hereby and thereby will not (a) constitute a violation (with or without the giving of notice or lapse of time, or both) of any provision of law or any judgment, decree, order, regulation or rule of any court or other governmental authority applicable to ShopNow.com or Merger Sub; (b) require any consent, approval or authorization of, or declaration, filing or registration with, any Person, except (i) compliance with applicable securities laws; (ii) the filing of all documents necessary to consummate the Merger with the Washington Secretary and the Nevada Secretary; (iii) the filing of a premerger notification report and all other required documents by ShopNow.com and the Company, and the expiration of all applicable waiting periods, under the HSR Act; and (iv) any filings with the SEC including such reports and information as may be required under the Exchange Act, the Securities Act and the rules and regulations promulgated by the SEC under the Exchange Act or the Securities Act and the declaration of the effectiveness of the S-4 by the SEC; or -38- (c) conflict with or result in a breach of or constitute a default under any provision of the Articles of Incorporation or Bylaws of ShopNow.com or Merger Sub. 3.5 INFORMATION SUPPLIED BY SHOPNOW.COM OR MERGER SUB None of the information supplied or to be supplied by ShopNow.com or its subsidiaries, auditors, attorneys, financial advisors, other consultants or advisors or Merger Sub for inclusion in the S-4 or the Proxy Statement/Prospectus, will, in the case of the Proxy Statement and any amendment or supplement thereto, at the time of the mailing of the Proxy Statement and any amendment or supplement thereto, and at the time of any meeting of stockholders of the Company to vote upon this Agreement and the transactions contemplated hereby, or in the case of the S-4, as amended or supplemented, at the time it becomes effective and at the time of any post-effective amendment thereto and at the time of the meeting of stockholders of the Company, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they are made, not misleading or necessary to correct any statement in any earlier filing with the SEC of such Proxy Statement/Prospectus or any amendment or supplement thereto or any earlier communication (including the Proxy Statement/Prospectus) to stockholders of the Company with respect to the transactions contemplated by this Agreement. 3.6 FULL DISCLOSURE Neither this Agreement or the Operative Documents contains any untrue statement by ShopNow.com or Merger Sub of a material fact or omits to state a material fact necessary in order to make the statements so made or information so delivered not misleading. 3.7 CAPITALIZATION (a) The authorized capital stock of ShopNow.com consists of 200,000,000 shares of ShopNow.com Common Stock, par value $.001 per share, 42,923,035 of which are issued and outstanding as of December 31, 1999, and 5,000,000 shares of Preferred Stock, $.001 par value per shares, none of which are issued and outstanding as of_December 31, 1999. As of December 31, 1999, there are 7,586,112 shares of ShopNow.com Common Stock reserved for issuance upon the exercise of outstanding stock options under the ShopNow.com 1999 Non-Officer Stock Option Plan and 1996 Combined Incentive and Nonqualified Stock Option Plan. The Shares of ShopNow.com Common Stock to be issued pursuant to the Merger in accordance with Section 1.7.1 and the shares of ShopNow.com Common Stock which will be issued -39- upon exercise of the options granted in accordance with Section 1.9 have been duly and validly authorized, have been reserved for issuance and upon issuance in accordance with the terms hereof or thereof, will be duly authorized, validly issued, fully paid and nonassessable. 3.8 SEC DOCUMENTS; FINANCIAL STATEMENTS (a) ShopNow.com has filed all forms, reports and documents required to be filed by it with the SEC since September 28, 1999 through the date of this Agreement (collectively, the "SHOPNOW.COM SEC DOCUMENTS"). As of their respective filing dates, the ShopNow.com SEC Documents complied in all material respects with the requirements of the Exchange Act or the Securities Act, as the case may be, and the rules and regulations of the SEC thereunder applicable to such ShopNow.com SEC Documents, and none of the ShopNow.com SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective filing dates, the financial statements of ShopNow.com included in the ShopNow.com SEC Documents (the "ShopNow.com FINANCIAL STATEMENTS") complied as to form in all material respects with all applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto and were prepared in accordance with GAAP consistently applied (except as may be indicated in the notes thereto) and fairly presented, in all material respects, the consolidated financial position of ShopNow.com and its subsidiaries as at the dates thereof and the results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal, recurring audit adjustments not material in scope or amount). There has been no change in ShopNow.com's accounting policies or the methods of making accounting estimates or changes in estimates that are material to the ShopNow.com Financial Statements, except as described in the notes thereto. (b) Except as disclosed in the ShopNow.com SEC Documents as filed and amended before the date hereof and as contemplated by this Agreement, since September 30, 1999, no material adverse change in the business, financial condition, results of operations or prospects of ShopNow.com has occurred. Changes in the trading prices of ShopNow.com Common Stock or a public offering of ShopNow.com Common Stock shall not be deemed material adverse changes under this Agreement. 3.9 COMPLIANCE WITH LAWS The business and operations of ShopNow.com have been conducted in compliance in all material respects with all federal, state, local and foreign laws, rules, -40- regulations, ordinances, decrees and orders applicable to it, to its employees or to its property, including, without limitation, all such laws, rules, regulations, ordinances, decrees and orders relating to intellectual property protection, antitrust matters, consumer protection, currency exchange, environmental protection, equal employment opportunity, health and occupational safety, pension and employee benefit matters, securities and investor protection matters, labor and employment matters and trading-with-the-enemy matters, except where the failure to so conduct its business and operations would not be reasonably likely to have a material adverse effect on the business or financial condition of ShopNow.com and its subsidiaries, taken as a whole. ShopNow.com has not received any notification of any asserted present or past unremedied failure by ShopNow.com to comply with any of such laws, rules, regulations, ordinances, decrees or orders. 3.10 TAX MATTERS Solely for tax purposes, ShopNow represents the following: (a) It has no present plan or intention to cause Merger Sub to issue, after the Merger, additional shares of Merger Sub stock (or rights to acquire shares of Merger Sub stock) or take any other action that would result in ShopNow.com losing control of Merger Sub, as defined in Section 368(c) of the Code. (b) ShopNow.com has no present plan or intention to directly or indirectly (including through a party related to ShopNow.com within the meaning of Treasury Regulation 1.368-1(e)(3)) reacquire any of its stock issued pursuant to the Merger such that the Merger would fail the "continuity of proprietary interest" requirement set forth in Treasury Regulation Section 1.368-1(e). (c) It has no present plan or intention to: (i) cause Merger Sub to sell, transfer or otherwise dispose of any of its assets or of any of the assets acquired from the Company except for dispositions made in the ordinary course of business or for the payment of expenses incurred by the Company in connection with the Merger; (ii) liquidate Merger Sub; (iii) merge Merger Sub with or into another corporation including ShopNow or any of its affiliates; or (iv) to sell, distribute or otherwise dispose of the stock of Merger Sub, other than as would be allowed by Section 368(a)(2)(C) of the Code or the corresponding Treasury Regulations. (d) It is ShopNow's present plan or intention to cause Merger Sub to continue the Company's historic business or use a significant portion of the Company's historic business assets in a business within the meaning of Treasury Regulation 1.368-1(d). -41- ARTICLE IV - CONDITIONS PRECEDENT TO OBLIGATIONS OF SHOPNOW.COM AND MERGER SUB The obligations of ShopNow.com and Merger Sub to perform and observe the covenants, agreements and conditions hereof to be performed and observed by them at or before the Closing shall be subject to the satisfaction of the following conditions, which may be expressly waived only in writing signed by ShopNow.com and Merger Sub: 4.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES The representations and warranties of the Company contained herein (including applicable Exhibits or Schedules to the Company Disclosure Memorandum) and in the Operative Documents shall have been true and correct in all material respects when made and, except (a) for changes contemplated by this Agreement and the Operative Documents, (b) for representations and warranties qualified by materiality which shall be correct in all respects and (c) to the extent that such representations and warranties speak as of an earlier date, shall be true and correct in all material respects as of the Closing Date, as though made on that date. 4.2 PERFORMANCE OF AGREEMENTS The Company shall have performed in all material respects all obligations and agreements and complied with all covenants contained in this Agreement or any Operative Document to be performed and complied with by it at or prior to the Closing. 4.3 OPINION OF COUNSEL FOR THE COMPANY ShopNow.com shall have received the opinion letter of Dorsey & Whitney LLP, counsel for the Company, dated the Closing Date in the form attached hereto as EXHIBIT 4.3. 4.4 COMPLIANCE CERTIFICATE ShopNow.com shall have received a certificate of the President and the Chief Financial Officer of the Company, dated the Closing Date, in form and substance reasonably satisfactory to ShopNow.com, (a) certifying that the conditions to the obligations of ShopNow.com and Merger Sub in Sections 4.1, 4.2, 4.5, 4.6, 4.12, and 4.13 have been fulfilled, and (b) verifying the accuracy of the information contained in the Option Consideration Spreadsheet (as defined below). -42- 4.5 MATERIAL ADVERSE CHANGE Since the date of the Company Balance Sheet and through the Closing, there shall not have occurred any change that is or is reasonably likely to be materially adverse to the Company's business, financial condition, operations, properties or prospects. Changes in the trading prices of the Company Common Stock shall not be deemed a material adverse change. 4.6 APPROVALS AND CONSENTS All transfers of permits or licenses and all approvals of or notices to public agencies, federal, state, local or foreign, the granting or delivery of which is necessary for the consummation of the transactions contemplated hereby, including, if applicable, approvals or notices required by the Hart-Scott-Rodino Act, or for the continued operation of the Company, shall have been obtained, and all waiting periods specified by law shall have passed. All other consents, approvals and notices referred to in this Agreement shall have been obtained or delivered. 4.7 PROCEEDINGS AND DOCUMENTS; SECRETARY'S CERTIFICATE ShopNow.com shall have received a certificate of the Secretary of the Company, in form and substance reasonably satisfactory to ShopNow.com, as to the authenticity and effectiveness of the actions of the Board of Directors of the Company and the stockholders authorizing the Merger and the transactions contemplated by this Agreement and the Operative Documents. Copies of (a) the Company's Articles of Incorporation, certified by the Nevada Secretary, (b) the Company's Bylaws, certified by the Secretary of the Company, and (c) the resolutions of the Board of Directors of the Company and the stockholders relating to the transactions contemplated by this Agreement and the Operative Documents shall be attached to such certificate. 4.8 NON-U.S. REAL PROPERTY HOLDING CORPORATION AFFIDAVIT ShopNow.com shall have received from the Company, pursuant to Section 1445 of the Code, a Foreign Investment in Real Property Tax Act Affidavit in the form attached hereto as EXHIBIT 4.8. 4.9 COMPLIANCE WITH LAWS The effectiveness of the Merger and the performance by ShopNow.com, Merger Sub, and the Company of their respective obligations pursuant to this Agreement and the Operative Documents shall be legally permitted by all laws and regulations to -43- which ShopNow.com, Merger Sub, the Company and the stockholders of the Company are subject. 4.10 LEGAL PROCEEDINGS No order of any court or administrative agency shall be in effect that enjoins, restrains, conditions or prohibits consummation of this Agreement or any Operative Document, and no litigation, investigation or administrative proceeding shall be pending or threatened that would enjoin, restrain, condition or prevent consummation of this Agreement or any Operative Document. 4.11 NONCOMPETITION ARRANGEMENTS Each of the Management Members and Retained Employees who has been offered and has accepted employment with ShopNow.com shall have executed the ShopNow.com standard form of Intellectual Property Agreement (Confidentiality, Invention Assignment, Non-raiding and Noncompetition) in the form attached hereto as EXHIBIT 4.11 and each such agreement shall be in full force and effect on the Closing Date. 4.12 TERMINATION OF CERTAIN AGREEMENTS Any and all rights of refusal, co-sale rights and registration rights for the benefit of the holders of Company Common Stock, or Stock Purchase Rights set forth in the Company Disclosure Memorandum, shall have terminated. The Company shall also terminate the following agreements: (i) the BBE Purchase Agreement and Note, (ii) the Share Pledge Agreement Among International Barter Corp., Bob Bagga and Barter Business Exchange Inc., dated March 2, 1999, (iii) all employment agreements with current Ubarter employees (including, without limitation, those employment agreements with Steven White, Dan Schneider, Dick Mayer, Alan Zimmelman, Kevin Andersen, Robert Benson, Eric Silver, Bob Bagga, Patricia Falus and Cameron Herold and Barbara Ryan), (iii) the Alpine Capital Note and Alpine Capital Warrant (as to registration rights) (iv) the Share Purchase Agreement, dated May 12, 1999, among Mark Thomas, Susan Thomas, the Company and Barter Business Exchange (Windsor), Inc. (as to registration rights) and (v) all agreements with Astra Ventures and Momentous. In addition, the Company shall withdraw its Registration Statement on Form SB-2, as amended. -44- 4.13 EXERCISE OR TERMINATION OF STOCK PURCHASE RIGHTS; CONVERSION OF CONVERTIBLE SECURITIES Any and all Stock Purchase Rights (including all options to purchase shares of the Company's Common Stock) and any and all securities and notes convertible at any time into Company Common Stock, vested and unvested, and regardless of restrictions on exercise or conversion, shall have been exercised or converted (for cash or on a cashless basis) for shares of Company Common Stock, or shall have been terminated, as the case may be, immediately prior to the Effective Time. 4.14 COMPANY OPTION PLAN The Company shall accelerate the vesting of all options issued and outstanding under the Company Option Plan and shall make such amendments to the Company Option Plan as are reasonably requested by ShopNow.com. The Company shall make all tax withholdings with respect to the exercise of options following such acceleration as required by law and prior to the Effective Time. 4.15 CONSENTS TO MERGER SCHEDULE 2.10.2 to the Company Disclosure Memorandum lists certain agreements, leases, notes or other documents identified in the schedules to the Company Disclosure Memorandum that, by their terms require consent or waiver to consummate the Merger. Unless otherwise set forth in SCHEDULE 2.10.2 to the Company Disclosure Memorandum, the Company shall have received and shall have delivered to ShopNow.com or its counsel written consents to the Merger or waivers, as applicable, from each of the parties (other than the Company) to such agreements, leases, notes or other documents, which consents or waivers, as the case may be, shall be reasonably satisfactory in all respects to ShopNow.com. 4.16 RESIGNATIONS ShopNow.com and Merger Sub shall have received copies of the resignations, effective as of the Effective Time, of all the directors and officers of the Company. 4.17 TAX CLEARANCE CERTIFICATES The Company shall provide to ShopNow.com tax clearance certificates from those states, including but not limited to Nevada, in which the Company is engaged in business. -45- 4.18 RELEASES OF LIENS Prior to the Effective Time, except as agreed to in writing by ShopNow.com, the Company shall obtain the release of any and all Encumbrances with respect to any of the Company's assets except for such Encumbrances that are incurred in the ordinary course of the Company's business and are not material. 4.19 STOCKHOLDER APPROVAL This Agreement and the Merger shall have been approved by the Company's stockholders as required by the Company's Articles of Incorporation and applicable law. 4.20 AFFILIATE LETTERS The Company shall have delivered or caused to be delivered to ShopNow.com an Affiliate Letter substantially in the form of EXHIBIT 4.20 from each of those Persons who were, on the date on which the requisite number of consents or votes has been obtained to approve the Merger, "affiliates" of the Company within the meaning of Rule 145 of the rules and regulations promulgated under the Securities Act. 4.21 VOTING AGREEMENTS Steven White and New Horizons, LP (the "KEY STOCKHOLDERS") shall have executed, concurrently with the execution of this Agreement, and have fulfilled the terms of, voting agreements in the form of EXHIBIT 4.21. 4.22 S-4 The S-4 shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings seeking a stop order and the Proxy Statement shall not be at the Effective Time subject to any proceedings commenced or threatened by the SEC. 4.23 AGREEMENTS WITH CERTAIN STOCKHOLDERS OF THE COMPANY ShopNow.com and Astra Ventures shall have entered into an agreement wherein at the Closing, in exchange for the termination of all obligations of the Company to or agreements with Astra Ventures, ShopNow.com shall pay to Astra Ventures $675,000 in cash and that number of shares of ShopNow.com Common Stock determined by dividing $675,000 by $17.31. ShopNow.com and Momentous shall have entered into an agreement wherein at the Closing ShopNow.com shall issue to Momentous a warrant to purchase 20,000 shares of ShopNow.com Common Stock -46- in exchange for the cancellation and retirement of all indebtedness under the Momentous Note. Such warrant shall have a one-year term and an exercise price equal to the closing sales price of ShopNow.com Common Stock as reported on the Nasdaq National Market on the trading day immediately preceding the Effective Time. 4.24 EMPLOYMENT AND CONSULTING AGREEMENTS ShopNow.com and Liad Meidar shall have entered into an Employment Agreement in substantially the form attached hereto as EXHIBIT 4.24A. ShopNow.com and Steven White shall have entered into a Consulting Agreement substantially in the form attached hereto as EXHIBIT 4.24B. 4.25 LOCK-UP AGREEMENTS ShopNow.com shall have entered into Lock-Up Agreements in substantially the form attached hereto as EXHIBIT 4.25A with Steven White and Liad Meidar. ShopNow.com and New Horizons LP shall have entered into the Lock-Up Agreement in substantially the form attached hereto as EXHIBIT 4.25B. 4.26 TAX OPINION ShopNow.com shall have received an opinion from Perkins Coie LLP to the effect that the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code. In rendering such opinion, Perkins Coie LLP shall be entitled to rely upon customary representation letters signed by the Company, ShopNow.com and Merger Sub. 4.27 NO DISSENTERS RIGHTS Holders of not more than 5% of the outstanding shares of Company Common Stock shall have delivered before the Effective Time timely written notice of such holders' intent to demand payment as dissenting shareholders for such shares in accordance with Nevada Law. 4.28 BOARD ACTIONS The Company shall provide ShopNow.com or its counsel with evidence reasonably satisfactory to ShopNow.com or its counsel that all corporate actions reflected in the minutes of the Company and all stock issuances and options grants have been duly authorized by the board of directors of the Company. -47- ARTICLE V - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY The obligations of the Company to perform and observe the covenants, agreements and conditions hereof to be performed and observed by it at or before the Closing shall be subject to the satisfaction of the following conditions, which may be expressly waived only in writing signed by the Company. 5.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES The representations and warranties of ShopNow.com and Merger Sub contained herein and in the Operative Documents shall have been true and correct in all material respects when made and, except (a) for changes contemplated by this Agreement and the Operative Documents and (b) to the extent that such representations and warranties speak as of an earlier date, shall be true and correct as of the Closing Date as though made on that date. 5.2 PERFORMANCE OF AGREEMENTS ShopNow.com and Merger Sub shall have performed in all material respects all obligations and agreements and complied with all covenants contained in this Agreement or any Operative Document to be performed and complied with by them at or prior to the Closing. 5.3 COMPLIANCE CERTIFICATE The Company shall have received a certificate of an officer of ShopNow.com, dated the Closing Date, in form and substance reasonably satisfactory to the Company, certifying that the conditions to the obligations of the Company in Sections 5.1, 5.2, 5.5 and 5.6 have been fulfilled. 5.4 LEGAL PROCEEDINGS No order of any court or administrative agency shall be in effect that enjoins, restrains, conditions or prohibits consummation of this Agreement or any Operative Document, and no litigation, investigation or administrative proceeding shall be pending or threatened which would enjoin, restrain, condition or prevent consummation of this Agreement or any Operative Document. 5.5 MATERIAL ADVERSE CHANGE Since the date of this Agreement and through the Closing, there shall not have occurred any material change in the business, financial condition, operations, -48- properties or prospects of ShopNow.com. Changes in the trading prices of ShopNow.com Common Stock or a public offering of ShopNow.com Common Stock shall not be deemed material adverse changes under this Agreement. 5.6 APPROVALS AND CONSENTS All transfers of permits or licenses and all approvals of or notices to public agencies, federal, state, local or foreign, the granting or delivery of which is necessary on the part of ShopNow.com and Merger Sub for the consummation of the transactions contemplated hereby, shall have been obtained, and all waiting periods specified by law shall have passed. All other consents, approvals and notices on the part of ShopNow.com and Merger Sub referred to in this Agreement shall have been obtained or delivered. 5.7 COMPLIANCE WITH LAWS The effectiveness of the Merger and the performance by ShopNow.com, Merger Sub and the Company of the obligations hereunder and under the Operative Documents shall be legally permitted by all laws and regulations to which ShopNow.com, Merger Sub and the Company are subject. 5.8 OPINION OF COUNSEL The Company shall have received the opinion letter of Perkins Coie LLP, counsel for ShopNow.com and Merger Sub, dated the Closing Date, in the form of EXHIBIT 5.8. 5.9 S-4 The S-4 shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings seeking a stop order and the Proxy Statement shall not be at the Effective Time subject to any proceedings commenced or threatened by the SEC. 5.10 TAX OPINION The Company shall have received an opinion from Dorsey & Whitney LLP to the effect that the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code. In rendering such opinion, Dorsey & Whitney LLP shall be entitled to rely upon customary representation letters signed by the Company, ShopNow.com and Merger Sub. -49- ARTICLE VI - COVENANTS Between the date of this Agreement and the Effective Time, the parties covenant and agree as set forth in this Article VI. 6.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER Unless ShopNow.com shall otherwise agree in writing, the Company covenants and agrees to conduct the Company's business between the date of this Agreement and the Effective Time in and only in, and the Company shall not take any action except in, the ordinary course of business and in a manner consistent with past practice and in accordance with applicable law; and the Company shall use its reasonable best efforts to preserve intact the business organization of the Company, to keep available the services of the current officers, employees and consultants of the Company and to preserve the current relationships of the Company with, and the goodwill of, customers, suppliers and other Persons with which the Company has significant business relations. By way of amplification and not limitation, except as otherwise contemplated by this Agreement, the Company shall not, between the date of this Agreement and the Effective Time, directly or indirectly do, or propose to do, any of the following without the prior written consent of ShopNow.com: (a) amend or otherwise change the Company's Articles of Incorporation or Bylaws; (b) except for the issuance of shares of Company Common Stock upon the exercise or conversion of currently outstanding Stock Purchase Rights, issue, sell, contract to issue or sell, pledge, dispose of, grant, encumber or authorize the issuance, sale, pledge, disposition, grant or Encumbrance of (i) any shares of capital stock of any class of the Company, (ii) any assets of the Company, except in the ordinary course of business and in a manner consistent with past practice or (iii) any options, warrants, convertible securities or other rights of any kind to acquire any shares of such capital stock, or any other ownership interest (including, without limitation, any phantom interest) of the Company; (c) declare, set aside, make or pay any dividend or other distribution, payable in cash, stock or other securities, property or otherwise, with respect to any of its capital stock; (d) reclassify, combine, split, subdivide, redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock or other securities; -50- (e) (i) acquire (including, without limitation, by merger, consolidation, or acquisition of stock or assets) any corporation, partnership, other business organization or division thereof or any material amount of assets; (ii) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse, or otherwise as an accommodation become responsible for, the obligations of any Person, or make any loans or advances, except in the ordinary course of business and consistent with past practice; (iii) enter into any contract or agreement other than in the ordinary course of business, consistent with past practice; (iv) authorize any single capital expenditure which is in excess of $50,000 or capital expenditures which are, in the aggregate, in excess of $200,000 for the Company taken as a whole; (v) enter into any agreement in which the obligation of the Company exceeds $50,000 or which shall not terminate or be subject to termination for convenience within 30 days following execution; (vi) license any Technology or IP Rights; or (vii) enter into or amend any contract, agreement, commitment or arrangement with respect to any matter set forth in this subsection (e); (f) enter into or amend any employment, consulting or agency agreement, or increase the compensation payable or to become payable to its officers, employees, agents or consultants, or grant any severance or termination pay to, or enter into any employment or severance agreement with, any director, officer or other employee of the Company, or establish, adopt, enter into or amend any Employee Benefit Plan, collective bargaining, bonus, profit-sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance, benefit or other plan, agreement, trust, fund, policy or arrangement for the benefit of any director, officer or employee; (g) take any action, other than reasonable and usual actions in the ordinary course of business and consistent with past practice, with respect to accounting methods, policies or procedures (including, without limitation, procedures with respect to the payment of accounts payable and collection of accounts receivable); (h) make any Tax election or settle or compromise any Tax liability; (i) pay, discharge or satisfy any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business and consistent with past practice; (j) take any action that would or is reasonably likely to result in any of the representations or warranties of the Company set forth in this Agreement being untrue in any material respect, or in any covenant of the Company set forth in this Agreement -51- being breached, or in any of the conditions to the Merger specified in Article IV not being satisfied; or (k) agree to do any of the foregoing. 6.2 ACCESS TO INFORMATION; CONFIDENTIALITY From the date hereof to the Effective Time, the Company shall, and shall cause the officers, directors, employees and agents of the Company to, afford the officers, employees and agents of ShopNow.com access at all reasonable times to the officers, employees, agents, properties, offices, plants and other facilities, books and records of the Company and shall furnish ShopNow.com with all financial, operating and other data and information as ShopNow.com , through its officers, employees or agents, may reasonably request. From the date hereof until the Effective Time, the Company shall provide ShopNow.com with monthly and other financial statements of the Company as they become available internally at the Company, all of which financial statements shall fairly present the financial position and results of operations of the Company as of the dates and for the periods therein specified. No investigation pursuant to this Section 6.2 shall affect any representation or warranty in this Agreement of any party hereto or any condition to the obligations of the parties hereto. The parties shall continue to comply with and to perform their respective obligations under the Mutual Nondisclosure Agreement between ShopNow.com and the Company entered into as of December 17, 1999. 6.3 NO ALTERNATIVE TRANSACTIONS (a) Unless this Agreement shall have been terminated in accordance with its terms, the Company shall not, directly or indirectly, through any officer, director, agent or otherwise, solicit, initiate or encourage the submission of any proposal or offer from any Person relating to any acquisition or purchase of all or (other than in the ordinary course of business) any material portion of the assets of, or any equity interest in, the Company or any business combination with the Company (an "ALTERNATIVE TRANSACTION"), or participate in any negotiations regarding, or furnish to any other Person any information with respect to, or otherwise cooperate or negotiate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other Person to do or seek any of the foregoing. The Company shall notify ShopNow.com promptly if any such proposal or offer, or any inquiry or contact with any Person with respect thereto, is made and shall, in any such notice to ShopNow.com, indicate in reasonable detail the identity of the Person making such proposal, offer, inquiry or contact and the terms and conditions of such proposal, offer, inquiry or contact. The Company agrees not to release any third party from, or waive any -52- provision of, any confidentiality or standstill (e.g., agreement not to invest in or seek change of control of the Company) agreement to which the Company is a party. Notwithstanding the foregoing, in the event the Company receives a bona fide offer or proposal from any third party regarding an Alternative Transaction (an "OFFER") the Company may accept such Offer (after complying with Section 6.3(b) below) if the board of directors of the Company reasonably determines after due consideration of the factual basis and the advice of counsel experienced in such matters that such action is required by law; provided, however, that any such action by the Company shall be deemed a breach of this Section 6.3 for purposes of determining whether the Company must pay the Termination Fee described in Section 7.2. (b) In the event the Company receives an Offer as described in the last sentence of Section 6.3(a), then the Company shall, prior to accepting such Offer or entering into any definitive agreement with respect to the Offer, notify ShopNow.com in writing of: (a) all of the terms and conditions of such Offer (which notice shall include a copy of any term sheets and proposed definitive agreements reflecting such terms and conditions and include the identity of the third party or parties making the Offer); (b) the Company's intention of accepting the Offer on such terms and conditions; and (c) the Company's agreement to enter into a proposed Alternative Transaction with ShopNow.com on terms and conditions substantially similar to those set forth in the Offer (a "Notice of Offer"). ShopNow.com will have 10 days from the receipt of such Notice of Offer (the "Exclusivity Period") to deliver written notice to the Company of ShopNow.com's acceptance of the Company's offer to enter into an agreement with the Company providing for a Alternative Transaction on terms and conditions substantially similar to those set forth in the Notice of Offer (a "Notice of Acceptance"); provided, however, that to the extent that the consideration being offered to the Company in the Offer consists of property other than cash or securities, then ShopNow.com's acceptance shall, in lieu of such noncash property or securities, provide for the payment of other consideration to the Company of substantially equivalent fair market value. The Company agrees that it will not accept any Offer, enter into any definitive agreement providing for, or otherwise consummate any Alternative Transaction with any third party other than ShopNow.com until the expiration of the Exclusivity Period. If ShopNow.com delivers a Notice of Acceptance to the Company prior to the expiration of the Exclusivity Period, then ShopNow.com and the Company shall, within 20 days following receipt of the Notice of Acceptance, enter into an agreement, on final terms and conditions to be negotiated in good faith between them, providing for a Alternative Transaction on the terms and conditions provided for in the Notice of Offer and Notice of Acceptance. -53- 6.4 NOTIFICATION OF CERTAIN MATTERS Each party shall give prompt notice to the other parties of (a) the occurrence or nonoccurrence of any event that would be reasonably likely to cause any representation or warranty made by such party contained in this Agreement to be untrue or inaccurate in any material respect and (b) any material failure by such party 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 6.4 shall not limit or otherwise affect the remedies available to the parties hereunder. 6.5 FURTHER ACTION; COMMERCIALLY REASONABLE EFFORTS Upon the terms and subject to the conditions hereof, each of the parties hereto shall use commercially reasonable efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated hereby, including, without limitation, using commercially reasonable efforts to obtain all waivers, licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental authorities and parties to contracts with the Company as are necessary for the consummation of the transactions contemplated hereby and to fulfill the conditions to the Merger. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement or the Operative Documents, each party to this Agreement shall use commercially reasonable efforts to promptly take all such action. After the Closing, each party hereto, at the request of and without any further cost or expense to the other parties, shall take any further actions reasonably necessary or desirable to carry out the purposes of this Agreement or any Operative Document, to vest in the Surviving Corporation full title to all properties, assets and rights of the Company and to effect the issuance of the Closing Shares pursuant to the terms and conditions hereof. 6.6 PUBLICITY No party hereto shall issue any press release or otherwise make any statements to any third party with respect to this Agreement or the transactions contemplated hereby other than the issuance by ShopNow.com of a press release announcing this Agreement and the transactions contemplated hereby or as required by law. Any party who is required by law to make any such disclosure must provide notice in advance of the disclosure to all other parties. Such notice shall contain (a) the contents of the proposed disclosure; (b) the reasons that the party contemplating disclosure believes -54- that disclosure is required by law; and (c) the proposed time and place of such disclosure. 6.7 BRING-DOWN CAPITALIZATION SCHEDULE No later than three days prior to the Closing, the Company shall deliver to ShopNow.com an updated version of SCHEDULE 2.3 to the Company Disclosure Memorandum (Capitalization). The updated SCHEDULE 2.3 shall be deemed an amendment to SCHEDULE 2.3 attached hereto. 6.8 EXECUTION OF ALL OPERATIVE DOCUMENTS Each party shall execute at or prior to the Closing each Operative Document to which he, she or it is a party. 6.9 STOCKHOLDER APPROVAL The Company will call a special Stockholders Meeting as soon as practicable but in no event later than 30 days after the Form S-4 is declared effective by the SEC to submit this Agreement, the Merger and related matters for the consideration and approval of the Company's Stockholders ("COMPANY STOCKHOLDERS MEETING"). Such approval will be recommended by the Company's Board of Directors, subject to the fiduciary obligations of its directors. Such meeting will be called, held and conducted, and any proxies will be solicited, in compliance with applicable law. 6.10 PREPARATION OF S-4 The Company will as promptly as practicable provide to ShopNow.com and its counsel for inclusion within the Proxy Statement/Prospectus and the S-4 in a form reasonably satisfactory to ShopNow.com and its counsel, such information concerning the Company, its operations, capitalization, technology, share ownership and other information as ShopNow.com or its counsel may reasonably request. By February 15, 2000, or as soon as practicable thereafter, ShopNow.com and the Company shall prepare and file with the SEC the Proxy Statement and any other documents required by the Exchange Act in connection with the Merger, and ShopNow.com shall prepare and file with the SEC the S-4, in which the Proxy Statement will be included as a part of the prospectus. Each of ShopNow.com and the Company shall use its commercially reasonable best efforts to have the S-4 declared effective under the Securities Act as promptly as practicable after such filing. Prior to the effective date of the S-4, ShopNow.com shall also take any action required to be taken under any applicable federal or state securities or blue sky laws in connection with the issuance of the ShopNow.com Common Stock in the Merger. The Company agrees that the Proxy -55- Statement/Prospectus will comply as to form in all material respects with the provisions of all applicable laws, including the provisions of the Exchange Act and the rules and regulations of the SEC thereunder, except that no representation is made by the Company with respect to information supplied by ShopNow.com specifically for inclusion therein. ShopNow.com agrees that the S-4 and the Proxy Statement/Prospectus will comply as to form in all material respects with the provisions of all applicable laws including the provisions of the Securities Act and the Exchange Act and the rules and regulations of the SEC thereunder, except that no representation is made by ShopNow.com with respect to information supplied by the Company specifically for inclusion therein. 6.11 SHOPNOW.COM COMMON STOCK ShopNow.com agrees to authorize for listing on the Nasdaq National Market the shares of ShopNow.com Common Stock comprising the Closing Shares by filing with the Nasdaq National Market a Notification of Listing of Additional Shares (or such other form as may be required by the Nasdaq National Market) as soon as reasonably practicable after the Closing or otherwise in accordance with the rules and regulations of the Nasdaq National Market. 6.12 RETIREMENT OF INDEBTEDNESS Immediately prior to the Effective Time, ShopNow.com agrees to pay off all outstanding indebtedness of the Company under the Alpine Capital Note. ARTICLE VII - TERMINATION, AMENDMENT AND WAIVER 7.1 TERMINATION This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time (notwithstanding approval of this Agreement by the stockholders): (a) by mutual written consent of the Company and ShopNow.com; (b) by either the Company or ShopNow.com, if the Merger has not been consummated by June 22, 2000; provided, however, that the right to terminate this Agreement under this subsection (b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before such date; -56- (c) by either the Company or ShopNow.com, if there shall be any law or regulation that makes consummation of the Merger illegal or if any judgment, injunction, order or decree enjoining ShopNow.com, Merger Sub or the Company from consummating the Merger is entered and such judgment, injunction, order or decree shall become final and non-appealable; provided, however, that the party seeking to terminate this Agreement pursuant to this subsection (c) shall have used all reasonable efforts to remove such judgment, injunction, order or decree; (d) by the Company, in the event of a material breach by ShopNow.com or Merger Sub of any representation, warranty or agreement contained herein that has not been cured or is not curable by June 22, 2000; or (e) by ShopNow.com, in the event of a material breach by the Company of any representation, warranty or agreement contained herein that has not been cured or is not curable by June 22, 2000. (f) by either ShopNow.com or the Company upon written notice to the other party, in the event that the Undisclosed Liability as determined in accordance with Section 1.7.1(c)(ii) exceeds $1,000,000 and the parties are unable to agree within 15 days after the date such Undisclosed Liability is determined to any adjustment to the Closing Shares. 7.2 EFFECT OF TERMINATION (a) Except as specifically provided in this Section 7.2, in the event of the termination of this Agreement pursuant to Section 7.1 hereof, there shall be no further obligation on the part of any party hereto, except that nothing herein shall relieve any party from liability for any willful breach hereof. (b) If ShopNow.com shall terminate this Agreement pursuant to (i) Section 7.1(b) by reason of the Company's failure or inability to satisfy the conditions to the Merger or (ii) Section 7.1(e) by reason of the Company's breach of the covenants contained in Sections 6.1, 6.3 or 6.6 (a "BREAKUP TERMINATION"), and the Company consummates an Alternative Transaction on or before the one-year anniversary of such termination, the Company shall: (i) pay to ShopNow.com upon the closing of the Alternative Transaction a termination fee (the "TERMINATION FEE"), equal to 20% of the aggregate value of cash and non-cash consideration (including the assumption of any liabilities of the Company) received and to be received by the Company and/or its stockholders in respect of such Alternative Transaction in excess of $45 million. -57- ARTICLE VIII - GENERAL 8.1 SURVIVAL All representations and warranties contained in this Agreement or in the Operative Documents or in any certificate delivered pursuant hereto or thereto shall terminate upon the Effective Time. The covenants and agreements contained in this Agreement shall survive and continue until all obligations with respect thereto shall have been performed or satisfied or shall have been terminated in accordance with their terms. 8.2 TAX MATTERS - REORGANIZATION TREATMENT Solely for tax purposes and except as otherwise required by law, ShopNow.com shall, and shall cause Merger Sub and the Company to: (a) report the Merger as a reorganization under Section 368(a)(1) of the Code on all applicable U.S. federal, state and local Tax Returns (as defined in Section 2.8) and (b) keep records and file in connection with their respective U.S. federal and state Tax Returns all such information as may be required by Treasury Regulation Section 1.368-3. 8.3 EXPENSES If the transactions contemplated by this Agreement are not consummated, each party shall pay its own fees and expenses incident to the negotiation, preparation and execution of this Agreement and the Operative Documents (including legal and accounting fees and expenses); provided, however, that the attorneys' fees and expenses of the prevailing party in any action brought hereunder shall be paid by the other party to such action. If the transactions contemplated by this Agreement are consummated, ShopNow.com will pay the reasonable fees and expenses of the Company and the Key Stockholders incident to the negotiation, preparation and execution of this Agreement and the Operative Documents (other than the costs and expenses of the attorneys, accountants and other representatives of the Key Stockholders in excess of $10,000, which excess expenses shall remain the responsibility of the Key Stockholders). The stockholders of the Company shall pay any and all brokerage or finders' fees or agents' commissions or any similar charges incurred in connection with the Merger and set forth on Schedule 2.19 to the Company Disclosure Memorandum. 8.4 NOTICES Any notice, request or demand desired or required to be given hereunder shall be in writing given by personal delivery, confirmed facsimile transmission or overnight -58- courier service, in each case addressed as respectively set forth below or to such other address as any party shall have previously designated by such a notice. The effective date of any notice, request or demand shall be the date of personal delivery, the date on which successful facsimile transmission is confirmed or the date actually delivered by a reputable overnight courier service, as the case may be, in each case properly addressed as provided herein and with all charges prepaid. TO SHOPNOW.COM OR MERGER SUB: ShopNow.com Inc. 411 First Avenue South, Suite 200 North Seattle, Washington 98101 Fax: (206) 223-2324 Attention: Alan D. Koslow with a copy to: Perkins Coie LLP 1201 Third Avenue, 48th Floor Seattle, Washington 98101-3099 Fax: (206) 583-8500 Attention: Edmund Belsheim TO THE COMPANY: Ubarter.com Inc. 2815 2nd Avenue Suite 500 Seattle, WA 98121 Fax: (206)239-2729 Attention: Steven M. White with a copy to: Dorsey & Whitney LLP U.S. Bank Building Center 1420 Fifth Avenue, Suite 400 Seattle, WA 98101 Fax: (206) 903-8820 Attention: Michael Brown -59- 8.5 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 so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. 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 in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible. 8.6 ENTIRE AGREEMENT This Agreement, the Operative Documents, that certain Non-Disclosure Agreement dated on or about December 17, 1999, and the ShopNow.com Note, constitute the entire agreement among the parties with respect to the subject matter hereof and thereof and supersede all prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof and thereof (including, without limitation, the Letter of Intent, dated December 20, 1999, between ShopNow.com, the Company, and the Key Stockholders). 8.7 ASSIGNMENT This Agreement shall not be assigned by operation of law or otherwise; provided, however, that Merger Sub's rights and obligations may be assigned to and assumed by ShopNow.com or any other corporation wholly owned (directly or through intermediate wholly owned subsidiaries) by ShopNow.com. 8.8 PARTIES IN INTEREST This Agreement shall be binding upon and inure solely to the benefit of the parties hereto and their respective successors, heirs, legal representatives and permitted assigns, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. -60- 8.9 GOVERNING LAW; VENUE This Agreement shall be governed by, and construed in accordance with, the laws of the state of Washington applicable to contracts executed in and to be performed in that state. The parties irrevocably consent to the jurisdiction and venue of the state and federal courts located in King County, Washington in connection with any action relating to this Agreement (except to the extent provisions of Nevada Law apply to the Merger). 8.10 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. 8.11 COUNTERPARTS This Agreement may be executed and delivered (including by facsimile transmission) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed and delivered shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 8.12 WAIVER OF JURY TRIAL Each of ShopNow.com, the Company and Merger Sub hereby irrevocably waives all right to trial by jury in any action, proceeding or counterclaim (whether based on contract, tort or otherwise) arising out of or relating to this Agreement, the transactions contemplated hereby or the actions of such parties in the negotiation, administration, performance and enforcement hereof. 8.13 AMENDMENT This Agreement may not be amended except by an instrument in writing signed by ShopNow.com, Merger Sub and the Company. 8.14 WAIVER At any time prior to the Effective Time, any party hereto may (a) extend the time for the performance of any obligation or other act of any other party hereto, (b) waive any inaccuracy in the representations and warranties contained herein or in any document delivered pursuant hereto, or (c) waive compliance with any agreement -61- or condition contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party or parties to be bound thereby. [Signature Page Follows] -62- IN WITNESS WHEREOF, the parties hereto have entered into and signed this Agreement and Plan of Merger as of the date and year first above written. SHOPNOW.COM INC. /s/ Alan Koslow ------------------------------------------- Name --------------------------------------- Its ---------------------------------------- SHAMU ACQUISITION, INC. /s/ Alan Koslow ------------------------------------------- Name --------------------------------------- Its ---------------------------------------- UBARTER.COM INC. /s/ Steven M. White ------------------------------------------- Name --------------------------------------- Its CEO ---------------------------------------- EX-21.1 4 EXHIBIT 21.1 Exhibit 21.1 Subsidiaries of the Registrant
Name Jurisdiction of Incorporation - ---- ----------------------------- GO Software Inc. Washington CardSecure, Inc. Delaware 3019542 Nova Scotia Company Nova Scotia 3019543 Nova Scotia Company Nova Scotia 3037952 Nova Scotia Company Nova Scotia WebCentric, Inc. Kansas SpeedyClick, Corp. California Cortix Inc. Arizona AXC Corporation Washington Shamu Acquisition, Inc. Washington
EX-23.1 5 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement File No. 333-90099 of Form S-8 and Registration Statement File No. 333-92533 on Form S-8. /s/ Arthur Andersen LLP Seattle, Washington February 9, 2000 EX-27.1 6 EXHIBIT 27.1
5 1,000 YEAR YEAR YEAR DEC-31-1997 DEC-31-1998 DEC-31-1999 JAN-01-1997 JAN-01-1998 JAN-01-1999 DEC-31-1997 DEC-31-1998 DEC-31-1999 0 9,849 10,660 0 150 52,172 0 2,496 6,882 0 (230) (291) 0 59 825 0 14,422 77,084 0 5,188 24,145 0 1,063 4,760 0 23,783 274,174 0 8,744 33,653 0 1,837 5,409 0 0 0 0 35,070 0 0 6,559 325,502 0 (28,427) (96,289) 0 23,783 274,174 604 4,458 15,486 604 7,154 36,955 515 4,452 18,883 515 5,849 27,329 0 0 0 0 384 617 164 211 127 (4,766) (24,745) (75,943) 0 0 0 (4,766) (24,745) (75,943) 0 0 0 0 0 0 0 0 0 (4,766) (24,745) (75,943) (1.83) (7.01) (5.80) (1.83) (7.01) (5.80)
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