-----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, Sid0eYf9odqH928lz2+pX7d49xxH0MMymkrwsvnNM7YxcYZfiQS7AcW6KpKT0iau hosg4B9xHlqy2dhibhEQCQ== 0000929624-00-000147.txt : 20000214 0000929624-00-000147.hdr.sgml : 20000214 ACCESSION NUMBER: 0000929624-00-000147 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 20000211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORE COM INC CENTRAL INDEX KEY: 0001099413 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 943300529 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-30190 FILM NUMBER: 536080 BUSINESS ADDRESS: STREET 1: 520 THIRD ST STREET 2: 2ND FLR CITY: SAN FRANCISCO STATE: CA ZIP: 94107 BUSINESS PHONE: 4159799597 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on February 11, 2000 Registration No. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- MORE.COM, INC. (Exact name of registrant as specified in its charter)
Delaware 5912 94-3300529 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code No.) Identification No.)
520 Third Street Second Floor San Francisco, California 94107 (415) 979-9597 (Address and telephone number of principal executive offices and principal place of business) -------------- Donald M. Kendall, Jr. Chief Executive Officer more.com, Inc. 520 Third Street Second Floor San Francisco, California 94107 (415) 979-9597 (Name, address, and telephone number of agent for service) -------------- Copies to:
Gavin B. Grover, Esq. Steven L. Berson, Esq. Matthew Burns, Esq. Michael S. Russell, Esq. Jaclyn Liu, Esq. Michael A. DeAngelis, Esq. Donald C. Hunt, Esq. Wilson Sonsini Goodrich & Rosati Morrison & Foerster LLP Professional Corporation 425 Market Street 650 Page Mill Road San Francisco, California 94105 Palo Alto, CA 94304-1050
-------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] -------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Title of Each Class Proposed Maximum Amount of of Securities to be Registered Aggregate Offering Price (1)(2) Registration Fee - -------------------------------------------------------------------------------- Common Stock, $0.001 par value per share........... $86,250,000 $22,770
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Estimated solely for the purpose of determining the registration fee in accordance with Rule 457(o) under the Securities Act of 1933. (2) Includes the value of shares that the underwriters have the option to purchase to cover over-allotments, if any. -------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and it is not soliciting an offer to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion Preliminary Prospectus dated February 11, 2000 PROSPECTUS Shares more.com, Inc. Common Stock ----------- This is more.com, Inc.'s initial public offering. more.com is selling all of the shares. We expect the public offering price to be between $ and $ per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will trade on the Nasdaq National Market under the symbol "MORE." Investing in the common stock involves risks that are described in the "Risk Factors" section beginning on page 5 of this prospectus. -----------
Per Share Total --------- ----- Public offering price................................. $ $ Underwriting discount................................. $ $ Proceeds, before expenses, to more.com, Inc........... $ $
The underwriters may also purchase up to an additional shares at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The shares will be ready for delivery on or about , 2000. ----------- Merrill Lynch & Co. Lehman Brothers U.S. Bancorp Piper Jaffray ----------- The date of this prospectus is , 2000. Inside Front Cover ------------------ [Art depicting more.com's virtual operating model] TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 1 Risk Factors............................................................. 5 Forward-Looking Statements............................................... 21 Use of Proceeds.......................................................... 22 Dividend Policy.......................................................... 22 Capitalization........................................................... 23 Dilution................................................................. 25 Selected Consolidated Financial Data..................................... 26 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 27 Business................................................................. 34 Management............................................................... 51 Related Party Transactions............................................... 62 Principal Stockholders................................................... 65 Description of Capital Stock............................................. 68 Shares Eligible for Future Sale.......................................... 72 Underwriting............................................................. 74 Legal Matters............................................................ 77 Experts.................................................................. 77 Change in Principal Accountants.......................................... 77 Where You Can Find More Information...................................... 77 Index to Consolidated Financial Statements............................... F-1
--------------- You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date. --------------- more.com(TM), Acumin(TM), Acumin Corporation Custom Formulated Nutritional Supplements(TM), Acumin Custom Formula(TM), Acumin Personal Nutrition Program(TM), Acumins(TM), QuickShop(TM) and SmartSelect(TM) are trademarks of more.com. GreenTree SM, greentree.com SM and GreenTree Nutrition SM are service marks of more.com. This prospectus also includes trademarks and service marks of entities other than more.com. i PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in the common stock. You should read the entire prospectus carefully, including "Risk Factors" and our financial statements, before making an investment decision. more.com, Inc. more.com is a leading online health superstore that currently offers its customers more than 45,000 stock keeping units, or SKUs, in a variety of health product categories at everyday low prices. Our online health superstore contains over-the-counter medicine products, health and beauty aids, vision care products, nutritional supplements, baby products, prescription medications and other health products. Through our relationship with our third-party distribution and fulfillment providers, we have the opportunity to access over 300,000 health product SKUs that we could make available to our customers. In an effort to further enhance our customers' shopping experience, we have also created five customized specialty stores that are built around specific product categories and are closely integrated with our broader more.com superstore. These specialty stores include Acumins for personalized vitamins, GreenTree for natural health and beauty products, Clearly Contacts for vision products, Comfort Living for baby, back and healthy home products and Pharmacy for prescription drugs. In addition, we plan on increasing the number of specialty stores on our Web site over the next few years. To ensure that our customers can quickly find and purchase the health products they need, we have designed our Web site, www.more.com, with navigation tools that provide our customers with an intuitive, easy-to-use shopping interface. For example, we have developed proprietary solutions, such as our QuickShop(TM) technology, that dramatically reduce the amount of time necessary for customers to find and purchase products in our online health superstore. We use a business model that involves outsourcing the majority of our operating infrastructure including distribution and fulfillment, credit card processing and the hosting of our system infrastructure and database servers. We believe that these outsourcing arrangements provide us with a variety of benefits, including capital and cost efficiencies, operating flexibility and enhanced scalability. By taking advantage of these benefits, we believe we are able to offer a broader selection of products at lower prices and operate with significantly lower operating expenses than many of our competitors. Additionally, this operating model allows us to easily add new product categories and specialty stores, minimizes the cost of carrying inventory and enables us to focus on maintaining a superior customer experience, which is critical to building customer loyalty. As of December 31, 1999, we have sold our products to more than 57,000 customers, of which more than 46,000 were added during the fourth quarter of 1999. During January 2000, approximately 45.8% of our total revenue came from repeat customers. Media Metrix estimates that approximately 584,000 unique visitors came to our site in December 1999, representing a 10.6% increase over the estimated 528,000 unique visitors to our site in November 1999. "Unique visitor" is an industry term used to describe an individual that has visited a particular Internet site once or more during a specific period of time. We believe that the increase in visitor traffic to our Web site and relatively high levels of repeat purchases demonstrate our customers' growing satisfaction with our shopping experience and value proposition. Our objective is to become the world's leading online health superstore, offering a broad selection of products and services at everyday low prices, backed by superior customer service. We plan to expand our product offerings and specialty stores through both internal growth and acquisitions. Additionally, we intend to continue to work with our distribution and fulfillment providers to obtain more timely and accurate product information, shipping and fulfillment. 1 Our business strategy focuses on offering our customers low prices, and we intend to offer the lowest prices online for the most frequently purchased health products. Initially, however, we offered a broad range of products at very low prices and pursued aggressive marketing campaigns, such as free shipping for life, $1.00-for-life and fixed prices-for-life product promotions as part of our charter customer promotion, to drive traffic to our Web site. As customer loyalty and recognition of our brand name have increased, we have recently begun to modify our pricing and merchandising strategy to improve our overall gross margins without experiencing a decline in the growth of overall sales volumes or customer levels. Additionally, the creation of our specialty stores on our Web site has promoted cross-selling opportunities that enable us to migrate our customers to higher margin products. We intend to further refine this pricing strategy over time. In early February 2000, we acquired Comfort Living, Inc., an Internet retailer specializing in personal care and comfort products, back care and pain reduction products, baby care and maternity products and allergy control products. Under the terms of the agreement, the stockholders of Comfort Living received $2.5 million in cash and 1,500,000 shares of our common stock. Comfort Living's net revenues were $4.6 million for the year ended December 31, 1999. In early February 2000 we also completed the private placement of our Series E convertible preferred stock to a group of investors led by Bain Capital and its affiliates for $25.5 million. more.com was formed as a California limited liability company in January 1998 under the name Nutrition Direct, LLC and was incorporated in Delaware as GreenTree Nutrition, Inc. in May 1998. In July 1999, we changed our name to more.com. Our executive offices are located at 520 Third Street, Suite 245, San Francisco, California 94107, and our telephone number is (415) 979-9597. Our primary Web site is located at www.more.com. Information on our Web site does not constitute part of this prospectus. 2 The Offering Common stock offered................................ shares Common stock to be outstanding after this offering.. shares Use of proceeds..................................... We estimate that our net proceeds from this offering without exercise of the over-allotment option will be approximately $ million. We intend to use the net proceeds to build out our Web site and our specialty stores within our Web site, acquire and develop complementary businesses, technologies and strategic relationships and for general corporate purposes, including working capital and capital expenditures. Pending these uses, the net proceeds of this offering will be invested in short-term, investment grade, interest-bearing instruments. Risk factors........................................ See "Risk Factors" and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock. Proposed Nasdaq National Market symbol.............. MORE
--------------- Unless otherwise noted, all information in this prospectus assumes that: . the underwriters will not exercise their option to purchase additional shares of common stock to cover over-allotments, if any; and . all outstanding shares of our preferred stock will convert into shares of common stock upon the completion of this offering. 3 Summary Consolidated Financial Information
Period from January 9, 1998 (inception) to Year Ended December 31, 1998 December 31, 1999 ------------------ ------------------- (in thousands, except per share data) Consolidated Statement of Operations Data: Net revenues............ $ 99 $ 2,923 Gross profit (loss)..... (44) (830) Operating loss.......... (5,236) (34,812) Net loss................ (5,169) (34,685) Accretion of discount on mandatorily redeemable convertible preferred stock........ (101) (1,597) Net loss available to common stockholders.... (5,270) (36,282) Basic and diluted net loss per share......... $ (5.90) $ (15.74) Shares used in computing basic and diluted net loss per share......... 893 2,305 Pro forma basic and diluted net loss per share (unaudited)...... $ (2.68) Shares used in computing pro forma basic and diluted net loss per share (unaudited)...... 13,556
December 31, 1999 -------------------------- Actual As Adjusted ------------- ------------ (unaudited) (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents........................ $ 24,655 $ Working capital.................................. 17,576 Total assets..................................... 40,161 Borrowings under lines of credit, less current portion......................................... 1,376 1,376 Mandatorily redeemable convertible preferred stock........................................... 58,064 -- Total stockholders' equity (deficit)............. (27,765) Three Months Ended ----------------------------------------------- March 31, June 30, September 30, December 31, 1999 1999 1999 1999 --------- -------- ------------- ------------ (in thousands) (unaudited) Quarterly Consolidated Statement of Operations Data: Net revenues.................. $ 162 $ 260 $ 666 $ 1,835 Gross profit (loss)........... (44) (63) (90) (633) Operating loss................ (2,533) (4,285) (9,759) (18,235) Net loss...................... (2,458) (4,240) (9,907) (18,080)
4 RISK FACTORS This offering involves a high degree of risk. You should carefully consider the risks described below and the other information in this prospectus, including our consolidated financial statements and the related notes, before you purchase any shares of our common stock. Additional risks and uncertainties, including those generally affecting the market in which we operate or that we currently deem immaterial, may also impair our business. Risks Relating to more.com We have a limited operating history upon which to evaluate our business prospects and may face difficulties encountered by early stage companies. From our inception in January 1998 through May 1998, we had no sales and our operating activities related primarily to the planning and development of our original Web site. Beginning in May 1998, we had some sales as GreenTree Nutrition but the majority of our sales did not occur until the launch of the more.com Web site in August 1999. Accordingly, we have a limited operating history upon which to base an evaluation of our business and prospects. In assessing our prospects, you should consider the risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets, particularly companies in the e-commerce market. These risks include our ability to: . establish and increase awareness of the more.com brand and strengthen customer loyalty; . attract and retain customers at a reasonable cost; . process transactions quickly, accurately and securely; . ensure the dependability of a limited number of inventory and order processing suppliers; . continue to offer products that appeal to our customers; . manage rapidly changing and expanding operations; . maintain our current, and develop new, strategic relationships; . implement and successfully execute our business and marketing strategy; . provide superior customer service; and . continue to develop and enhance our technology and systems. Because of our limited operating history and the early stage of development of our market, we have limited insight into trends that may emerge and affect our business. We cannot assure you that our business strategy will be successful or that we will successfully address the above challenges. We have incurred substantial losses and expect to continue to incur losses for the foreseeable future. We have not achieved profitability and expect to continue to incur operating losses for the foreseeable future. We incurred net losses of approximately $5.2 million for the period from January 9, 1998 (our inception) through December 31, 1998 and net losses of $34.7 million for the year ended December 31, 1999. We expect the rate at which we incur these losses will increase significantly from current levels. In the future, we will need to generate significant revenues to achieve profitability. Although our revenues have grown substantially in recent quarters, we cannot assure you that we will achieve sufficient revenues for profitability. To attract customers to our Web site, we sell a substantial portion of our products at very competitive prices, resulting in low and sometimes negative gross margins on our product sales. Our ability to become profitable depends on, among other things: . our ability to generate and sustain substantially higher net sales with improved gross margins while maintaining reasonable operating expense levels; 5 . our ability to generate significant advertising revenue; and . our ability to sell other higher margin products and services. In addition, we will incur expenses related to product shipping that we may decide not to fully pass on to customers. We expect that it will take several years to build a critical mass of customers. We cannot assure you that we will obtain enough customer traffic or a high enough volume of purchases to achieve profitability. If revenues grow more slowly than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted accordingly, our business will be materially and adversely affected. We depend almost exclusively on Bergen Brunswig to supply and distribute our health products, and its failure to adequately supply and distribute our health products could reduce our revenues and harm our business. We depend on Bergen Brunswig Drug Company to provide the majority of our health products and to fulfill our customers' orders. Since August 1999, a substantial majority of our product sales revenues were derived from products supplied by Bergen Brunswig. We cannot guarantee that Bergen Brunswig will continue to supply a sufficient quantity of inventory on a timely basis to satisfy our customers' order requirements. If Bergen Brunswig were to terminate or refuse to renew our distribution arrangement with them, we would have to purchase our health products from other distributors. Bergen Brunswig's termination or failure to renew our contract could cause significant delays in our ability to fulfill our customers' orders, and we may not be able to locate another distributor that can provide comparable fulfillment, processing and shipping services in a timely manner or on acceptable commercial terms. Our distribution agreement with Bergen Brunswig expires in July 2009. However, either party may terminate the agreement after each year under specific occurrences, including failure to perform material obligations under the agreement, entering into a bankruptcy, receivership or similar proceedings and adverse regulatory changes. We are also subject to risks associated with Bergen Brunswig's ability to replenish its inventory in a timely manner. Our contract with Bergen Brunswig does not guarantee the availability of merchandise, establish guaranteed prices or provide for the continuation of particular pricing practices. Although alternative sources of supply for certain of the products we offer exist, we have not established alternative sources for our products. Our contract with Bergen Brunswig does not restrict it from selling products to other retailers, including online drugstores, which could limit our ability to supply the quantity of products requested by our customers. Our distribution agreement with Bergen Brunswig does not require them to set aside any amount of inventory to fulfill our orders or to give our orders priority over other resellers to whom they sell. If we are unable to supply products to our customers due to Bergen Brunswig's delay or inability to fulfill our orders, our business would be substantially harmed. Our future success also depends on our ability to provide timely and accurate order fulfillment. We rely on Bergen Brunswig to fulfill our orders, maintain and track inventory and provide us with financial data and related fulfillment and distribution information. In addition, our order fulfillment and distribution process requires us to cooperate extensively with Bergen Brunswig with respect to the coordination of separate information technology systems. However, we have limited control over their shipping and processing procedures. If our customers become dissatisfied with Bergen Brunswig's fulfillment practices, our reputation and the more.com brand could suffer. We rely exclusively on Medi-Mail for the fulfillment of pharmaceutical products that we sell, and our prescription drug business would be significantly disrupted if this relationship is terminated. We currently rely exclusively on Medi-Mail, a wholly owned subsidiary of Bergen Brunswig, for fulfillment and delivery of pharmaceutical products for our online pharmacy. If Medi-Mail were unable or unwilling for any reason to provide these products, our ability to continue delivery of pharmaceutical products would be negatively impacted. We cannot assure you that we will succeed in finding additional providers of pharmaceutical products on reasonable terms, if at all. 6 We are dependent on several third-party providers to whom we outsource a majority of our operating infrastructure. If these parties are unwilling or unable to continue providing services, our business could be seriously harmed. We outsource the majority of our operating infrastructure to third-party providers. For example, we use Airborne Express, United Parcel Service and the U.S. Post Office to deliver the majority of our customer orders. In addition, we rely on Lens Express to fulfill our customers' orders for vision products. We depend on CyberSource Corporation for most of our credit card processing. Due to our dependence on these third parties, we are subject to various risks associated with their operations, which are largely outside our control. If the services of any of these third parties become unsatisfactory, our customers may experience lengthy delays in receiving their orders. We may not be able to find a suitable replacement on a timely basis or on commercially reasonable terms. Failure to deliver products to our customers in a timely and accurate manner would harm our reputation, the more.com brand and our business. In addition, if we establish new relationships with third-party providers, we cannot assure you that we will be able to integrate our respective information systems on a timely basis. If our logistics providers' systems fail or are unable to scale or adapt to our changing needs, we may not have adequate, accurate or timely inventory or financial information. Our failure to have adequate, accurate or timely inventory and financial information would harm our ability to manage our business effectively. Our ability to provide our customers with a broad and deep selection of products depends in large part on the vendors who supply inventory to Bergen Brunswig and our other fulfillment providers. These vendors may decide, for reasons outside our control, not to allow their products to be offered for sale on the Internet. These vendors may also cause our fulfillment providers not to sell products to us. If our fulfillment providers are prevented from securing sufficient inventory to meet the demands of our customers, our business would be severely harmed. We currently rely exclusively on Bergen Brunswig to provide promotional advertisements on our Web site for all health products for which it acts as our fulfillment provider, and our revenues and future profitability would be negatively impacted by its failure to adequately perform these services. We currently rely on Bergen Brunswig as our exclusive sales representative for the marketing and sale of advertisements on our Web site for all health products for which it acts as our fulfillment provider. Bergen Brunswig may terminate this contractual relationship anytime prior to August 1, 2000, and we may terminate the exclusivity of our arrangement with Bergen Brunswig after August 1, 2000 if it fails to generate a specified amount of advertising revenue. Further, on February 1, 2001, our management and Bergen Brunswig will evaluate the feasibility of an ongoing exclusive arrangement. If Bergen Brunswig terminates its relationship with us earlier or if it is unable or unwilling for any reason to provide its services for the duration of the contractual term, our ability to generate advertising revenues would be negatively impacted. We cannot assure you that we will succeed in internally generating advertising revenue with similar returns or finding additional sales representatives on favorable terms, if at all. If there is not a widespread acceptance of purchasing health products online, our revenue growth and future profitability will be negatively impacted. If we do not attract and retain a high volume of customers to our online health superstore at a reasonable cost, our business and operating results will be negatively affected. We may not be able to convert a large number of customers from traditional shopping methods to online shopping for health products. Specific factors that could prevent widespread customer acceptance of our online health superstore include: . shipping charges, which do not apply when shopping at traditional brick and mortar stores; . delivery time associated with Internet orders, as compared to the immediate receipt of products at traditional brick and mortar stores; 7 . pricing that does not meet customer expectations; . product damage from shipping or shipments of wrong or expired products; . customer concerns about the security of online transactions and the privacy of their personal health information; . delays in responses to customer inquiries; and . difficulties experienced by our customers in returning or exchanging orders. If we fail to establish and strengthen the more.com brand, our revenue from operations may not grow or may grow at a lower rate than expected. We believe that achieving widespread acceptance of the more.com brand is critical to our business, particularly because of the early stage and competitive nature of the online market for health products. In particular, if we do not establish the more.com brand quickly, we may lose the opportunity to build a critical mass of customers. Moreover, if we are unsuccessful in our branding efforts, advertisers may not view our Web site as an effective marketing and sales channel for their merchandise, resulting in decreased advertising revenues. Promoting and positioning the more.com brand will depend largely on: . the success of our and Bergen Brunswig's advertising and promotional efforts; . our ability to provide our customers with a broad selection of health products at competitive prices; and . attracting and training customer service personnel to provide our customers with high-quality customer service. We intend to pursue an aggressive promotional strategy to build the more.com brand. These initiatives will involve significant expenditures. We cannot assure you that these marketing and brand promotion activities will yield increased revenues or that revenues will be sufficient to offset the expenses incurred in building our brand. We may not successfully expand the breadth and depth of our product offerings. We intend to expand the breadth and depth of our product offerings by selling a broader assortment of health products on our Web site. Expansion of our offerings in this manner will require significant additional expenditures and could strain our management, financial and operational resources. For example, we may need to incur significant expenses, develop relationships with new fulfillment providers or manufacturers, or comply with new regulations, specifically those in the prescription drug and pharmaceutical areas. We cannot assure you that we will be able to expand our product and service offerings in a cost-effective or timely manner. Furthermore, any new product offerings or sales formats that are not favorably received by consumers could damage our reputation and the more.com brand. The lack of market acceptance of these efforts or the inability to generate satisfactory revenues to offset the cost of expanded product offerings could harm our business. While our continued reliance on aggressive price-based promotions may prevent us from achieving profitability, the elimination of these promotions may have a negative impact on our product sales and customer base. We established a charter customer promotion beginning with the launch of the more.com Web site on August 17, 1999 that ran until January 26, 2000. The purpose of the promotion was to attract and retain customers. At the end of the promotion, approximately 85,000 customers were charter customers. The program allowed charter customers to lock-in the prices for all product SKUs that they purchased during the promotion period, for the life of the product SKU. The program also allowed charter customers to receive free shipping with future purchases, as long as the purchase includes at least one product SKU purchased during the charter customer promotion period. 8 We recorded a liability of $1.7 million for estimated future losses attributable to the charter customer promotion through December 31, 1999. We also deferred revenue of $120,000 in 1999, which represents the estimated value of this promotion to charter customers. We will continue to assess our exposure to loss for these products and adjust our reserves as necessary. A significant change in actual consumer purchasing patterns, inflation or product life cycles could have a material effect on the amount of the required reserve and our results of operations. On November 8, 1999, we also instituted a $1.00 days promotional campaign in an effort to drive consumers to our online health superstore and build the more.com brand. Currently, this $1.00 days promotion allows customers to purchase various product SKUs for $1.00 on our Web site and receive free shipping if the customer's total order exceeds $20.00. Our continued reliance on these types of aggressive price-based promotional activities would make it very difficult for us to ever achieve profitability. As a result, we have recently terminated the charter customer program and intend to eventually end our $1.00 days promotion. The elimination of these and similar promotions may result in a decline in product revenues and a reduced customer base if current or prospective purchasers shop elsewhere for lower-priced products. Furthermore, we may be unable to attract new online customers, many of whom use the Web to shop for bargains. The occurrence of any of these events would have a negative impact on our financial condition. Our quarterly revenues and operating results may fluctuate and therefore they are not indicative of future performance. Our revenues and operating results have varied in the past and will continue to fluctuate significantly from quarter to quarter due to a number of factors, many of which are outside of our control. Some important factors affecting our revenues and operating results include: . demand for our products; . our ability to attract visitors to our Web site and convert those visitors into customers; . frequency of repeat purchases by customers; . the announcement or introduction of new or enhanced sites, services and products by us or our competitors; . changes in the growth rate of Internet usage; . average order size and the mix of products sold; . our ability to scale technology and upgrade order processing capabilities; . the amount and timing of the incurrence of operating costs relating to the expansion of our business, operations and infrastructure and the integration costs of potential acquisitions; . our ability and the ability of our fulfillment providers to ensure sufficient product supply; . changes in pricing policies by us or our competitors; and . changes in government regulation. We currently expect that substantially all of our revenues for the foreseeable future will come from orders of health products on our Web site. The volume and timing of these orders are difficult to predict because the online market for health products is in its infancy. Our operating expenses are largely based on anticipated revenue trends and a high percentage of our expenses are fixed in the short term. As a result, a delay in generating or recognizing revenue for any reason could cause significant variations in our operating results from quarter to quarter and could result in substantial additional operating losses. 9 Historical trends and quarter-to-quarter comparisons of our operating results are not good indicators of our future performance. In some future quarter or quarters, our operating results may be below the expectations of public market analysts or investors. In that event, the market price of our common stock may decline significantly. Because we depend on third parties to provide content, reliable software, systems and related services, our business would be disrupted if any one of them terminates its relationship with us. We intend to continue to strategically license content for our Web site from third parties, including content that is integrated with internally developed content and used on our Web site to provide key services. These third-party content licenses may not be available to us on commercially reasonable terms in the future, and we may be unable to integrate third-party content with our own content. The inability to obtain any third-party content licenses could result in delays in site development or services until equivalent content can be identified, licensed and integrated. Any delays in site development or services could negatively impact our business and operating results. We currently license technologies and information incorporated into our Web site from third parties. As we continue to introduce new services, we may be required to license additional technology and information from others. We cannot assure you that these third-party technology and information licenses will continue to be available to us on commercially reasonable terms, if at all. Any failure to obtain any of these technology and information licenses could result in delays or reductions in the introduction of new features, functions or services and could negatively affect the performance of our existing services. We have also contracted with Oracle Corporation to assist in the integration and customization of our enterprise resource planning applications and provide other consulting services and have contracted with Level 3 Communications to host our system hardware. The failure of these third parties to provide these services could negatively affect the performance of our existing services until another third party that can provide similar services can be identified. Several of the third parties upon whom we depend for software, systems and related services have a limited operating history, have relatively immature technology and are themselves dependent on reliable delivery of services from others. As a result, our ability to deliver various services to our customers may be adversely affected by the failure of these third parties to provide reliable software, systems and related services to us. We may not be able to compete successfully against current and future competitors. We compete in a market that is highly competitive and expect competition to intensify in the future. We currently or potentially compete with a variety of companies in several broad categories, including: . chain drugstores such as CVS, Eckerd's, Rite Aid and Walgreen's; . mass market retailers such as K Mart, Target and Wal-Mart; . supermarkets such as Albertson's, Kroger, Safeway and Whole Foods Market; . warehouse clubs such as Costco Wholesale; . online retailers of health products such as drugstore.com, MotherNature.com and PlanetRX.com; . mail-order pharmacies such as Rx America; . prescription benefits managers such as Express Scripts and Merck; 10 . Internet portals and online service providers that feature shopping services such as America Online, Excite, Lycos and Yahoo!; and . cosmetics departments at major department stores such as Bloomingdale's, Macy's and Nordstrom. Many of our competitors have existed for a longer period, have greater financial and technical resources, have more established marketing relationships with leading manufacturers and advertisers or have secured a greater presence in distribution channels than we have. Some of these companies may also commence or expand their presence on the Internet. If we fail to attract and retain a large customer base and our competitors establish a more prominent market position relative to ours, our ability to grow will be inhibited. We also believe we may face a significant competitive challenge from alliances formed among our competitors. Some of these companies already have entered into strategic relationships with one another. The combined resources of these partnerships could pose a significant competitive challenge to us. We believe the principal factors that will draw customers to an online store include brand availability, selection, personalized services, confidentiality, convenience, price, accessibility, customer service, quality of search tools, quality of content and reliability and speed of fulfillment for products ordered. We will have no control over how successful our competitors are in addressing these factors. In addition, our online competitors can duplicate many of the products, services and content offered on our Web site. Increased competition could result in price reductions, fewer customer orders, reduced gross margins and loss of market share. Limited insurance reimbursement coverage may reduce our ability to sell pharmacy products online, which would reduce our revenues. To obtain reimbursement on behalf of our customers for the prescription products that they purchased on our Web site, we need to enter into contracts with numerous insurance companies and pharmacy benefit managers, or PBMs. We currently only offer reimbursements through our alliance with PlusCare. Our ability to enter into contracts with insurance companies and PBMs is uncertain. Many of these companies are in the early stages of evaluating the impact of the Internet and online pharmacies on their businesses. These companies may delay their decisions to contract with online pharmacies or may decide to develop their own Internet capabilities that may compete with us. Additionally, many insurance companies have existing contracts with chain drugstores and PBMs that have announced their intentions to establish online pharmacies. Some insurance companies and PBMs will likely contract with only one or a limited number of online pharmacies. If our online competitors obtain these contracts and we do not, we would be at a competitive disadvantage. In addition, we must process each insurance application individually, which may raise the costs of processing prescription orders and delay our order processing time. If customers do not accept our online insurance coverage procedure, our business could be adversely affected. Any errors in the filling or packaging of the prescription drugs we dispense may expose us to liability and negative publicity. Pharmacy errors relating to prescriptions, dosage and other aspects of the medication dispensing process can produce liability for us that our insurance may not cover. Because our prescription drug fulfillment provider, Medi-Mail, distributes pharmaceutical products directly to the consumer, this service is a very visible part of the medication distribution chain and may create risks of liability claims for us. Pharmacists are required by law to offer counseling, without additional charge, to our customers about medication, dosage, delivery systems, common side effects and other information deemed significant by the 11 pharmacists. Medi-Mail's pharmacists have a duty to warn customers regarding any potential adverse effects of a prescription drug if the warning could reduce or negate these effects. This counseling is in part accomplished through Medi-Mail's e-mail system and inserts that are included with the prescription, which may increase the risk of miscommunication because the customer is not personally present or may not have provided all relevant information. We also post product information on our Web site. Providing information on pharmaceutical and other products creates the potential for claims to be made against us for negligence, personal injury, wrongful death, product liability, malpractice, invasion of privacy or other legal theories based on our product or service offerings. Our general liability insurance, which includes coverage for product liability and professional liability, may not cover potential claims of this type or may not be adequate to protect us from all liability that may be imposed. We may be unable to protect our Internet domain names, which are essential to our business. We currently hold the Internet domain name more.com, as well as various other related names. If we are unable to protect these domain names, our competitors could capitalize on our brand recognition. The acquisition and maintenance of domain names generally are regulated by governmental agencies and their designees. The regulation of domain names has changed and is subject to further change in the near future. As a result, we may be unable to acquire or maintain relevant domain names. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. Therefore, we could be unable to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our trademarks and other proprietary rights. Also, third parties may be able to prevent us from continuing to use one or more of our domain names. If we do not protect our intellectual property rights, unauthorized use and misappropriation of our technology could occur. We rely or may in the future rely on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect the proprietary aspects of our technology. The legal protections upon which we rely afford only limited protection for our intellectual property and trade secrets. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our sales formats or obtain and use information that we regard as proprietary. Moreover, our means of protecting our proprietary rights may be inadequate, and our competitors could independently develop similar technology. We also cannot be certain that our technology does not or will not infringe upon valid patents, copyrights or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. We may incur substantial expenses in defending against these third-party infringement claims, regardless of their merit. Successful infringement claims against us may result in substantial monetary liability or may materially disrupt the conduct of our business. In July 1999, we filed an application for a U.S. trademark registration of more.com. We may be unable to secure this registration. It is also possible that our competitors or others will adopt service names similar to ours, thereby impeding our ability to build brand identity and possibly leading to customer confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of the term more.com. Any claim or customer confusion related to our trademark, or our failure to obtain trademark registration, would negatively affect our business. We are a defendant in a lawsuit commenced by More Online alleging, among other things, that our name more.com is confusingly similar to More Online's name. With this lawsuit, More Online is seeking to prevent us from using the name more and the URL www.more.com. Although we are vigorously defending this litigation, we cannot be certain that our defense will be successful. If we do not prevail in this litigation, we could be prevented from using the more.com name and be liable for monetary damages. 12 Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets and domain names and determine the validity and scope of our and others' proprietary rights. If third parties prepare and file applications in the United States that claim trademarks used or registered by us, we may oppose those applications and be required to participate in proceedings before the United States Patent and Trademark Office to determine priority of rights to the trademark. Any litigation or adverse priority proceeding could result in substantial costs and diversion of resources and could seriously harm our business and operating results. Finally, we may in the future sell our products internationally, and the laws of many countries do not protect our proprietary rights to the same extent as do the laws of the United States. Many countries have a first-to-file trademark registration system. As a result, we may be prevented from registering or using our trademarks in some countries if third parties have previously filed applications to register or have registered the same or similar trademarks. We are exposed to risks associated with credit card fraud, which may reduce collections and discourage online transactions. Under current industry practices, we are liable for fraudulent credit card transactions because we do not obtain a cardholder's signature. To date, we have suffered minor losses as a result of orders placed with fraudulent credit card data. As we expand our online store to introduce higher priced, high margin products on our Web site, fraudulent credit card transactions involving these products could have a greater impact on our financial results, and we may incur more significant losses resulting from fraudulent activities. We do not carry insurance against this risk. If we fail to adequately control fraudulent credit card transactions, we may be subject to liability claims and our revenues and results of operations would be harmed. We may be held liable if third parties misappropriate our users' personal information. If third parties were able to penetrate our network security or otherwise misappropriate our customers' personal information or credit card information, we could be subject to liability for: . unauthorized purchases with credit card information; . impersonation or other similar fraud claims; and . misuse of personal information such as for unauthorized marketing purposes. These types of claims could result in litigation. In addition, the Federal Trade Commission and state agencies have been investigating various Internet companies regarding their use of personal information. We could incur additional expenses if new regulations regarding the use of personal information are introduced or if our privacy practices are investigated. Information and products displayed on, retrieved from or linked by our Web site may subject us to potential liability. Because we post product information and other content on our Web site, we face potential liability for negligence, copyright, patent, trademark, defamation, indecency and other claims based on the nature and content of the materials that we post. Similar claims have been brought, sometimes successfully, against Internet content distributors. In addition, we could be exposed to liability with respect to the unauthorized duplication of content or unauthorized use of other parties' proprietary technology. Also, we could face potential liability for product liability claims for products sold through our Web site. Although we maintain general liability insurance, our insurance may not cover claims of this type or may be insufficient to indemnify us for all liability that may be imposed. Any liability that is not covered by insurance or is in excess of insurance coverage could harm our business. We could also be subject to claims based upon the content accessible through links from our Web site to other Web sites. 13 We are exposed to potential liability associated with pricing errors of our products. We use a computerized process to determine the prices posted on our Web site of our health products as well as to implement any pricing changes. This computerized method may result in pricing errors that may subject us to significant litigation and costs in the future. We cannot assure you that a pricing error will not occur in the future. If a pricing error occurs in the future or if we fail to fulfill any orders resulting from the pricing error, we may be exposed to liability associated with the error. These types of claims have been brought against Internet retailers in the past. Any imposition of liability that is not covered by our insurance or is in excess of our insurance coverage could negatively impact our results of operations during the period in which the liability is incurred. We are experiencing a period of significant growth, which places a substantial strain on our resources. We have experienced and may continue to experience rapid growth. From inception through December 31, 1999, we grew from 2 to 122 full-time employees. This growth has placed, and could continue to place, a significant strain on our managerial, financial and operational resources. To manage this growth, we will have to implement new operational and financial systems, procedures and controls. We will also need to train new employees and maintain close coordination among our product development, marketing and sales, and general and administrative organizations. These processes are time consuming and expensive, will increase management responsibility and will divert our management's attention. If we are unable to manage our growth effectively, our business could be adversely affected. Our business operations could be disrupted if we are unable to hire, integrate or retain qualified personnel. We depend to a significant extent on the continued services of our senior management and other key individuals, particularly Donald M. Kendall, Jr., our Chief Executive Officer, Bradford S. Oberwager, our Chief Operating Officer, Laureen De Buono, our Chief Financial Officer and Clarence A. Felong, our Vice President of Technology. We have no employment or consulting agreements with these individuals, nor do we maintain key person life insurance for these individuals, other than with Mr. Oberwager. The loss of the services of any of these individuals or other key employees would likely have a significant detrimental effect on our business. In addition, our business depends in part on our ability to maintain superior customer service. If we are unable to attract and train adequate numbers of customer service personnel, our efforts to establish our brand may be harmed and our business results may be impaired. We will need to commit significant additional financial resources to attract and train customer service personnel in order to provide our customers with high quality customer service. Our future success depends on our continued ability to attract, retain and motivate highly skilled employees. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. In addition, there is significant competition for qualified employees in the Internet industry. As a result, we expect to incur increased salaries, benefits and recruiting expenses during 2000. If we do not succeed in attracting new personnel or retaining and motivating our current personnel, our business will be adversely affected. If we are unable to successfully integrate acquisitions, our revenue growth and future profitability may be negatively impacted. If appropriate opportunities present themselves, we may attempt to acquire businesses, technologies, services or products that we believe are a strategic fit with our business. For example, we recently acquired Comfort Living, Inc. and are working to integrate its Web site, financial systems and distribution network with ours. This process of integrating an acquired business, technology, service or product may result in unforeseen 14 operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for ongoing development of our business. Moreover, we cannot assure you that the anticipated benefits of any acquisition will be realized. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities or amortization expenses related to goodwill. Our business may be harmed if we are unable to obtain additional funding to expand our business. Various elements of our business and growth strategies, including our plans to broaden existing product lines, introduce new products and invest in infrastructure, will require additional capital. Our future liquidity and capital requirements will depend on numerous factors, including timing and amount of funds required for, or generated by, operations and success and duration of our expansion program. We cannot assure you that funds will be available on terms satisfactory to us when needed, if at all. If adequate funds are unavailable, we may be unable to develop or enhance our business or respond to competitive pressures or unanticipated events, any of which could have a material adverse effect on our business. Systems failure or delay may cause interruption and disruption of our services. The performance of our server and networking hardware and software infrastructure is critical to our business, reputation and ability to attract users, advertisers and commerce providers to our Web site. Fire, floods, earthquakes, power loss, telecommunications failures, break-ins and similar events could damage these systems. Computer viruses, electronic break-ins and attacks or other similar disruptive problems could also adversely affect our Web site. Our business could be adversely affected if our systems were affected by any of these occurrences. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures or interruptions in our systems. Our Web site and transaction processing systems must accommodate a high volume of traffic and deliver frequently updated information. Our Web site has in the past experienced slower response times, decreased traffic and service interruptions. While these occurrences have not had a material impact on our business, if system failures or slowdowns were sustained or repeated, our revenues and our reputation could be impaired. In addition, because we depend on Internet service providers and other online service providers to provide consumers with access to our Web site, we are limited in our ability to prevent system failures in the future. Many of these service providers have sustained significant outages unrelated to our systems in the past and may experience similar failures in the future, resulting in less traffic to our Web site, which could in turn impair our revenues. If we do not successfully introduce and achieve market acceptance of new products and services, our revenue growth and future profitability would be negatively impacted. Our market is characterized by rapidly changing technologies, frequent new product and service introductions and evolving industry standards. The recent growth of the Internet and intense competition in our industry exacerbate these market characteristics. To achieve our goals, we need to effectively integrate software programs and tools required to enhance and improve our product and service offerings and manage our business. Our future success will depend on our ability to adapt to rapidly changing technologies by continually improving the performance features and reliability of our services. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new products and services. In addition, these new products and services must meet the requirements of our current and prospective users and must achieve significant market acceptance. We could also incur substantial costs if we need to modify our services or infrastructures to adapt to these changes. 15 Unanticipated year 2000 problems with our computer systems or the computer systems of our third-party providers could adversely affect our business. We have tested our current computer systems, and we believe, based on those tests, that our systems are year 2000 compliant. Our significant third- party providers have reported that their computer systems are also year 2000 compliant. However, we believe that it is not possible to determine with complete certainty that all year 2000 problems affecting us or our third-party providers have been identified or corrected. We cannot assure you that we or our third-party providers will not experience latent problems relating to computer systems processing dates after January 1, 2000. We have not developed nor have we surveyed our third-party providers to assess whether they have developed any specific contingency plan to deal with latent year 2000 problems after January 1, 2000. We cannot assure you that we or our third-party providers will be able to resolve any latent year 2000 problem before significant losses are incurred. Risks Relating to Our Industry Governmental regulation of our business could require significant expenses, and failure to comply with certain regulations could result in civil and criminal penalties. Our business is subject to extensive federal, state and local regulations, many of which are specific to pharmacies and the sale of over-the- counter drugs. Violations of these regulations could result in various civil and criminal penalties, including suspension or revocation of our licenses or registrations, seizure of our inventory or monetary fines, any of which could adversely affect our operations. Our prescription drug fulfillment provider, Medi-Mail, is responsible for complying with federal and state laws relating to the licensing and regulation of the sale of prescription drugs, including controlled substances. Although we believe Medi-Mail has fulfilled those requirements for the jurisdictions in which we do business, these laws are complex and at times ambiguous, and there remains a risk that one or more jurisdictions could impose additional requirements on our operations. The U.S. House of Representatives Committee on Commerce and the General Accounting Office are currently investigating online pharmacies and online prescribing. We believe that any regulations resulting from the investigations will likely result in increased reporting and monitoring requirements, which could increase our expenses. Other legislation and regulations currently being considered at the federal and state level could affect our business, including legislation or regulations relating to confidentiality of patient records, electronic access and storage, as well as the inclusion of prescription drugs as a Medicare benefit. Compliance with new laws or regulations could increase our expenses. The Health Insurance Portability and Accountability Act of 1996 mandated the use of standard transactions, standard identifiers, security and other provisions by the year 2000. Regulations have been proposed to implement these requirements, and we are currently designing our applications to comply with the proposed regulations. Until these regulations become final, however, possible changes in these regulations could cause us to use additional resources and lead to delays as we revise our Web site and operations. The federal anti-kickback law prohibits the knowing and willful solicitation, offer, payment or receipt of any remuneration in return for referring an individual for healthcare services or supplies for which payment may be made under any federally funded health care program. Similar rules exist at the state level. The reach of these laws is very broad, and we could inadvertently violate these statutes. To the extent we or Medi-Mail engage in this type of activity, we or Medi-Mail may be subject to penalties for violation of these laws. 16 If a regulatory body alleges that we have engaged in the practice of medicine or pharmacy, we may be subject to significant liabilities. The practice of medicine requires licensing under applicable state law. We do not intend to practice medicine, and we have attempted to structure our Web site and our business to avoid violation of state medical licensing requirements. However, a state regulatory authority could at some time allege that some portion of our business violates these statutes. An allegation that we practice medicine could result in significant liabilities. Further, any liability based on a determination that we engaged in the unlawful practice of medicine may be excluded from coverage under the terms of our general liability insurance policy. The practice of pharmacy also involves professional licensing and compliance with related requirements. Our prescription drug fulfillment provider, Medi-Mail, is licensed in the jurisdictions in which we do business, and is responsible under our fulfillment agreement for conducting all pharmacy services, including processing incoming prescriptions, providing patient counseling and shipping prescription drug orders to our consumers. Nevertheless, a regulatory authority could at some future time allege that some portion of our activity violates licensing or other pharmacy requirements, and a determination that we violated these requirements could result in substantial liabilities or a need to restrict our pharmacy operations. Government regulation and legal uncertainties could add costs to doing business on the Internet. Currently, few laws or regulations specifically regulate communications or commerce on the Internet. However, laws and regulations may be adopted in the future that address issues such as user privacy, product pricing and the characteristics and quality of products and services. Any new laws or regulations relating to the Internet could adversely affect our business. For example, the Telecommunications Act sought to prohibit transmitting various types of information and content over the Internet. Several telecommunications companies have petitioned the Federal Communications Commission to regulate Internet service providers and online service providers in a manner similar to long distance telephone carriers and to impose access fees on those companies. This could increase the cost of transmitting data over the Internet. It may take years to determine the extent to which existing laws relating to issues such as property ownership, libel and personal privacy are applicable to the Internet. The Federal Trade Commission is considering the adoption of regulations regarding the collection and use of personal identifying information obtained from individuals, including children, when accessing Web sites. These developments could have an adverse affect on our ability to target product offerings and attract advertisers and would have a material adverse effect on our business and results of operations. We may become subject to a Federal Trade Commission investigation, and the Federal Trade Commission's regulatory and enforcement efforts may adversely affect our ability to collect demographic and personal information from users. Our revenue from operations could suffer if we are required to collect additional sales and other taxes in the future. We do not currently collect sales or other similar taxes for shipments of goods into states other than California and Pennsylvania. However, one or more additional states into which our products are sold may seek to impose sales tax collection obligations. In addition, any ongoing presence in states outside California or Pennsylvania could subject shipments into these states to state sales taxes under current or future laws. If one or more states successfully assert that we should collect sales or other taxes on the sale of merchandise, our business operating results could be negatively impacted. 17 We are dependent on the continued growth in the use of the Internet as a medium for commerce. Our business would be adversely affected if Internet usage does not continue to grow as a medium for commerce, particularly for purchases of health products. A number of factors may inhibit the development of Internet and commercial online services into a viable commercial marketplace, including: . inadequate network infrastructure; . security and privacy concerns; . inconsistent quality of services and products; . lack of availability of cost-effective, high-speed service; . difficulties in delivery, exchange or return of products; and . government regulation. If Internet usage continues to grow, the existing Internet infrastructure may not be able to support the demands placed on it by this growth, which may result in declining performance and reliability. In addition, Web sites have experienced interruptions in their service as a result of outages and other delays occurring throughout the Internet network infrastructure. If these outages or delays frequently occur in the future, Internet usage, as well as the usage of our Web site, could grow more slowly or decline. Increased e-commerce activities may be hindered by Internet security concerns, which could inhibit the growth of our business. The need to securely transmit confidential information over the Internet has been a significant barrier to e-commerce and communications over the Internet. Anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by these breaches. To the extent that our activities or the activities of third-party contractors involve the storage and transmission of proprietary information, security breaches could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our security measures may not prevent security breaches and any failure to prevent security breaches may seriously harm our business and results of operations. We rely on encryption and authentication technology to provide the security and authentication necessary for secure transmission of confidential information. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments may result in a compromise or breach of the algorithms we use to protect customer transaction data. Any compromise of our security could seriously harm our reputation, as well as our business and results of operations. Concerns over the security of the Internet and other online transactions and the privacy of users may also inhibit the growth of the Internet and other online services generally, and the Web in particular, especially as a means of conducting commercial transactions. Any compromise of our security could deter people from using the Internet or using it to conduct transactions that involve transmitting confidential information. Risks Relating to This Offering An active trading market for our common stock may not develop and the trading price of our common stock may decline below the initial offering price. There is currently no public market for our common stock. The initial public offering price of our stock will be determined through negotiations between us and representatives of the underwriters, and may not reflect the price that will prevail in the open market. We cannot assure you that an active trading market for our common shares will develop or be sustained following the completion of this offering. Further, you may not be able to resell your shares at or above the initial public offering price. 18 The price of our common stock may be volatile, which may lead to losses by investors and subject us to securities litigation claims. The market price for our common stock could be highly volatile and could be subject to wide fluctuations in response to a number of factors, including: . quarterly variations in operating results; . investor perception about us and the e-commerce market in general; . announcements of technological innovations; . announcements of new products or services by us or our competitors; . changes in financial estimates by securities analysts; and . general economic and e-commerce market conditions. The common stock of many e-commerce companies has experienced significant fluctuations in trading price and volume. Often these fluctuations have been unrelated to operating performance. In the past, following periods of market volatility, security holders of these companies have instituted class action litigation. Class action litigation by security holders could be costly and divert management's attention, which could harm our business and results of operations. Declines in the trading price of our common stock could also harm employee morale and retention, our access to capital and other aspects of our business. We have broad discretion in how we use the proceeds of this offering, and we may not use the proceeds effectively. Our management has broad discretion over the use of proceeds of this offering. In addition, our management has not designated a specific use for a substantial portion of the proceeds of this offering. Accordingly, it is possible that our management may allocate the proceeds differently than investors in this offering would have preferred, or that we fail to maximize our return on the proceeds. The substantial number of shares that will be eligible for sale in the near future may adversely affect the market price of our common stock, even if our business is doing well. Sales of a substantial number of shares of our common stock in the public market following this offering could cause the market price of our common stock to decline. Our common stock sold in this offering will be eligible for immediate resale in the public market without restrictions. Shares of our common stock held by our existing stockholders may also be sold in the public market in the future pursuant to, and subject to the restrictions contained in Rule 144 under the Securities Act. After the offering, shares of our common stock will become available for resale in the public market as shown on the chart below.
Approximate Number Days after the Date of of Shares Eligible for this Prospectus Future Sale Comment ---------------------- ---------------------- ------------------------------- Freely tradable shares sold in Upon effectiveness.. this offering Lock-up released; shares saleable under Rule 144, 144(k) 180 days............ or 701
19 Provisions of our certificate of incorporation, bylaws and Delaware law could deter potential acquisition bids that a stockholder may believe are desirable, and the market price of our common stock may be lower as a result. Provisions of our certificate of incorporation, bylaws and other existing agreements may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. These provisions include: . authorizing our board of directors to issue additional preferred stock; . limiting the persons who can call special meetings of stockholders; . prohibiting stockholder actions by written consent; . prohibiting cumulative voting by stockholders; . creating a classified board of directors pursuant to which our directors areelected for staggered three-year terms; . establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings; and . limiting the ability of stockholders to remove directors without cause. Provisions of Delaware law may also discourage, delay or prevent someone from acquiring or merging with us. Further, some of our existing contracts may require a notice of assignment or give other parties the right to terminate the contract or take other action that could harm our business as a result of a change of ownership of our company. 20 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. These forward-looking statements include statements about our: . business strategy; . expectations for future expansion of our Web site; . anticipated growth in revenues from our various product offerings; . uncertainty regarding our future operating results; . anticipated sources of funds, including the proceeds from this offering, to fund our operations for the 12 months following the date of this prospectus; and . plans, objectives, expectations and intentions contained in this prospectus that are not historical facts. All statements, other than statements of historical facts included in this prospectus, regarding our strategy, future operations, financial position, estimated revenues or losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this prospectus, the words "will," "believe," "anticipate," "intend," "estimate," "expect," "project" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. All forward-looking statements speak only as of the date of this prospectus. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this prospectus are reasonable, we cannot assure you that these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations under "Risk Factors" and elsewhere in this prospectus. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. We undertake no obligation to publicly update or revise any forward- looking statements, whether as a result of new information or future events. 21 USE OF PROCEEDS We estimate that we will receive net proceeds of $ from the sale of the shares of common stock in this offering, assuming an initial public offering price of $ per share and after deducting the underwriting discounts and estimated offering expenses. If the underwriters' over-allotment option is exercised in full, our net proceeds will be approximately $ . At this time, the principal purposes of this offering are to obtain additional capital and increase our financial flexibility. We presently intend to use the net proceeds of this offering as follows: . An estimated $35.0 million to $45.0 million may be used for marketing and sales activities, particularly advertising campaigns and promotions, to increase our brand recognition. . The remainder of the net proceeds will be used to fund operating losses, for additional working capital and for general corporate purposes including the introduction of new product categories, the expansion of existing product categories and the launch of new specialty stores within the more.com superstore. As of the date of this prospectus, we have not allocated any specific amount of the proceeds for the purposes listed above. The amounts actually expended for the purposes listed above will depend on a number of factors including the growth of our sales and customer base, the type of efforts we make to build our brand and competitive developments in e-commerce. As a result, we cannot specify with certainty the amounts that may be allocated to the particular uses of the net proceeds of this offering, and the amounts we actually spend could be outside of the ranges set forth above. Our management will have significant flexibility and discretion in applying the net proceeds of this offering. Pending any use, the net proceeds of this offering will be invested generally in short-term, investment grade, interest bearing securities. We may also use a portion of the net proceeds of this offering to invest in or acquire complementary businesses, services or technologies, or to enter into strategic marketing relationships with third parties. From time to time, in the ordinary course of business, we expect to evaluate potential acquisitions of these businesses, services or technologies and strategic relationships. At this time, however, we do not have any present understandings, commitments or agreements with respect to any material acquisition. DIVIDEND POLICY We have never declared or paid any cash dividends on shares of our common stock. We currently intend to retain any future earnings for future growth and do not anticipate paying any cash dividends in the foreseeable future. 22 CAPITALIZATION The following table sets forth our capitalization as of December 31, 1999 on an actual, pro forma and pro forma as adjusted basis. The actual column reflects our capitalization as of December 31, 1999, without any adjustment to reflect subsequent events or anticipated events. The pro forma column gives effect to: . the conversion of all outstanding shares of preferred stock as of December 31, 1999 into 18,734,474 shares of common stock; . the issuance in January 2000 of 1,037,345 shares of Series D mandatorily redeemable convertible preferred stock for $5.0 million to Phar-Mor.com, Inc. and the conversion of those shares into the same number of shares of common stock; . the issuance of 3,399,991 shares of Series E mandatorily redeemable convertible preferred stock for $25.5 million issued in February 2000 and the conversion of those shares into the same number of shares of common stock; and . the issuance in February 2000 of 1,500,000 shares of common stock as part of the consideration for the acquisition of Comfort Living. The pro forma as adjusted column gives effect to the application of the estimated net proceeds from the sale of shares of common stock in this offering, after deducting the underwriting discount and estimated offering expenses. This table should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus.
December 31, 1999 --------------------------------- Pro Forma Actual Pro Forma As Adjusted -------- ----------- ----------- (unaudited) (unaudited) (amounts in thousands, except share and per share data) Long-term obligations, less current portion.. $ 1,376 $ 1,376 $ 1,376 -------- -------- ------- Mandatorily redeemable convertible preferred stock, issuable in series, $0.001 par value; 19,287,638 shares authorized, 17,373,310 shares issued and outstanding, actual; 23,287,638 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted........................... 58,064 -- -- -------- -------- ------- Stockholders' equity (deficit): Series A convertible preferred stock: $0.001 par value; 418,840 shares authorized, 398,109 shares issued and outstanding, actual; no shares issued and outstanding, pro forma and pro forma as adjusted ................ 10 -- -- Common stock: $0.001 par value; 30,000,000 shares authorized; 5,065,698 shares issued and outstanding, actual; 42,000,000 shares authorized; 29,737,508 shares issued and outstanding, pro forma; 42,000,000 shares authorized; shares issued and outstanding, pro forma as adjusted (1).... 5 30 Additional paid-in capital................. 16,698 120,147 Deferred stock-based compensation.......... (4,624) (4,624) (4,624) Accumulated deficit........................ (39,854) (39,854) (39,854) -------- -------- ------- Total stockholders' equity (deficit)..... (27,765) 75,699 -------- -------- ------- Total capitalization................... $ 31,675 $ 77,075 $ ======== ======== =======
See next page for footnote. 23 - -------- (1) Excludes: . 3,261,345 shares issuable upon the exercise of options outstanding under our amended and restated 1998 stock option plan as of December 31, 1999 at a weighted average exercise price of $1.40 per share; . 4,000,000 shares of common stock reserved for issuance under our 2000 stock incentive plan and the 2000 non-employee director option program, which will become effective upon the effectiveness of this offering; . 2,000,000 shares of common stock available for issuance under our employee stock purchase plan, which will become effective upon the effectiveness of this offering; . warrants to purchase 20,731 shares of Series A convertible preferred stock at an exercise price of $1.64 per share. Adjusted for the 3-for-2 common stock split effected August 11, 1998, these warrants are convertible into 31,097 shares of our common stock at an exercise price of $1.09 per share; and . warrants to purchase 48,192 shares of Series C mandatorily redeemable convertible preferred stock at $1.66 per share that are convertible into 48,192 shares of our common stock. 24 DILUTION Our pro forma net tangible book value as of December 31, 1999 was approximately $22.7 million, or approximately $0.96 per share of common stock. Pro forma net tangible book value per share represents the amount of tangible assets less total liabilities, divided by the number of shares of common stock outstanding, assuming the conversion of all outstanding shares of preferred stock into common stock. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after the offering. After giving effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share and after deduction of the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of December 31, 1999 would have been approximately $ million, or per share. This represents an immediate increase in pro forma net tangible book value of per share to existing stockholders and an immediate dilution in pro forma net tangible book value of per share to purchasers of common stock in this offering. Assumed initial public offering price per share.................... $ Pro forma net tangible book value per share before offering...... $0.96 Increase per share attributable to new investors................. ----- Pro forma net tangible book value per share after the offering..... ----- Net tangible book value dilution per share to new investors........ $ =====
The following table sets forth on a pro forma basis as of December 31, 1999 the total consideration paid and the average price per share paid by our existing stockholders and by new investors, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us at an assumed initial public offering price of per share.
Shares Purchased Total Consideration ------------------ ------------------- Average Price Number Percent Amount Percent Per Share ---------- ------- ----------- ------- ------------- Existing stockholders.... 23,800,172 % $65,390,683 % $2.75 Series D preferred stockholders............ 1,037,345 5,000,000 4.82 Series E preferred stockholders............ 3,399,991 25,499,933 7.50 Common stock issued in acquisition............. 1,500,000 14,850,000 9.90 New investors............ ---------- ----- ----------- ----- ----- Total.................. 100.0% $ 100.0% ========== ===== =========== ===== =====
Simultaneous with the close of this offering, we will convert an additional 1,037,345 shares of Series D preferred stock that were issued subsequent to December 31, 1999. We will also convert 3,399,991 shares of Series E preferred stock that were also issued subsequent to December 31, 1999. These preferred shares will convert to common shares on a one for one basis. The above table reflects the issuance in February 2000 of 1,500,000 shares of common stock as part of the consideration for the acquisition of Comfort Living, Inc. This table assumes that no options or warrants were exercised after December 31, 1999. As of December 31, 1999, there were outstanding options to purchase a total of 3,261,345 shares of common stock at a weighted average exercise price of approximately $1.40 per share, 119,740 shares of common stock reserved for issuance under our amended and restated 1998 stock option plan and 79,289 shares of common stock on an as converted basis issuable upon exercise of outstanding warrants at a weighted average exercise price of $1.44 per share. 25 SELECTED CONSOLIDATED FINANCIAL DATA The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes to the consolidated financial statements appearing elsewhere in this prospectus. The balance sheet data as of December 31, 1998 and 1999 and the statements of operations for the period from January 9, 1998 (inception) through December 31, 1998 and for the year ended December 31, 1999 are derived from our audited consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of the results to be expected in the future.
Period from January 9, 1998 (inception) to Year ended December 31, December 31, 1998 1999 --------------- -------------- (in thousands, except per share data) Net revenues.................................... $ 99 $ 2,923 Cost of net revenues(1)......................... 143 3,753 -------- -------- Gross profit (loss)........................... (44) (830) -------- -------- Operating expenses: Marketing and sales(2)........................ 2,613 20,480 Product development(3)........................ 1,387 3,254 General and administrative(4)................. 788 5,187 Amortization of deferred stock-based compensation................................. 404 5,061 -------- -------- Total operating expenses........................ 5,192 33,982 -------- -------- Operating loss.................................. (5,236) (34,812) Other income (expense): Interest income............................... 107 482 Interest expense.............................. (40) (355) -------- -------- Net loss........................................ $ (5,169) $(34,685) ======== ======== Accretion of discount on mandatorily redeemable convertible preferred stock.................... (101) (1,597) -------- -------- Net loss available to common stockholders....... $ (5,270) $(36,282) ======== ======== Basic and diluted net loss per share............ $ (5.90) $ (15.74) Pro forma basic and diluted net loss per share (unaudited).................................... $ (2.68) Weighted average shares outstanding used to compute basic and diluted net loss per share... 893 2,305 Weighted average shares outstanding used to compute pro forma basic and diluted net loss per share (unaudited).......................... 13,556 December 31, 1999 ------------------------------ Actual As Adjusted --------------- -------------- (unaudited) (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents....................... $ 24,655 $ Working capital................................. 17,576 Total assets.................................... 40,161 Borrowings under lines of credit, less current portion........................................ 1,376 1,376 Mandatorily redeemable convertible preferred stock.......................................... 58,064 -- Total stockholders' equity (deficit)............ (27,765)
- -------- (1) Excludes stock-based compensation charges of $11 in 1998 and $31 in 1999. (2) Excludes stock-based compensation charges of $93 in 1998 and $1,619 in 1999. (3) Excludes stock-based compensation charges of $39 in 1998 and $1,986 in 1999. (4) Excludes stock-based compensation charges of $261 in 1998 and $1,425 in 1999. 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read together with our selected consolidated financial data and the consolidated financial statements and related notes included elsewhere in this prospectus. Overview more.com is a leading online health superstore that currently offers its customers more than 45,000 SKUs in a variety of health product categories at everyday low prices. Our online health superstore contains over-the-counter medicine products, health and beauty aids, vision care products, nutritional supplements, baby products, prescription medications and other health products. We were formed as a California limited liability company in January 1998 under the name Nutrition Direct, LLC. We changed our name to GreenTree Nutrition, LLC in March 1998, and we incorporated in Delaware as GreenTree Nutrition, Inc. in May 1998. In June 1999, we changed our name to more.com, Inc. From our inception in January 1998 through May 1998, we had no sales and our operating activities related primarily to the planning and development of our original Web site, www.greentree.com, which offered vitamins and nutritional supplements. Since the opening of our more.com store in August 1999, we have expanded our infrastructure and focused on expanding distributor and vendor relationships, attracting customers to our Web site, building our brand and establishing customer service operations. In November 1998, we acquired the assets of Acumin Corporation, a manufacturer and online retailer of personalized vitamins. In addition, in December 1999, we acquired Clearly Contacts Lenses, Inc., an online store selling contact lenses. In February 2000, we acquired Comfort Living, Inc., an online store specializing in products for personal care and comfort, back care and pain reduction, baby care and maternity and allergy control. We derive revenues principally from the sale of products and, to a lesser extent, from paid advertisements on our Web site. We recognize product revenue upon shipment of products. Product revenues are net of discounts, coupon redemptions, estimated sales returns and bad debts. Shipping charges are included in product revenues. We recognize revenue from advertising sales ratably over the term of the advertising campaigns. We have employed a business model that includes outsourcing the majority of our infrastructure to third-party distribution and fulfillment providers. Through this model, we capitalize on the cost efficiencies achieved by these third-party providers and minimize our infrastructure and operating expenses, enabling us to pass significant savings on to our customers. Additionally, by aligning with third-party providers for distribution and fulfillment, we can use their significant inventories and distribution capabilities to offer a broader selection of products at lower costs than traditional brick and mortar retailers. For all product sales transactions with our customers, we act as a principal, take title to all products sold upon shipment, bear credit risk and bear inventory risk of loss for returned products that are not eligible to be returned to suppliers. These risks are mitigated somewhat through arrangements with credit card processors and shippers. For the year ended December 31, 1999, our product sales, including shipping, accounted for 86.2% of our net revenues. The remainder of our net revenues for the year ended December 31, 1999, were derived primarily from advertising. For the period ended December 31, 1998, all of our net revenues came from product sales. From the launch of the more.com Web site on August 17, 1999 to January 26, 2000, we engaged in a charter customer promotion in which we offered seven different product SKUs for $1.00 each along with guaranteed prices and free shipping during future purchases. The promotion allows charter customers to 27 purchase those product SKUs that they purchased during the promotion period forever, at the prices that prevailed during the promotion period, as long as they purchase each product SKU at least once per year and subject to various other terms and conditions. The promotion also allows charter customers to receive free shipping with future purchases, as long as each purchase includes at least one product SKU that was purchased during the promotion period. The purpose of the promotion was to drive traffic to our Web site, encourage frequent repeat purchases and retain customers. As of December 31, 1999, there were more than 57,000 charter customers as a result of this promotion. Net revenues from the purchase of the $1.00 promotional items during the year ended December 31, 1999 were $48,000, with an aggregate negative gross profit of ($226,000). The negative gross profit includes both the cost of goods sold as well as the associated shipping costs. Although we experienced increases in product revenues, total number of orders and customer accounts as a result of the charter member promotion and the $1.00 days promotion, our average order size, including $1.00 promotion items, declined from $30.88 in October 1999 to $10.91 in December 1999, and the average number of products purchased per order decreased from 6.0 to 3.9 during the same period. However, excluding $1.00 promotion items, in December 1999 our average order size was $31.42 and the average number of products purchased per order increased to 6.8. We have recorded a liability of $1.7 million for estimated future losses attributable to the charter customer promotion through December 31, 1999. We also deferred revenue of $120,000 during the year ended December 31, 1999, which represents the estimated value of this promotion to charter customers. The deferred revenue will be amortized into revenue over an estimated life of the benefit to the customer of five years. These amounts were determined based on our historical records of charter customer transactions, third party industry data on comparable product life cycles, third party industry data on consumer purchasing patterns for products sold by us, estimated inflation rates and the terms and conditions of the charter customer promotion. We will continue to assess our exposure to loss from this program and adjust our reserves as necessary. We have incurred significant losses since our inception and our cost of sales and operating expenses have increased dramatically. This trend reflects the costs associated with our formation as a company, as well as our increased efforts to promote the more.com brand, build market awareness, attract new customers, recruit personnel, build operating infrastructure and develop and expand our Web site and related transaction-processing systems. We intend to continue to invest heavily in building out our Web site and our specialty stores within our Web site and acquiring and developing complementary businesses, technologies and strategic alliances. We believe that we will continue to incur substantial operating losses for the foreseeable future. Although we have experienced significant revenue growth in recent periods, this growth may not be sustainable, and we may never achieve profitability. Results of Operations In view of the rapidly evolving nature of our business and our limited operating history, we believe that period-to-period comparisons of our operating results, including our negative gross margin and operating expenses as a percentage of our net revenues, should not be relied upon as an indication of our future performance. Period from January 9, 1998 (inception) through December 31, 1998 and the Year Ended December 31, 1999 Net Revenues Net revenues consist of product sales, which are net of discounts, coupon redemptions, estimated sales returns and bad debts, advertising revenue and customer shipping charges. During 1999, the majority of our net revenues were derived from product sales. Net revenues increased from $99,000 for the period ended December 31, 1998 to $2.9 million for the year ended December 31, 1999. This increase was predominantly 28 driven by increased product sales that resulted from a broader product selection, significant growth in our customer base, repeat purchases from our existing customers and $400,000 in advertising revenue. This increase in product sales also resulted from the expansion of our Web site and the addition of our Acumins specialty store in November 1998. The acquisition of our Clearly Contacts specialty store in December 1999 did not have a significant impact on 1999 results. Sales returns and bad debts for the period ended December 31, 1998 and the year ended December 31, 1999 were insignificant. Cost of Net Revenues Cost of net revenues consists primarily of the cost of products sold and related shipping cost. Cost of net revenues increased from $143,000 for the period ended December 31, 1998 to $3.8 million for the year ended December 31, 1999 as a result of the significant increase in our net revenues. Gross profit margin improved from (44.4)% for the period ended December 31, 1998 to (28.4)% for the year ended December 31, 1999. The improvement in gross profit margin resulted from changes in our cost structure for shipping functions and increased sales volume. This improvement was also the result of gross profit derived from higher margin advertising revenue. While we plan to increase gross margin in the future by employing more selective pricing and merchandising strategies, increasing advertising revenues and emphasizing the sale of higher margin products, we may not be able to improve our profit margins. Marketing and Sales Expenses Marketing and sales expenses consist primarily of advertising and promotional expenses, as well as fulfillment fees, credit card processing fees, outsourced customer service fees, affiliate commissions and payroll associated with our advertising, marketing and customer service personnel. Marketing and sales expenses increased from $2.6 million for the period ended December 31, 1998 to $20.5 million for the year ended December 31, 1999. This increase was primarily attributable to increased fulfillment expenses due to increased sales volume, credit card processing fees associated with increased product sales, the provision for estimated losses associated with the charter customer promotion and the expansion of our online and offline advertising campaigns. In addition, beginning with the launch of our Web site in August 1999, we experienced higher customer service costs as a result of an increase in the overall number of customers. The increase in our marketing and sales expense was also due, to a lesser extent, to increased personnel and related expenses required to implement our marketing strategy as well as the amortization of deferred fulfillment costs associated with the issuance of common stock to Bergen Brunswig Drug Company, one of our fulfillment providers. We intend to continue to pursue an aggressive branding and marketing campaign and, therefore, expect marketing and sales expenses to continue to increase significantly in future periods. Product Development Expenses Product development expenses consist primarily of personnel and other expenses associated with maintaining our Web site. They also consist of related facilities costs and depreciation and amortization of capitalized Web site development and enhancement costs, purchased software and computer equipment. Product development expenses increased from $1.4 million for the period ended December 31, 1998 to $3.3 million for the year ended December 31, 1999. This increase was primarily attributable to increased staffing in our information systems, product management, Web site maintenance and content groups. The increase was also attributable to the increased depreciation of capitalized costs related to developing and enhancing the features and functionality of our online health superstore and transaction-processing systems and telecommunications infrastructure. Maintenance of information technology and telecommunications infrastructure is expensed as incurred. 29 General and Administrative Expenses General and administrative expenses consist primarily of payroll and related expenses for executive and administrative personnel, facilities expenses, professional fees, amortization of intangible assets and other general corporate expenses. General and administrative expenses increased from $788,000 for the period ended December 31, 1998 to $5.2 million for the year ended December 31, 1999. This increase was primarily attributable to additional administrative personnel, increased professional fees, increased amortization of intangible assets associated with the acquisitions of Acumin Corporation and Clearly Contacts, expanded facilities and increased general corporate expenses attributable to the growth in our business. We expect general and administrative expenses to continue to increase as we expand our sales, increase our staff and incur additional costs related to the growth of our business and our operations as a public company. Amortization of Deferred Stock-Based Compensation Deferred stock-based compensation represents the difference between the exercise price of stock option grants and the deemed fair value of our stock at the time of the grants. These amounts are amortized over the vesting period for the grants, which is typically four years. Amortization of deferred stock-based compensation increased from $404,000 for the period ended December 31, 1998 to $5.1 million for the year ended December 31, 1999. This increase was attributable to the grant of stock options to new employees as well as the increase in the difference between the grant price and the deemed fair market value of our common stock. At December 31, 1999, we had approximately $4.6 million in deferred stock-based compensation that will be amortized through December 2003. We expect to record additional deferred stock-based compensation for the first quarter ended March 31, 2000 and future quarters related to stock grants, the actual amount of which will depend on the number of options granted during such quarter and their exercise prices. From the period from January 9, 1998 (inception) to December 31, 1998, approximately $11,000 of stock-based compensation charges are excluded from the cost of net revenues, approximately $93,000 of stock-based compensation charges are excluded from marketing and sales expenses, approximately $39,000 of stock- based compensation charges are excluded from product development expenses and approximately $261,000 of stock-based compensation charges are excluded from general and administrative expenses. For the year ended December 31, 1999, approximately $31,000 of stock- based compensation charges are excluded from the cost of net revenues, approximately $1.6 million of stock-based compensation charges are excluded from marketing and sales expenses, approximately $2.0 million of stock-based compensation charges are excluded form product development expenses and approximately $1.4 million of stock-based compensation charges are excluded from general and administrative expenses. Interest Income (Expense) Net interest income (expense) increased from $67,000 for the period ended December 31, 1998 to $127,000 for the year ended December 31, 1999. This increase was largely due to a higher average investment balance due to issuances of preferred stock in October 1998 and October 1999. Net Loss Our net loss increased from $5.2 million for the period ended December 31, 1998 to $34.7 million for the year ended December 31, 1999. This increase in net loss was due to increased losses on product sales, increased operating expenses, including an increase in amortization of goodwill, and deferred stock-based compensation. 30 Quarterly Results of Operations The following table presents unaudited quarterly results of operations in dollars, for the year ended December 31, 1999. This information has been derived from and prepared by us on a basis consistent with our audited consolidated financial statements and includes all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation of the information for the periods presented.
Three Months Ended -------------------------------------- Mar. 31, June 30, Sep. 30, Dec. 31, 1999 1999 1999 1999 -------- -------- -------- -------- (unaudited) (amounts in thousands) Statements of Operations Data: Net revenues............................ $ 162 $ 260 $ 666 $ 1,835 Cost of net revenues.................... 206 323 756 2,468 -------- -------- ------- -------- Gross profit (loss)................... (44) (63) (90) (633) -------- -------- ------- -------- Operating expenses: Marketing and sales................... 1,030 1,888 7,724 9,838 Product development................... 620 1,010 101 1,523 General and administrative............ 752 866 1,284 2,285 Amortization of deferred stock-based compensation......................... 87 458 560 3,956 -------- -------- ------- -------- Total operating expenses............ 2,489 4,222 9,669 17,602 -------- -------- ------- -------- Operating loss.......................... (2,533) (4,285) (9,759) (18,235) Interest income....................... 89 57 34 302 Interest expense...................... (14) (12) (182) (147) -------- -------- ------- -------- Net loss................................ $ (2,458) $ (4,240) $(9,907) $(18,080) ======== ======== ======= ========
Our quarterly operating results have fluctuated in the past and may continue to fluctuate in the future based on a number of factors, not all of which are in our control. Liquidity and Capital Resources Due to our business model, we have generally operated with limited working capital. Most of our customers pay for their purchases by credit cards over the Internet, and as a result, we typically receive payment for shipments within one to four business days of product shipment. Additionally, we rely on our distribution and fulfillment providers to manage inventory. We typically pay our distributors within seven days after the products have been shipped. As a result of these factors, our business does not experience the level of capital requirements faced by traditional brick and mortar retailers who must maintain large inventories. Since our inception, we have financed our operations primarily through private sales of our equity securities, and to a lesser extent, debt from financial institutions and vendors. Cash used in operating activities was $4.0 million for the period ended December 31, 1998 and $22.0 million for the year ended December 31, 1999. Cash used in operating activities in 1998 and 1999 was primarily attributable to the development and launch of our Web site, the expansion of our infrastructure, our marketing campaigns and operations. Cash used in investing activities was $2.1 million for the period ended December 31, 1998 and $5.5 million for the year ended December 31, 1999. Cash used in investing activities was primarily attributable to purchases of fixed assets and to a lesser extent, the acquisition of Clearly Contacts, the purchase of customer lists from VitaSave and the purchase of the more.com domain name. Cash provided by financing activities was $14.6 million for the period ended December 31, 1998 and $43.6 million for the year ended December 31, 1999. We anticipate that we will have negative cash flows for the foreseeable future. We also currently anticipate that we will invest 31 approximately $6.0 to $8.0 million in capital expenditures over the next 12 months to expand our infrastructure. These expenditures will include computer hardware and enhancements to our Web site to improve functionality and navigation, incorporating features that are intended to improve the customer shopping experience and the scalability and performance of our Web site. We expect to fund most of these expenditures with debt financing. Currently, we are negotiating with a financial institution for a $6.0 million term loan to be collateralized by future equipment purchases. In January 2000, we entered into a strategic marketing arrangement and issued 1,037,345 shares of Series D mandatorily redeemable convertible preferred stock at $4.82 per share resulting in net cash proceeds of $5.0 million. Given the timing between this issuance and our public offering, the difference between the value of our common stock and the issuance price of $4.82 per share represents a deemed discount on the mandatorily redeemable convertible preferred stock that will be accounted for as deferred marketing costs and amortized to marketing and sales over the five year term of the arrangement. Upon the closing of this offering, all outstanding shares of Series E mandatorily redeemable convertible preferred stock will be converted on a one- for-one basis into shares of our common stock. For the quarter ending March 31, 2000, we will record a non-cash preferred stock dividend to reflect the beneficial conversion feature as a result of the difference between the issuance price of the Series E mandatorily redeemable convertible preferred stock and the midpoint of the assumed initial price range of the common stock in this offering. In February 2000 we acquired Comfort Living, Inc. for $2.5 million cash and 1,500,000 shares of our common stock. We believe that the net proceeds from this offering, along with the proceeds of our Series D and Series E convertible preferred stock financings, will be sufficient to satisfy our working capital requirements through the next 12 months. Even if additional funds are not required, we may seek additional equity or debt financing. We may not be able to obtain additional funds on acceptable terms, if at all. Recent Accounting Pronouncements In March 1998, the American Institute of Certified Public Accountants, or AICPA, issued Statement of Position 98-1, or SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires all costs related to the development of internal use software other than those incurred during the application development stage to be expensed as incurred. Costs incurred during the application development stage are required to be capitalized and amortized over the estimated useful life of the software. We adopted SOP 98-1 on January 1, 1999. Adoption did not have a material effect on our consolidated financial position or results of operations. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. We adopted SOP 98-5 on January 1, 1999. Adoption did not have a material effect on our consolidated financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, or FAS 133, "Accounting for Derivative Instruments and Hedging Activities." FAS 133, as amended by FAS 137, is effective for fiscal years beginning after June 15, 2000. FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income (loss) depending on whether a derivative is designed as part of a hedge transaction and, if so, the type of hedge transaction involved. We do not expect that adoption of FAS 133 will have a material impact on our consolidated financial position or results of operations as we do not currently hold any derivative financial instruments. 32 Year 2000 Compliance We are aware of year 2000 compliance issues and problems relating to hardware and software systems incorrectly distinguishing 21st century dates from 20th century dates. Year 2000 issues could affect both our products and services as well as the hardware and software systems used, operated or maintained by us. To date, we have not experienced any year 2000 problems relating to our hardware or software systems or operations. We have completed our year 2000 compliance review. We conducted a full review of our systems and infrastructure and believe that our internal infrastructure, including our non-information technology systems, is year 2000 compliant. We obtained assurances from our primary vendors from whom we purchase hardware and software products, as well as from our distributors and fulfillment providers who provide and distribute the health products we sell on our Web site, that they are year 2000 compliant. Based on our internal tests and the representations of our primary vendors, distributors and fulfillment providers, we do not believe we will incur material losses relating to the upgrade or replacement of our or their systems and infrastructure. To date, our expenses in connection with identifying and addressing year 2000 compliance issues have been approximately $17,000. These expenses were generally related to the operation costs associated with time spent by our employees in the evaluation process and year 2000 compliance in general. We cannot assure you that our total costs will be limited to these amounts. We could incur additional costs in addressing any latent year 2000 issues, which could have a material adverse affect on our business. We believe we have identified and resolved all year 2000 problems that could materially adversely affect our business. We do not anticipate material year 2000 compliance costs in the future. However, we believe that it is not possible to determine with complete certainty that all year 2000 problems affecting us have been identified or corrected, and we cannot accurately predict the extent to which latent year 2000 problem-related failures may affect us. In the event we discover latent year 2000 problems in our hardware and software systems or those of our primary vendors, distributors and fulfillment providers, we will attempt to resolve these problems by making appropriate modifications on a timely basis. However, we have no other contingency plan nor have we surveyed our primary vendors, distributors and fulfillment providers to assess whether they have developed any specific contingency plan to address the effect of any latent year 2000 problems. We cannot assure you that we or our primary vendors, distributors and fulfillment providers will be able to resolve any latent year 2000 problem before significant losses are incurred. 33 BUSINESS Overview more.com is a leading online health superstore that currently offers its customers more than 45,000 SKUs in a variety of health product categories at everyday low prices. In addition to a large selection of the most popular health products, we also offer additional products through our specialty stores, or stores within the more.com superstore, including Acumins for nutritional supplements, GreenTree for natural products, Clearly Contacts for vision products, Comfort Living for baby, back and healthy home products and Pharmacy for prescription drugs. We designed our Web site with an intuitive, easy-to-use shopping interface that enables our customers to quickly find and purchase the products they need in our online health superstore. To offer this wide selection of products at everyday low prices while minimizing our operating costs, we have adopted a business model in which we outsource the majority of our operating infrastructure so that we can focus on our customers' shopping experience and easily add new products and specialty stores. Through our distribution and fulfillment providers, we will have the opportunity to offer more than 300,000 SKUs. As of December 31, 1999, we have sold our health products to more than 57,000 customers. Industry Background The Growth of the Internet and E-Commerce The Internet has emerged as a significant interactive medium for worldwide communication, instant access to information and e-commerce. International Data Corporation estimates that the number of Internet users worldwide will increase from more than 212 million at the end of 1999 to more than 510 million by the end of 2003. The unique characteristics of the Internet have created a number of advantages for online retailers and have dramatically affected the manner in which companies market and sell goods and services. In contrast to traditional brick and mortar retailers, the Internet allows online retailers to offer a broad and evolving selection of merchandise to consumers worldwide, while enabling consumers to shop at their convenience without leaving their homes or offices. Increasing numbers of consumers are engaging in e-commerce as online retailers take advantage of technological improvements associated with the Internet that allow the integration of product information, intelligent product recommendations and near real-time customer service. This integration enables online consumers to easily search for product information and make informed purchase decisions. International Data Corporation estimates that the number of customers making purchases on the Internet will grow from 48 million in 1999 to 183 million in 2003. As a result, International Data Corporation predicts the total value of goods and services purchased annually by consumers from businesses over the Internet will increase from approximately $31.0 billion in 1999 to approximately $177.7 billion in 2003. The Internet has also become a compelling medium for advertisers. Online retailers can obtain demographic and behavioral data about customers in real time, increasing opportunities for targeted marketing and personalized services that improve the conversion of shoppers to buyers at the point of sale. The Internet allows advertisers to cost effectively interact with specific customer groups to determine the effectiveness of targeted advertising campaigns. These methods generally are not economically viable using traditional media. Forrester Research estimates that the amount of Internet advertising worldwide will grow from approximately $3.3 billion in 1999 to approximately $33.1 billion by 2004. The Health Product Market Healthcare is one of the largest sectors of the U.S. economy, representing approximately 14% of the gross domestic product or over $1.0 trillion in annual spending. Furthermore, the purchase of health products is typically less sensitive to fluctuations in the economy because people place a high priority on their health and well being. This sector is expected to become even more important to the U.S. economy as people live longer 34 and healthier lives. The U.S. Bureau of Census expects the population over the age of 45 to increase from 94 million in 1999 to 118 million by 2010. As a result, the market for health products is expected to grow dramatically. Forrester estimates that e-commerce transactions over the Internet for health products will grow from $440 million in 1999 to $11.0 billion in 2003. Health product categories in the consumer health product market include the following: . Medicine chest--over-the-counter medicine products such as allergy and sinus products, cough and cold remedies, digestive aids, pain and fever relief products, sleep aids and stimulants and smoking cessation products; . Face and body care--health and beauty aids such as bath and skin care products, eye and ear care, feminine hygiene, foot care, hair care, oral care, sex and contraception products, shaving products and deodorants; . Vision care--contact lenses, contact lens products and prescription and non-prescription eyewear; . Nutrition and wellness--supplements used to promote health and well being such as vitamins, minerals, herbs, homeopathic remedies and wellness teas; . Baby--consumable and durable baby products such as diapers, wipes, infant formulas, strollers, car seats and nursing supplies; . Healthy environment--products used primarily in the home to improve air quality, comfort or the overall environment such as products for allergy sufferers, air purifiers and humidifiers, water filters and ergonomic supplies and furniture; . Home healthcare--typically special-use or hard-to-find products designed for use in the home by people with particular assisted living and healthcare needs such as crutches, wheelchairs, shower rails, convalescent bathroom aids, walkers, canes, electric scooters and ergonomic supports; . Cosmetics--products that promote personal beauty such as makeup, fragrances and other high-end beauty products; . Diet and fitness--weight loss and weight management products, sports nutrition products, personal fitness equipment and accessories of all kinds, as well as products people consume to promote their overall health; . Medical supplies--medical diagnostic kits such as home pregnancy tests and HIV tests, and medical supplies such as glucose strips for diabetics; and . Pharmacy--prescription medications for both chronic and acute conditions. The Online Health Superstore Market Opportunity Health products are ideally suited for e-commerce, and consumers can enjoy numerous benefits by purchasing these products over the Internet. Those particular attributes of health products and the health product market that make the Internet an ideal mechanism for their purchase include: Wide Variety of Products for a Wide Variety of Health Needs. Due to shelf space limitations, traditional health product retailers typically carry only a small fraction of these products. In contrast, online retailers do not face these same space limitations. The addition of new products to an online store and to the online retailer's distribution network is much less costly than it is for traditional brick and mortar retailers. As a result, consumers are more likely to find the products they need in stock at an online store. Recurring Product Purchases. Many health products are consumable necessities that require frequent repurchase by customers. Online health product retailers can use technology to track a customer's frequent and recurring purchases of consumable items and can customize product offerings to support the repeat purchasing habits of customers. 35 Rapidly Changing Product Requirements. Health product needs of consumers may vary for many reasons and can fluctuate by season or geography. Health product manufacturers continuously seek new ways to gain an advantage over their competitors to meet these needs. Traditional brick and mortar health product retailers are typically less able to change the format of their stores to meet changes in supply and demand, and due to geographic limitations they cannot easily span large geographic areas. The limited space available in a traditional brick and mortar retail store constrains merchandising flexibility. In addition, traditional brick and mortar retailers must make significant investments in inventory that may become outdated. Online health product retailers can easily overcome these limitations by providing a single location where customers can purchase all their health products and changing their Web sites to meet the evolving demands of customers and manufacturers. Information Intensive Nature of Health Products. Health products generally are information intensive, as the government and consumers require a great deal of information regarding each product's use, potential side effects and ingredients. Historically, healthcare information has been tightly controlled or difficult to access or locate. More recently, consumers and healthcare professionals have begun to openly debate the attributes and benefits of different health products, placing more information demands on health product retailers. Traditional brick and mortar retailers face challenges in hiring, training and maintaining knowledgeable sales staff. The Internet has enabled consumers to gain more control over their own care by providing easier access to health product information and improving communication between people with similar health issues and interests. Online health product retailers have the ability to provide consumers with a trusted source for healthcare information and can personalize this information to each customer's unique interests. In addition, online health product retailers' sales staffs can more easily communicate with a larger number of customers using the Internet. Consumer Privacy Requirements. Many health product purchases can make a customer uncomfortable because they can reveal very personal information about the purchaser. Customers may be unwilling to ask store employees questions regarding these products to avoid embarrassment. As a result, the customer may purchase the incorrect product or avoid purchasing the product altogether. The Internet allows Web users to shop privately for personal products and ask questions about these products without embarrassment. While some online retailers offer health products, we believe that none has fully met the broad needs of consumers. In particular, we believe that consumers are seeking a single, trusted online store where they can find all the health products they need, including hard to find or specialized health products. We believe consumers want a health superstore that is electronically personalized to their unique health product needs and that enables them to quickly make recurring health product purchases. The more.com Solution more.com is a leading online health superstore that currently offers its customers more than 45,000 SKUs in a variety of health product categories at everyday low prices. Our online health superstore contains over-the-counter medicine products, health and beauty aids, vision care products, nutritional supplements, baby products, prescription medications and other health products. Customers want to reduce their shopping time and increase the likelihood of finding exactly what they want, no matter how specialized their need. We satisfy this desire by providing a convenient, easy-to-use Internet shopping experience that simplifies the purchase of health products and access to expert information. For those customers with special health needs, we currently offer five distinct specialty stores that are built around product categories, including Acumins, GreenTree, Clearly Contacts, Comfort Living and Pharmacy. As a result, our customers can shop for their daily necessities more efficiently, conveniently and economically than traditional brick and mortar retailers. We can provide these shopping advantages while maintaining competitive prices because we operate based on a business model in which we outsource the majority of our operating infrastructure, such as distribution and fulfillment of product orders, to third-party providers. The key elements of our solution include: 36 Broad product selection. In terms of both product breadth and depth, we believe we offer the largest selection of health products for sale directly to consumers. We currently offer more than 45,000 SKUs and have access to over 300,000 health product SKUs through alliances with third-party providers. We believe this is significantly more than the selection of traditional brick and mortar drugstores. Because we outsource the majority of our operating infrastructure, we can make adjustments quickly within existing product lines and add new product categories or specialty stores easily and rapidly without significant capital investment. Superior convenience. Our online health superstore provides customers with an intuitive, easy-to-use shopping interface that is available 24 hours a day, seven days a week and may be reached anywhere that customers can access the Internet. Our customers can quickly and privately find the products they are looking for using our fast, intuitive search technology and proprietary QuickShop(TM) process, which allows customers to choose from more than 2,000 of the most popular SKUs in the 50 most popular product categories sold in our store. Additionally, we allow customers to search for and compare products based on attributes they find important such as price or significant features, and personalize their experience in our online health superstore by creating shopping lists to simplify the process of making recurring purchases. We believe that the enhanced functionality of our Web site greatly improves the overall customer experience and encourages repeat purchases. Competitive pricing. We attempt to offer the lowest prices among online retailers for the most commonly purchased items in our online health superstore. For the remainder of products we sell, we offer our customers value-based pricing. To ensure that we offer low prices in comparison with other online stores, we frequently review ACNielsen reports that rank the top selling health products. We then use specialized third-party software to track the online prices for those products each week and set our prices at or below those of online competitors. Additionally, we strive to set our prices 20% below those of traditional brick and mortar retailers by consistently monitoring pricing data supplied by our distribution and fulfillment providers. Information focused on the customer purchase decision. We provide our customers with information focused on enabling them to make informed product purchasing decisions. Customers can use the Resource Center portion of our Web site to find products related to specific health conditions or concerns. In doing so, we give our customers the ability to rapidly access an extensive list of health products that may meet their specific health needs. Within the Resource Center, we also offer customers Buying Guides comprised of brand- agnostic, detailed product information regarding product ingredients, efficacy and use to assist in the purchase of health products. We currently provide information on more than 100 health conditions through our in-house team of health editors, an independent network of contributing editors and third-party content licenses. We have a sixteen-member health advisory board, comprised of physicians, nutritionists and other practitioners and academics, that guides our use of health information. World-class customer service. To build customer loyalty, we seek to provide superior customer service throughout the shopping experience. We are committed to customer satisfaction and regularly upgrade our services to ensure total customer care. Every page of our Web site contains a customer service link, "May We Help," which outlines store policies, provides answers to frequently asked questions and gives our customers a direct online link to our customer service agents. We provide free pre- and post-sales support via e- mail, toll-free telephone service and instant chat during extended business hours. We believe we are the only online health store that offers real-time Web-based customer support incorporating full browser-synchronization capability. This technology allows our customer service agents to control a customer's Web browser and assist the customer in quickly finding products or information to make a purchase decision. 37 The more.com Strategy Our objective is to be the world's leading online health superstore. Key elements of our strategy to achieve this objective include: Offer the World's Largest Selection of Health Products. Selection is a key driver of commerce of all kinds, and to become the leading online health superstore, we intend to offer the world's largest selection of consumer health products. Unlike traditional brick and mortar retailers, the number of health products we offer is not limited by shelf space or store size. As a result of our business model, the incremental cost to us of offering new products is small. As part of our strategy for offering the largest selection of health products, we intend to open new specialty stores frequently over the next few years. These specialty stores are dedicated to providing products to customers with special interests or conditions. For example, we intend to offer contact lenses and other vision products through our Vision Center and baby products in our Baby Center. Maximize Customer Value through Low Prices and Shopping Convenience. We intend to maximize the value our customers recognize from purchasing products through our online health superstore. In pursuit of this goal, we attempt to offer our products at prices lower than our online and traditional brick and mortar competitors. We believe that by continuing to use new technologies that simplify our customers' recurring purchases, we can maximize value to our customers. We enable customers to quickly reorder their favorite products through the use of shopping lists and our proprietary QuickShop technology. We believe our existing and future technology will continue to improve our customers' shopping experience, increasing customer loyalty to our Web site and resulting in more frequent and larger purchases by our customers. Pursue a Business Model that Minimizes Operating Costs. Our business model allows us to focus on the customer shopping experience and add new products and specialty stores while minimizing our operating costs. Our fulfillment providers are responsible for supply chain management, inventory management and product shipping. We closely integrate our information systems with those of our fulfillment providers giving us real-time insight into product availability, customer order status, product costs and other purchasing and accounting information. By eliminating a large portion of the normal logistics of the typical health product retailer, we have substantially lowered our overall operating costs. Build Brand Recognition to Drive New Customer Acquisition. Our top marketing objective is to make the more.com brand synonymous with the best place to purchase health products. We attempt to drive new customers to our Web site through the use of both traditional media, including radio and television advertising, and online media. Our marketing programs place special emphasis on cities that have the highest concentration of Internet users as well as on particular demographic markets that are important to building our brand, including a focus on serving the health needs of women. This demographic segment represents an increasingly significant and fast-growing segment of Internet users and health-conscious consumers. According to Jupiter Communications, women are expected to represent the majority of U.S. Internet users by the end of 2003. Jupiter Communications also estimates that women are responsible for over 80% of healthcare decisions and over 60% of healthcare purchases. We believe that women between the ages of 18 and 49 represent over 70% of our customer base. Additionally, over one-third of our customers are female purchasers with families. Continuously Improve Our Customer Shopping Experience. We actively seek customer feedback regarding the shopping experience customers' have when using our superstore. We poll more than 1,000 customers on a monthly basis to determine overall customer satisfaction, identify problem areas for improvement and opportunities for store expansion and enhancement. Similarly, we provide a feedback card with every product shipment to encourage customer feedback. In addition, we have developed a proprietary, scalable architecture designed to support fast, secure and reliable online shopping. This architecture enables us to personalize every customer's experience in our health superstore based on their interests, product needs and past purchases. 38 Expand Key Alliances and Pursue Selected Acquisitions. We intend to expand our alliances with leading online health sites and health product manufacturers. These relationships are contractual in nature. Our alliances with leading online health sites, such as Dr. Koop at Go.com and drDrew.com, have resulted in numerous co-promotion, content sharing and revenue sharing arrangements. In addition, we offer an affiliate program to third-party Web sites. This affiliate program enables these Web sites to send customers to our site and in return receive a portion of the revenues those customers generate. We currently have more than 13,000 members in the more.com affiliate program and we intend to rapidly expand this program. Our alliances with leading health product manufacturers such as Durex, Johnson & Johnson, Procter & Gamble and Revlon have resulted in product sampling programs, media advertising and inbox promotions. We also intend to pursue selected acquisitions of additional businesses, products or technologies that we believe will complement our current or future business, such as the Comfort Living acquisition. Shopping at more.com We have combined our commitment to providing enormous product selection with easy-to-use Web site navigation capabilities that allow our customers to quickly specify and find the particular product or health solution for which they are shopping. Shoppers at our Web site are greeted by a home page that is designed to anticipate the way people shop for various types and categories of health products. Customers can choose between browsing our entire selection of health products in our online health superstore or entering one of our five distinct specialty stores that are built around specific product categories. Specialty Stores. We currently have integrated the following five specialty stores within the more.com superstore. These stores offer an extensive selection of products for specific health interests or conditions. . Acumins--our specialty store that contains our proprietary line of nutritional supplement products. The Acumins SmartSelect(TM) process enables each customer to create a customized mix of vitamins, minerals and herbs. The process reduces the number of pills that need to be taken daily to receive the same nutritional benefits. Acumins is priced to be an attractive value when compared to purchasing the combined ingredients separately. Acumins nutritional supplements are the first in a series of personalized health products to be offered in our Acumins store. . GreenTree--our specialty store that contains 23 natural product categories that would typically be found in natural products supermarkets and supplements specialty stores. These products include vitamins, nutritional supplements and homeopathic remedies. . Clearly Contacts--our specialty store that currently offers a full spectrum of all brand-name contact lenses and associated accessories and products. We plan to expand the current offering to include designer sunglasses and prescription eyeglasses as we continue to build out our Vision Center. . Comfort Living--our specialty store that offers higher priced, high margin products that attempt to make customers feel better, safer and more comfortable. This store currently offers products for such categories as baby and maternity, back care and healthy home. . Pharmacy--our specialty store that combines the flexibility of an online pharmacy with the convenience of 2,000 Good Neighbor Pharmacies that offer same day pickup and, where available, home or office delivery. This delivery flexibility enables our customers to either receive their prescription drugs through our current distribution network for chronic conditions or through a Good Neighbor Pharmacy for immediate pharmaceutical needs. Our pharmacy provider and all of the Good Neighbor Pharmacy stores are included in Bergen Brunswig's PlusCare Managed Care Network through which we have access to 80 million individuals covered by 70 healthcare payors. 39 Web Site Navigation. We strive to improve our customers' shopping experience by designing our Web site navigation to enable customers to easily and quickly make informed purchases among the broad selection of health products we offer. We have the following inter-related navigation tools and information features on our Web site: . QuickShop--our proprietary QuickShop technology that allows customers to choose from more than 2,000 of the most popular SKUs in the 50 most popular product categories sold in our online store. Unlike shopping for books or computers online, customers shopping for health products may want to purchase an entire basket of goods in one visit. Using QuickShop, customers can screen products based on both brands and unique product attributes to create a customized basket of their most frequently ordered items in just four simple steps. Once a customer has used QuickShop and saved the purchase history in the shopping list, the customer can easily return to QuickShop the next time the customer wishes to purchase that item. . Shopping Lists--a tool that enables customers to retrieve a list, or multiple lists, of their previous purchases made at our Web site. Customers can personalize their shopping lists by editing and adding products, and they can re-order previously purchased items or add a particular item to their shopping cart in a single click. . Shortcuts--a list of the most popular health product categories that allows the customer to go immediately to the specific product page. . Search--a shopping friendly tool, with links to related products and related topics, as opposed to a research tool. Our search tool differs from many others on the Web in that if no exact product match is found, our search tool relays a related answer and avoids a "no products found" result. . My Account--the personal shopping information of individual customers is securely stored in My Account. The information required to checkout is an e-mail address, a password, a billing and shipping address and a valid credit card number. All of this information is maintained in a secure format and remains available for a customer's future access. Customers are given the option to indicate the name by which they would like to be greeted, their shipping options and their desire to receive occasional promotional information and health newsletters. . Shopping Cart--a section of every page on the site that contains a summary shopping cart, where the customer can see the number of items selected, the total amount and the total savings of all the items currently in the shopping cart. Customers can either check-out from this shopping cart or get more detailed information about the items. . Product Packaging Information--a section of our Web site that contains information on almost every product available on our site that can be viewed in an expanded format where package information, including directions and warnings, can be read next to an enlarged photograph of the product. The Resource Center. Customers can use our Resource Center to access information that enables them to make a more informed purchase decision. The Resource Center allows customers to navigate the site from a conditions or health concerns perspective, which is usually unavailable in traditional brick and mortar stores. The Resource Center contains: . Health Centers--centers that organize products and information together around particular conditions or demographics and . Buying Guides--links to category-based articles that offer brand- agnostic, in-depth consumer information regarding product ingredients, efficacy and use to support purchase decisions. Customers can add products to their shopping cart directly from the Buying Guides or click on a link to the appropriate product page. 40 Content Services. We offer a variety of content services free to anyone who visits our Web site. This content includes alphabetical listings of various medical conditions, herbs and vitamins with links to related products offered on our Web site. We also offer a daily newsletter, Health Headline News, which contains major news stories related to health and well being. Additionally, our Web site offers question and answer columns addressing our customers' nutrition and skin care needs. In addition to in-store content, we offer a twice-monthly health newsletter that is available to all our customers. The newsletter contains news stories and product information that we believe to be of particular interest to the customer. We are able to provide this content through our in-house team of health editors, a freelance network of contributing editors and an active content licensing effort. Health Advisory Board. We have a 16-member health advisory board comprised of physicians, nutritionists and other practitioners and academics in the healthcare field. We consult with our health advisory board on our programs, strategies, content and overall store development. Distribution Network We use a business model in which we outsource the distribution and fulfillment of a vast majority of our products, which is fundamental to our efficiency and long-term profitability goals. Our current third-party fulfillment providers include Bergen Brunswig Drug Company for health products, Lens Express for contact lenses and Medi-Mail for prescription drugs. These fulfillment providers maintain product inventory and pick, pack and ship our customers' orders. We believe this business model enables us to cost- effectively deliver the largest selection of products to our customers nationwide. For example, Bergen Brunswig, which currently carries a catalog of more than 300,000 SKUs, constructed an Internet direct-to-consumer fulfillment center adjacent to its Louisville, Kentucky distribution center. This facility is located less than one mile from a major United Parcel Service package distribution hub. This allows us to minimize shipping costs and reduces the time needed to deliver products to our customers. Orders placed by our customers are transmitted directly to the appropriate fulfillment provider through integrated and secured electronic connections to each of our fulfillment providers. These orders are automatically fed into the fulfillment provider's system where they are processed and sent to a warehouse to be picked, packed and shipped. We strive to process, pack and ship our customers' orders within 24 hours from the time these orders are placed on our Web site. This connection with each of our fulfillment providers also provides us with data on inventory quantities, inventory location, shipping status, shipper tracking numbers and the estimated time of arrival for back-ordered products. We offer a variety of shipping options, including next-day delivery for orders received during the business week, through Airborne Express, United Parcel Service and the U.S. Postal Service. We have established various quality assurance programs at Bergen Brunswig, Lens Express and Medi-Mail facilities to monitor quality control and order fulfillment. Bergen Brunswig Drug Company Beginning in March 1999, we established a strategic alliance with Bergen Brunswig Drug Company, a wholly owned subsidiary of Bergen Brunswig Corporation, with the intent that Bergen Brunswig would act as our primary fulfillment provider for the health products we offer on our online health superstore. With $17.0 billion in annual revenues, Bergen Brunswig Corporation is one of the nation's leading supply-chain management companies, providing consumer health products, pharmaceuticals, medical-surgical supplies, home healthcare specialty products, as well as information management solutions and outsourcing services to retail pharmacies, managed care organizations and other institutions across the United States. In July 1999, we entered into an Internet fulfillment services agreement with Bergen Brunswig through which it agreed to source, stock, pick, pack and ship directly to our customers the health product orders placed on our Web site. We are subject to a flexible pricing schedule for the products purchased from Bergen 41 Brunswig based on the cost of the product and the volume purchased. We are responsible for the collection of payment for placed orders. This agreement expires in July 2009, however, either party may terminate each successive year upon the occurrence of specified events, including failure to perform material obligations under the agreement, entering into a bankruptcy, receivership or similar proceedings and adverse regulatory changes. In August 1999, we entered into a service mark license and access agreement with Bergen Brunswig through which Bergen Brunswig agreed to extend to our customers the ability to pick up their pharmacy orders at a network of over 2,000 retail stores nationwide through its affiliate, the Good Neighbor Pharmacy network. Our customers may also participate in PlusCare, a provider network maintained for the reimbursement of non-cash prescriptions with over 70 health plans. This agreement expires upon the expiration of the Internet fulfillment services agreement with Bergen Brunswig. In September 1999, we entered into an advertising representative agreement with Bergen Brunswig through which it was appointed as our exclusive sales representative for the marketing and sales of advertisements on our Web site for all health products for which it acts as our fulfillment provider. We may independently seek additional advertising revenue for products not fulfilled by Bergen Brunswig. Bergen Brunswig may terminate this contractual relationship anytime prior to August 1, 2000, and we may terminate the exclusivity of our arrangement with Bergen Brunswig after August 1, 2000 if it fails to generate a specified amount of advertising revenues. Further, on February 1, 2001, Bergen Brunswig and our management will reconsider the feasibility of our exclusive arrangement. We will pay Bergen Brunswig a commission if it guarantees a specified amount of advertising revenue within a specified time period. This agreement expires in September 2009, subject to extension upon mutual agreement. Lens Express In January 2000, we entered into a database license and supply and purchase agreement with Lens Express through which they agreed, on a nonexclusive basis, to source, stock, pick, pack and ship directly to our customers all contact lens orders placed on our Web site. With revenues of $46.9 million for the year ended December 31, 1999, Lens Express is the second largest national mail-order fulfillment contact lens operation and a direct marketer of replacement contact lenses, eye care solutions and designer sunglasses. Under the terms of this agreement, we have access to Lens Express's entire product catalog of currently 250,000 contact lens products. We negotiated a flexible pricing schedule for the products purchased from Lens Express based on the retail price of the product and the volume purchased. We are responsible for the collection of payment for placed orders. If Lens Express provides an online retailer any contact lens products at lower prices or under more favorable terms or conditions, it has agreed to provide the same benefit to us. This agreement expires in December 2002. Either party may terminate the agreement earlier upon the other party's material breach of any representation, warranty or obligations under the agreement or upon adverse regulatory changes. Medi-Mail In August 1999, we entered into a prescription pharmaceuticals Internet fulfillment services agreement with Medi-Mail, a subsidiary of Bergen Brunswig Corporation, located in Las Vegas, Nevada. Under this agreement, Medi-Mail will fill, pack and ship directly to our customers the orders for prescription pharmaceutical drugs placed on our Web site, as well as provide related pharmacist counseling and customer service. Our cost for fulfillment of prescription drugs is based on industry pricing guides and is subject to adjustment based on whether we use Medi-Mail as our exclusive prescription fulfillment provider. An additional dispensing fee scaled for volume incentives is charged. We are responsible for the collection of payment from our customers for that portion of the order that is not covered by any health insurance provider. Medi-Mail is initially responsible for the collection of the insured portion. This agreement expires in June 2009 but is subject to automatic one year renewal periods. We may terminate this agreement earlier, subject to our payment of a termination fee. 42 In-House Fulfillment In addition to our third-party fulfillment providers, our Acumin division manufactures customized vitamins, minerals and herbs for our customers from our facility in Philadelphia, Pennsylvania. We maintain minimal inventory of products manufactured by Acumin relative to its total sales. The finished product is typically shipped within 24 hours of its manufacture. Comfort Living currently manages its own inventory and distributes and fulfills its own orders. As part of the integration of Comfort Living, we intend to outsource the distribution and fulfillment of these products through a third party. Merchandising Strategies We believe that our strong brand name and the breadth and depth of our product selection in our online health superstore enable us to pursue unique merchandising and pricing strategies. Because we are not restricted by physical capacity limitations, we have a significant amount of flexibility with regard to the presentation and organization of our product categories and the product selection within each of those categories. To date, our merchandising and pricing efforts have focused on offering popular health products with high brand awareness at low prices to drive traffic to our site. As customer loyalty and recognition of our brand name has increased, we have begun cross-marketing higher margin products to our customers once they are on our Web site. By operating specialty stores that feature a broad range of product categories, we can promote higher margin products, including accessories and other products that are complementary to the customers' initial purchases, as well as popular point-of-purchase impulse buys. In addition, we have begun to refine our pricing strategy and increase gross margins by raising prices on selected products. We believe we can continue to improve our pricing strategy by identifying products that are characterized by lower degrees of price sensitivity, which will provide the opportunity to raise margins through targeted price increases that do not diminish overall sales volumes. Within each specialty store, we offer an extensive selection of products for specific health interests or conditions. For example, Acumin contains our proprietary line of nutritional supplement products and Clearly Contacts offers a full spectrum of all brand-name contact lenses and associated accessories and products. The broad selection of product categories in our specialty stores is also enhanced by our fast, intuitive search technology and the design of our Web site navigation, which enable our customers to easily and quickly make informed purchases. Marketing and Business Development Our marketing objective is to make the more.com brand synonymous with the best place to purchase health products. Our major marketing strategies are to build brand recognition, drive customer traffic to our Web site, stimulate purchases, generate customer loyalty and maximize the lifetime value of the customer by continued targeted marketing to existing customers. Advertising and Promotion We have engaged in a highly coordinated national advertising and public relations effort since August 1999. Representative ad media include television, radio, outdoor and various promotional vehicles. Public relations efforts target the business and consumer press and media. As a result of our public relations efforts to date and unsolicited inquiries, we have been featured in Fortune, Newsweek, USA Today and the Wall Street Journal and other high profile media, including broadcast outlets such as CNBC and CNN. Further, our Web site has received widespread industry recognition, including being acknowledged in 1999 as the top online drugstore by eHealthcare World, receipt of a gold medal for top online drugstore at the WWW Health Awards and ranking by Information Week as one of the top 100 e-Business Innovators for 1999. 43 Our broad-based demographic and geographic brand-building programs target this customer demographic, among others, through the use of programming vehicles that include: . use of syndicated national radio programming featuring hosts such as Dr. Joy Browne, Dr. Ronald Hoffman and Dr. Laura Schlessinger; . prime-time TV shows such as Ally McBeal, ER and Friends; and . highly targeted women's interest magazines such as Martha Stewart Living, Good Housekeeping, Parents and Working Mother. We place advertisements on Internet Web sites to optimize access to our target audience. These currently include Alta Vista/Shopping.com, Ask Jeeves, Go.com, Intellihealth, LifeMinders, Lycos, My Simon, Planet Out and uBid. The majority of our online advertising consists of placements that encourage, usually by trial offers, click-throughs directly to our Web site. Session information is obtained from our Web site and combined with data from our business systems and fed into a data warehouse. This allows us to obtain and extrapolate information for business reporting and planning and marketing activities. Experience to date has demonstrated the power of one-to- one marketing to efficiently acquire new customers and activate shopping interest among current customers. Currently, over 90% of our customers subscribe to our promotional newsletter, which is sent to them twice monthly with new product and promotional news. Our goal is to continue to build our customer understanding and use database marketing as a key tool in driving customer lifetime value. Marketing Alliances We have engaged in extensive alliance building efforts since our inception in order to quickly build market share, acquire customers, create brand presence and provide more integrated services to our customers. Strategic alliances involve a combination of online and offline co-promotion, content sharing, and revenue sharing or payments based on actual customers acquired. Our alliance building efforts can be grouped into the following categories: Phar-Mor.com. We entered into a Web site affiliate agreement with Phar- Mor.com, a chain of discount retail drugstores, in January 2000. Under the terms of this agreement, we will collaborate with Phar-Mor.com to create a URL through which Phar-Mor.com's customers may access our Web site. This URL will be linked to our Web site either directly or through an intermediate, transition Web page hosted by us. Phar-Mor.com will prominently promote this URL in its marketing materials, on its Web sites and in its stores. Furthermore, we will become the exclusive online provider of health products for Phar-Mor.com. As part of this exclusivity arrangement, Phar-Mor.com agreed not to sell any products on its Web sites that are sold on our Web site. Phar- Mor.com also will not display any advertisements of, link its Web sites to or refer its customers to any third-party Web site that sells the same health products that we sell. On each home page of Phar-Mor.com's Web sites, it will identify more.com as its exclusive online provider of health products as well as display a hyperlinked button labeled "Shop more.com." Phar-Mor.com will receive a sales commission for each product sold to a customer who reached our Web site via the collaborative URL. Under the agreement, Phar-Mor.com also agreed to purchase at least $1.0 million but no more than $2.0 million of advertising annually from us during the five-year term of the agreement. Also, our customers will be able to pick up prescription drugs purchased on our Web site at participating Phar-Mor stores. We believe this alliance will drive customer traffic to our Web site and will represent a cost-efficient source of customer acquisition. Sponsorships. Our alliances have offered us exclusive sponsorship opportunities and premier access to efficient marketing vehicles such as e-mail newsletters. An example of one of our sponsorships is an 44 agreement that we have entered into with drDrew.com. Under the terms of this agreement, drDrew.com prominently promotes more.com on the drDrew.com Web site and in its marketing and promotional materials as its exclusive online drugstore e-commerce partner. In addition, drDrew.com's weekly e-mail newsletters will regularly contain a credit indicating that they are sponsored by more.com. Other examples of our sponsorship agreements include a premier sponsorship of Dr. Koop at Go.com, Gold merchant status in Go.com's shopping channel, as well as similar arrangements with AccentHealth, e-Diets, Perks@Work, Physicians Online, snap! and women.com. Affiliate Programs. Leveraging the reach of complementary third-party sites is a significant revenue driver for us. The more.com affiliate program has over 13,000 members. These affiliates provide one of our most cost- efficient sources of customer acquisition and have consistently contributed over 15% of our aggregate sales. Under the terms of our standard affiliate agreement, affiliate program applicants that we accept select a more.com icon to feature on their Web site. Each icon contains an electronic link to our Web site. When a customer follows a link from an affiliate's Web site to our Web site and makes a purchase, the affiliate is credited with a referral fee based on the sale price of the product purchased. Affiliates do not earn referral fees for prescription items or contact lenses. We have outsourced the management of our affiliate program to LinkShare to aggressively pursue affiliate acquisition and build new partnerships. Co-Marketing Ventures. We have engaged in co-marketing ventures and sampling programs with manufacturers of health products, including Durex, Johnson & Johnson, Procter & Gamble and Revlon. Our goal is to rapidly deepen and broaden marketing partnerships with these and other manufacturers to generate incremental product sales for all parties. In addition, we have initiated an advertising sales program that will be managed by Bergen Brunswig to assist manufacturers in accessing online health shoppers via paid advertising and merchandising placements on the more.com site. We plan to continue building important strategic alliances by positioning ourselves as the e-commerce partner of choice for health portals, new distribution channels, important health-related networks and healthcare provider networks, both online and offline. Additionally, we will focus on similar initiatives among important channels that reach primary target markets, such as women, online shoppers and college students. Customer Service We believe that superior customer service and support are critical to retain and expand our customer base. Our goal is to further facilitate the customer experience, while at the same time providing the hands-on support and interaction that currently is lacking in most e-commerce shopping experiences. We anticipate that our customer support technology will also increase our conversion of visitors into buyers. Our customer service agents handle questions about orders and how to use our Web site, assist customers in finding desired products and resolve problems. Our customer service agents are a valuable source of feedback and identifiers of opportunity for improvement regarding customer satisfaction. Thus, in addition to traditional call center and help desk roles, our customer service agents handle all products returned by customers. Customer returns provide us with a valuable source of information for continuous improvement. Our customer service offerings include: . Help screen--our customers can browse help screens on our Web site. These screens reflect the most common questions posed by our customers and the most up to date answers we provided to them; . E-mail--customers can send an e-mail to our customer service center; . Toll-free telephone service--if a customer would prefer to speak to a live person about their shopping experience at more.com, the customer can call our toll-free telephone number. We staff 45 our call center so that we can quickly respond to customer concerns. We strive to answer 90% of the phone calls within 30 seconds. When customers call, they are greeted by a live person to answer their question instead of an automated list of options; and . Live chat--because most of our customers are accessing our Web site via a modem and may not want to use the telephone, we have provided access to a live chat line where the customer can speak with a customer service agent. Live chat allows our customer service agents to push pages to the customer, which is a process in which the customer's screen is moved to a page by the agent. Technology and Infrastructure We have designed and implemented a next generation health superstore with complete supply chain and cash management integration. Our design is based upon a three-tier architecture that can support extremely high volumes of traffic with quick response and page display times. Our architecture integrates our customer service applications with our Web site and business solutions. This architecture is designed to allow use of thin browser and java based clients that enable us to use customer service agents regardless of their physical location. We have integrated multiple fulfillment providers using industry standard data interchange methods such as EDI and XML. We have employed a variety of scalable and reliable software and hardware systems for transaction processing, administration, searching, customer support, fulfillment and order tracking. These services and systems use a combination of our own proprietary technologies and commercially available licensed technologies. Our transaction processing systems are integrated with our accounting and financial systems. We focus our internal development efforts on creating and enhancing proprietary software that is unique to our business. Session information is obtained from our Web site and combined with data from our business systems and fed into a data warehouse. This allows us to obtain and extrapolate information for business reporting and planning and marketing activities. Our systems are based on industry standard architectures and have been designed to reduce downtime in the event of outages or catastrophic occurrences. We use Sun Microsystem's UltraSPARC-based servers and Solaris operating system. Front-end and back-end software systems use Oracle's DBMS. Our system hardware is hosted at a Level 3 Communications facility in San Francisco, California, which provides high-speed, redundant communications lines, emergency power backup and continuous systems monitoring. We have implemented load balancing systems and our own redundant servers to provide for fault tolerance. We have implemented a variety of scalable and reliable software and hardware systems for transaction processing, administration, searching, customer support, fulfillment and order tracking. These services and systems use a combination of our own proprietary technologies and commercially available, licensed technologies. Our transaction-processing systems are integrated with our accounting and financial systems. We focus our internal development efforts on creating and enhancing the specialized, proprietary software that is unique to our business. We use an encryption technology that works with most common Internet browsers and makes it extremely difficult for unauthorized parties to read information sent by our customers. We outsource a majority of our credit card authorization and settlement to CyberSource through secure Internet connections. Competition The e-commerce market is new, rapidly evolving and highly competitive. In particular, the online health market is intensely competitive and highly fragmented, with no clear dominant leader in any of our product segments. Our competitors can be divided into several broad categories, including: . chain drugstores; . mass market retailers; 46 . supermarkets; . warehouse clubs; . online retailers; . mail-order pharmacies; . prescription benefits managers; . Internet-portals and online service providers that feature shopping services; and . cosmetics departments at major department stores. Each of these competitors operate within one or more of the health, wellness, beauty, personal care or pharmacy product categories. In addition, nearly all our competitors have, or have announced their intention to have, the capability to accept orders for products online. We believe that the following are principal competitive factors in our market: . selection; . convenience; . price; . Web site performance and accessibility; . customer service; . quality of information services; . reliability and speed of order fulfillment; and . brand recognition. We believe that our ability to compete depends in large part on our ability to maintain a broad product selection, value and convenience. Some of our competitors may be able to secure products from vendors on more favorable terms, fulfill customer orders more efficiently and adopt more aggressive pricing or inventory availability policies than we can. Traditional brick and mortar retailers also enable customers to see and feel products in a manner that is not possible over the Internet. Traditional brick and mortar retailers can also sell products to address immediate, acute care needs, which we and other online sites cannot do. Intellectual Property Our performance and ability to compete are dependent in part on our proprietary and licensed technology. We rely on a combination of patent, copyright, trademark and trade secret laws and contractual restrictions to establish and protect our technology. All key employees have signed confidentiality and invention assignment agreements and we intend to require newly hired employees to execute similar agreements. We cannot be certain that these contractual arrangements or other steps taken will be adequate to prevent the misappropriation of our proprietary rights or technology. In addition, our competitors may independently develop technologies that are substantially equivalent or superior to our technology. We have certain common law rights in the service marks and trademarks used in our business and have applications pending to register several service marks and trademarks used in our business. There can be no assurance that we will be able to secure significant protection for all our service marks or trademarks, or that are applications will be successful. Competitors of ours or others could adopt product or service marks similar to our marks, or try to prevent us from using our marks, thereby impeding our ability to build brand identity and possibly leading to customer confusion. 47 We do not currently have any issued patents or registered copyrights. Our two patent applications were filed on February 24, 1999 and August 5, 1999. We have been assigned the rights to patent applications claiming a number of the technologies underlying our products and services. There can be no assurance that the applications will result in the issuance of patents or that, if issued, such patents would adequately protect us against competitive technology or that they would be held valid and enforceable against a challenge. In addition, it is possible that our competitors may be able to design around any such patents. Also, our competitors may obtain patents that we would need to license or circumvent in order to make, use, sell or offer for sale the technology. We believe that we do not infringe upon the proprietary rights of any third party, and no third party has asserted a patent infringement claim against us. It is possible, however, that such a claim might be asserted successfully against us in the future. Our ability to make, use, sell or offer for sale our products and services depends on our freedom to operate. That is, we must ensure that we do not infringe upon the proprietary rights of others or have licensed all such rights. We rely on a variety of technology, primarily software, that we license from third parties. There can be no assurances that the third-party technology licenses that we do have will continue to be available to us on commercially reasonable terms or at all. Also, the loss or inability to maintain or obtain upgrades to any of these technology licenses could result in delays or breakdowns in our ability to continue developing and providing our products and services or to enhance and upgrade our products and services. Government Regulation Various aspects of our business are subject to extensive federal, state and local regulations, many of which are specific to the practice of pharmacy. For example, distributors of controlled substances are subject to requirements established under the Controlled Substances Act, as well as related state and local laws and regulations. These laws and regulations relate to pharmacy operations, including registration, security, record keeping and reporting requirements related to the purchase, storage and dispensing of controlled substances, prescription drugs and some over-the-counter drugs. Our contract with Medi-Mail, our prescription drug fulfillment provider, is structured to ensure that only Medi-Mail is subject to federal, state and local licensing and registration regulations with respect to prescription drug sales and pharmacy operations. Although the law surrounding internet sales is still developing, the Food and Drug Administration, or FDA, currently asserts jurisdiction over Web site claims based upon the agency's view that claims included on a Web site constitute product labeling. The FDA also regulates the advertising of prescription drug products, and the agency currently asserts jurisdiction over prescription drug Web site claims based upon the agency's view that such claims constitute product advertising. The Federal Trade Commission, or FTC, regulates the advertising of over-the-counter drugs, conventional foods, dietary supplements, cosmetics and medical devices. Most states have laws similar or identical to the laws applied by the FDA and FTC with regard to the products we distribute. The Consumer Product Safety Commission regulates consumer products not regulated by the FDA. The FDA and FTC are currently reviewing Web site formats for ordering products subject to their jurisdiction. In the future, one or both agencies may establish a formal policy, or apply an informal policy, regarding the format of these Web sites with regard to content and disclosures. We may need to modify the format of our Web site in the future to comply with FDA and FTC requirements. We could also conceivably be found liable at present based upon the format and content of our Web site. The practice of medicine requires licensing under applicable state law. It is not our intent to practice medicine, and we have tried to structure our Web site and customer interactions to avoid practicing medicine. However, a regulatory authority could at some time allege that some portion of our business violates these statutes and, any liability based on a determination that we engaged in the unlawful practice of medicine may be excluded from coverage under the terms of our general liability insurance policy. 48 The U.S. House of Representatives Committee on Commerce and the General Accounting Office are currently investigating online pharmacies and online prescribing, placing particular focus on those who prescribe drugs online and on pharmacies that fill invalid prescriptions, including those that are written online. Because Medi-Mail makes every effort only to fulfill valid prescriptions and we do not prescribe drugs, we believe that our business will not be negatively affected by any regulations that result from the investigations. However, we believe that any regulations resulting from the investigations will likely result in increased reporting and monitoring requirements. The Clinton Administration recently announced a new initiative to protect consumers who purchase prescription drugs over the Internet. The initiative is intended to prevent rogue online prescription drug companies who unlawfully prescribe drug products over the Internet and are not licensed to engage in the practice of pharmacy or medicine. The initiative would establish new federal requirements for all Internet pharmacies to ensure that they comply with federal and state law. Based upon our contract with Medi-Mail, we believe we are in compliance with the new initiative. Nevertheless, the final contours of the initiative have not yet been established, and depending upon the content of the initiative, compliance may cause delays or unexpected complications. The National Association of Boards of Pharmacy, a coalition of state pharmacy boards, has developed a program, the Verified Internet Pharmacy Practice Sites, as a model for self-regulation for online pharmacies. We have applied to the National Association of Boards of Pharmacy for certification by its Verified Internet Pharmacy Practice Sites program and intend to comply with its criteria for certification. We are also subject to extensive regulation relating to the confidentiality and release of patient records and the transmission of Medicare eligibility information over the Internet. Additional legislation governing the distribution of medical records exists or has been proposed at both the state and federal level. Our business is also subject to rules, such as anti-kickback laws, prohibiting certain practices that could result in overutilization of healthcare services and supplies. Legal Proceedings We are a defendant in a lawsuit brought by More Online alleging, among other things, that our name, more.com, is confusingly similar to More Online's name. With this lawsuit, More Online is seeking to prevent us from using the name more and the URL www.more.com. We believe we have strong defenses to these allegations and are vigorously defending this litigation. We cannot be certain that our defense will be successful. If we do not prevail in this litigation, we could be prevented from using the more.com name and be liable from monetary damages. Other than the More Online litigation, we are not currently party to any material legal proceedings. We may in the future be party to litigation arising in the ordinary course of business. These claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. Employees As of December 31, 1999, we had 122 full-time employees. Of our employees, 44 were primarily involved in the development and production of our Web site, 30 in our marketing and sales department, 16 in our customer service department, 11 in our manufacturing department and 21 in our general and administrative department. We believe that our relationship with our employees is good. 49 Facilities Our principal executive and administrative offices are located at 520 Third Street, Second Floor, San Francisco, California 94107, where we lease approximately 15,000 square feet, under a lease that expires in July 2000. We also lease approximately 1,900 square feet at 485 Third Street, San Francisco, California 94107, and approximately 2,125 square feet at 495 Third Street, San Francisco, California 94107; both leases expire in November 2002. Our manufacturing facility for the production of Acumin products, where we lease approximately 2,440 square feet, is located at 3401 Market Street, Philadelphia, Pennsylvania 19104, under a year-to-year lease that started on May 31, 1999. We will likely require additional space before the end of 2000. 50 MANAGEMENT Executive Officers and Directors Our executive officers and directors, and their ages and positions, as of February 5, 2000 are as follows:
Name Age Position ---- --- -------- Donald M. Kendall, Jr... 32 Chief Executive Officer and Director Bradford S. Oberwager... 30 Chief Operating Officer Laureen De Buono........ 42 Chief Financial Officer and Secretary Eric Budin.............. 31 Vice President of Corporate Development Clarence A. Felong...... 46 Vice President of Engineering Bruce S. Mowery......... 55 Vice President of Marketing and Business Development Samuel J. Salkin........ 49 Vice President of Merchandising and Operations Mark Leschly............ 31 Director Thomas A. Penn.......... 53 Director Perk Perkins............ 46 Director Donald R. Roden......... 53 Director E. Scott Russell........ 39 Director John Sculley III........ 60 Director John Neil Weintraut..... 41 Director
Donald M. Kendall, Jr., co-founder of more.com, has served as our Chief Executive Officer and a member of our board of directors since our inception. From 1992 until January 1998, Mr. Kendall was the co-founder and president of American Retail Systems, which operates 85 Pizza Hut and Kentucky Fried Chicken restaurants in the Republic of Poland and the Czech Republic, with annual sales of $100 million and 5,000 employees. From 1990 to 1992, Mr. Kendall was a management consultant for McKinsey & Co. in the consumer industries group. Mr. Kendall earned a B.A. in U.S. History from Stanford University. Bradford S. Oberwager has served as our Chief Operating Officer since November 1998. From January 1997 to November 1998, Mr. Oberwager was the founder and president of Acumin Corporation, a manufacturer and Internet retailer of customized vitamins, which has been incorporated as a division of more.com. Before founding Acumin, from 1992 to 1995, Mr. Oberwager worked in the investment banking divisions of Smith Barney and Bear Stearns. Mr. Oberwager is a member of the board of advisors of various private companies. Mr. Oberwager earned a B.S. in Finance from Georgetown University and an M.B.A. from the Wharton School of Business. Laureen De Buono has served as our Chief Financial Officer since November 1999 and our Secretary since January 2000. From June 1998 until October 1999, Ms. De Buono was the chief operating officer and chief financial officer of Resound Corporation, a public hearing device and communications company. From 1992 to 1998, Ms. De Buono was an executive vice president at Nellcor Puritan Bennett, a public respiratory products company, where she led the legal, mergers and acquisitions, human resources and communications groups. Ms. De Buono was corporate counsel at The Clorox Company from 1987 to 1992. Ms. De Buono is a member of the board of directors of Invivo Corporation and a member of the Board of Visitors of the Institute of Public Policy at Duke University. She earned a B.A. in Economics, Political Science and History from Duke University, an M.A. in Economics and Political Science from Stanford University and a J.D. from New York University School of Law. Eric Budin, co-founder of more.com, has served as our Vice President of Corporate Development since May 1998, and previously served as a member of our board of directors from May 1998 to October 1999 and our President from January 1998 to May 1998. From March 1996 to July 1997, Mr. Budin was a senior product manager in charge of product management for client applications at OnLive! Technologies, a company that pioneered real-time group communications over the Internet. From August 1994 to February 1996, Mr. Budin 51 was a director of product development and marketing at Worlds, Inc., a provider of three dimensional multi-user spaces over the Internet. Mr. Budin worked as a management consultant for McKinsey & Co. from 1990 to 1992. Mr. Budin holds a B.A. in economics and psychology from the University of Michigan and an M.B.A. from Stanford Graduate School of Business. Clarence A. Felong has served as our Vice President of Engineering since March 1999. From April 1996 to March 1999, Mr. Felong was a vice president at Oracle's Internet applications division, where he managed the e-commerce, messaging and document management groups, as well as a joint effort between CNN and Oracle to produce a personalized news Web site. From June 1988 to March 1996, Mr. Felong held various positions at Apple Computer, Inc., including senior director of communications and collaboration technologies and was a member of the product strategy council. Prior to joining Apple, Mr. Felong held senior management positions at Frame Technology Corporation, GO Corporation, Claris Corporation and the Jet Propulsion Laboratory. Mr. Felong studied Mathematics at the State University of New York at Fredonia and Computer Science at West Los Angeles College and West Coast University. Bruce S. Mowery has served as our Vice President of Marketing and Business Development since April 1999. Mr. Mowery has more than 20 years of technology marketing experience. From June 1997 to March 1999, Mr. Mowery was the owner and managing partner of Ellipsis Consulting, a marketing consulting firm. From March 1996 to May 1997, Mr. Mowery served as a vice president of marketing at Visioneer, a manufacturer of personal imaging products. From October 1993 to November 1996, Mr. Mowery was a vice president of sales and marketing at MNI Interactive, Inc., an Internet e-commerce firm involved in the sale of music products. He was the senior director of marketing at Apple from April 1984 to September 1996. Mr. Mowery also served as an entrepreneur in residence at Kleiner, Perkins, Caulfield and Byers, a venture capital firm, during 1996. Mr. Mowery received a B.A. in International Studies from Ohio State University and an M.A. in Management from American Graduate School of International Management. Samuel J. Salkin has served as our Vice President of Merchandising and Operations since August 1998. He served as the chief operating officer for the Jewish Community Federation, the central fund-raising and community-planning agency of the San Francisco Jewish community from September 1997 to September 1998. From January 1994 to September 1996, Mr. Salkin was the president and chief executive officer of Peet's Coffee & Tea, Inc., then a privately held retailer of specialty coffee with more than 50 retail stores in California. Mr. Salkin currently serves on the board of directors of Real Good Trading Company, a retail firm specializing in ecological energy systems and consumer products. Mr. Salkin received a B.S. in Industrial and Labor Relations and an M.S. in Development Sociology from Cornell University. Mark Leschly has been a member of our board of directors since October 1998. Since June 1999, Mr. Leschly has served as a managing director of Rho Management Company, Inc., a New York-based international investment firm with principal activities in venture capital, private equity funds and public securities. From September 1995 to June 1999, Mr. Leschly was a general partner at Healthcare Ventures, a venture capital firm specializing in making healthcare investments. Mr. Leschly currently serves on the board of directors of Diversa Corporation and is a member of the Board of Directors of various private companies. He is also a member of the advisory board of the Harvard AIDS Institute. Mr. Leschly received an M.B.A. from the Stanford Graduate School of Business. Thomas A. Penn has been a member of our board of directors since October 1999. Since June 1998, Mr. Penn has been a partner at Boston Millennia Partners, a Boston-based venture capital firm. From March 1994 to March 1998, Mr. Penn served as the president and chief executive officer of Tektagen, Inc., a contract services organization that provides product development services and support to the biotechnology and pharmaceutical industries. Mr. Penn is a member of the board of directors of various private companies. Mr. Penn received a B.S. in Metallurgy and Materials Science and a B.S. in Industrial Management from the Massachusetts Institute of Technology, an M.B.A. from the Stanford Graduate School of Business and a J.D. from the University of Pennsylvania. 52 Perk Perkins has been a member of our board of directors since June 1998. Since November 1992, Mr. Perkins has served as president and chief executive officer of The Orvis Company, a retailer of outdoor sporting equipment and clothing. From July 1977 to November 1992, Mr. Perkins served in various positions with Orvis, including vice president of merchandising, vice president of operations and president of Orvis UK. He currently serves on the board of directors of the Center for Compatible Economic Development and is the co-chair of the Conservation Committee of The Nature Conservancy. Donald R. Roden has been a member of our board of directors since January 2000. From October 1995 to November 1999, Mr. Roden was the president, chief executive officer and a member of the board of directors of Bergen Brunswig Corporation. Prior to joining Bergen Brunswig Corporation, he was the chief executive officer of Reed Elsevier Medical, North America Division. From October 1977 to April 1989, Mr. Roden was the owner of Pracon Incorporation, a healthcare consulting and communications company. Mr. Roden received a B.A. in Business from University of Wisconsin and an M.B.A. in Pharmaceutical Management from Fairleigh Dickinson University. E. Scott Russell has been a member of our board of directors since October 1998. Since September 1996, Mr. Russell has served as a general partner of SOFTBANK Venture Capital. Prior to joining SOFTBANK, Mr. Russell spent 16 years managing corporate MIS technology for Swiss Bank Corporation, SBC Warburg, Goldman, Sachs & Co. and J.P. Morgan & Co. Incorporated. While with SBC Warburg, he headed the technology division in Asia and later served on the firm's information technology management committee based in London. Mr. Russell currently serves on the board of directors of BUY.COM Inc. and E-Loan, Inc., and is a member of the board of directors of various private companies. Mr. Russell received a B.S. in Engineering from Carnegie Mellon University and an executive M.B.A. from London School of Business. John Sculley III has been a member of our board of directors since June 1998. Since March 1994, Mr. Sculley has served as a partner in the investment firm of Sculley Brothers LLC. From November 1993 to February 1994, Mr. Sculley served as the chief executive officer of Spectrum Information Technologies, Inc., a manufacturer of weather monitoring and soil testing equipment. In January 1995, Spectrum, together with three of its four operating subsidiaries, filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of New York. From 1983 to 1993, Mr. Sculley served as the chief executive officer of Apple Computer, Inc. Since 1984, Mr. Sculley has also been the chief executive officer of Sculley Bros., Inc., a private investment company. Mr. Sculley currently serves on the board of directors of NetObjects, Inc. and Talk City, Inc. Mr. Sculley received a B.S. in Architecture from Brown University and an M.B.A. from the Wharton School of Business. John Neil Weintraut has been a member of our board of directors since June 1998. Mr. Weintraut is a founder of 21st Century Internet Venture Partners, a venture capital firm, and has been a partner since its founding in October 1996. From June 1987 to May 1996, Mr. Weintraut was a partner at Hambrecht & Quist, an investment banking firm, where he led the enterprise software practice and, later, the Internet practice. He currently serves on the board of directors of CareerBuilder, Inc. Mr. Weintraut received a B.S. in Electrical Engineering from Drexel University and an M.B.A. from the Wharton School of Business. Classified Board of Directors Our board of directors is currently comprised of eight directors. Our board will be divided into three classes of directors serving staggered three- year terms upon the effectiveness of this offering. As a result, approximately one-third of the board of directors will be elected each year. These provisions, together with provisions in our certificate of incorporation, allow our board of directors to fill vacancies of or increase the size of the board and may deter our stockholders from removing incumbent directors and filling these vacancies with their own nominees to gain control of the board. 53 Our board of directors has designated that Messrs. Leschly, Penn and Weintraut will serve as Class I directors, whose terms expire at the 2001 annual meeting of stockholders. Messrs. Kendall and Russell will serve as Class II directors whose terms expire at the 2002 annual meeting of stockholders. Messrs. Perkins, Roden and Sculley will serve as Class III directors whose terms expire at the 2003 annual meeting of stockholders. Director Compensation Our directors who are also employees will receive no additional compensation for their services as directors. Our non-employee directors will receive a fee of $1,000 for each meeting of the board attended in person. In addition, our non-employee directors are eligible to receive options and be issued shares of common stock directly under our 2000 non-employee director stock option program. Non-employee directors will be granted an initial option to purchase 25,000 shares of our common stock with subsequent annual option grants to purchase 5,000 shares of our common stock. The exercise price per share for these options will equal the fair market value of our common stock at the date of grant. Each stock option received by our non-employee directors will vest and become exercisable over a period of four years. Our directors who are also employees are eligible to receive options and be issued shares of common stock directly under our amended and restated 1998 stock option plan and 2000 stock incentive plan. Board Committees Our board of directors has established a compensation committee and an audit committee. The compensation committee, consisting of Messrs. Leschly and Penn, reviews and approves the salaries, bonuses and other compensation payable to our executive officers and administers and makes recommendations concerning our employee benefit plans. The audit committee, consisting of Messrs. Penn, Roden and Sculley, makes recommendations to our board of directors regarding selection of independent public accountants. The committee reviews the scope and results of the audit and other services provided by our independent accountants, and reviews our accounting policies and systems of internal accounting controls. Compensation Committee Interlocks and Insider Participation No member of our compensation committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee. There are no family relationships among any of our directors or executive officers. Executive Compensation Summary Compensation Information The following table contains information in summary form concerning the compensation paid to our Chief Executive Officer and each of our four most highly compensated executive officers whose total salary, bonus and other compensation exceeded $100,000 during the fiscal year ended December 31, 1999. In accordance with the rules of the Securities Exchange Commission, the compensation described in this table does not include perquisites and other personal benefits received by the executive officers named in the table below which do not exceed the lesser of $50,000 or 10% of the total salary and bonus reported for these executive officers. 54 Summary Compensation Table
Annual Long-Term All Other 1999 Compensation Compensation Compensation(1) --------------- ------------ --------------- Securities Underlying Total Health Name and Principal Position Year Salary Bonus Options Insurance - --------------------------- ---- -------- ----- ------------ --------------- Donald M. Kendall, Jr........ 1999 $132,500 $ -- -- $ -- Chief Executive Officer and 1998 85,000 -- -- -- Director Bradford S. Oberwager........ 1999 131,250 2,500 300,000 -- Chief Operating Officer 1998 15,057 -- 235,000 -- Eric Budin................... 1999 144,167 -- -- -- Vice President of Corporate 1998 70,000 -- -- -- Development Samuel J. Salkin............. 1999 172,221 -- 133,078 912 Vice President of 1998 55,549 -- 144,000 -- Merchandising and Operations Clarence A. Felong........... 1999 164,031 25,000 519,207 1,166 Vice President of 1998 -- -- -- -- Engineering
- -------- (1) Consists of medical reimbursements. Option Grants During Fiscal 1999 The following table sets forth information concerning grants of stock options to each of the executive officers named in the table above during the fiscal year ended December 31, 1999. All of these options were granted under our amended and restated 1998 stock option plan at an exercise price equal to the fair market of our common stock at the time of grant. Except as noted in the footnote for the respective executive officer, each option vests over a period of four years and is exercisable immediately. Our board of directors determined the fair market value of our common stock on the date of grant based on, among other things, our financial results and prospects and the share price in arms-length transactions that accrued around the time of the grant. The exercise price may in some cases be paid by delivery of other shares or by offset of the shares subject to options. Potential realizable values are net of exercise price, but before taxes associated with exercise. Amounts represent hypothetical gains that could be achieved for the options if exercised at the end of the option term. The assumed 5% and 10% rates of stock price appreciation are provided in accordance with the rules of the Securities and Exchange Commission and do not represent our estimate or projection of the future common stock price. Options Granted in Fiscal Year Ended December 31, 1999
Potential Realizable Percent of Value at Assumed Number of Total Options Annual Rates of Stock Securities Granted to Price Appreciation Underlying Employees in for Option Term Options Fiscal Year Exercise Price Expiration --------------------- Name Granted 1999(1) Per Share Date 5% 10% - ---- ---------- ------------- -------------- ---------- ---------- ---------- Donald M. Kendall, Jr... -- -- $ -- -- Bradford S. Oberwager... 300,000 9.4% 0.330 10/8/2009 62,261 157,776 Eric Budin.............. -- -- -- -- Samuel J. Salkin........ 83,078 2.6% 0.166 5/25/2009 8,673 21,979 50,000 1.6% 3.620 12/15/2009 113,831 288,460 Clarence A. Felong...... 419,207 13.2% 0.166 4/14/2009 43,764 110,903 100,000 3.1% 3.620 12/15/2009 227,662 576,920
- -------- (1) The percentage of total options is based on an aggregate of 3,181,888 options granted to employees in fiscal 1999. 55 Option Exercises The following table sets forth information concerning exercisable and unexercisable stock options held by each of the executive officers named in the summary compensation table at the fiscal year ended December 31, 1999. The value realized upon exercise is based on the estimated fair value of our common stock of $0.33 per share at the time of exercise less the per share exercise price, multiplied by the number of shares acquired upon exercise. The value of unexercised in-the-money options is based on the assumed initial public offering price of $ per share less the per share exercise price, multiplied by the number of shares underlying the options. All options were granted under our amended and restated 1998 stock option plan. Aggregate Option Exercises in Fiscal Year Ended December 31, 1999 and Option Values at December 31, 1999
Number of Value of Securities Underlying Unexercised Unexercised Options In-the-Money Options at Fiscal Year End at Fiscal Year End Shares Acquired Value ------------------------- ------------------------- Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable - ---- --------------- -------- ------------------------- ------------------------- Donald M. Kendall, Jr... -- $ -- -- -- Bradford S. Oberwager... 235,000 38,540 300,000/0 -- Eric Budin.............. -- -- -- -- Samuel J. Salkin........ 144,000 31,824 133,078/0 -- Clarence A. Felong...... -- -- 519,207/0 --
Compensation Protection Agreements We will enter into compensation protection agreements with each of our executive officers. These agreements are for a term of three years commencing in January 2000 and are subject to automatic annual extensions. If within 12 months of a change of control of our company, an executive officer's employment with us is terminated by us other than for cause or by the officer personally for good reason, excluding by reason of the officer's disability, death or retirement, then we must pay that officer: (a) his or her accrued compensation, including unpaid base salary, pro rata bonus, and vacation pay; and (b) an amount equal to two times the sum of the officer's highest annual base salary and annual bonus in effect immediately prior to the change of control. In addition, until the third anniversary of the officer's termination we will provide the officer with the maximum benefits provided to that officer between the effective date of the agreement and 90 days preceding the date of the change of control. The officer will also receive immediate vesting and removal of all restrictions on any outstanding incentive awards granted under our stock option and other stock incentive plans, excluding our employee stock purchase plan, or any other arrangement, unless it would render unavailable pooling of interest accounting for a change of control, and the board of directors determined that such change of control shall be accounted for as a pooling of interest. However, acceleration shall occur regardless of whether it would render pooling of interest accounting unavailable to the extent provided in any employment agreement, offer letter, stock option or other equity-based compensation protection agreement with an executive officer prior to the date of the compensation protection agreement with us. The compensation protection agreements further provide that the executive officers will not be required to mitigate the amounts due to them as a result of their termination. Benefit Plans Amended and Restated 1998 Stock Option Plan Our amended and restated 1998 stock option plan was adopted by our board of directors in January 2000. We expect to receive stockholder approval prior to the effectiveness of this offering. We have reserved a total of 8,117,500 shares of our common stock under our 1998 stock option plan for issuance pursuant to stock 56 options. As of December 31, 1999, options to purchase an aggregate of 3,261,344 shares were outstanding, 736,416 shares of common stock had been purchased pursuant to exercises of stock options and 119,740 shares were available for future grant. Our board of directors may grant incentive stock options, which are stock options that qualify under Section 422 of the Internal Revenue Code, to our employees. Non-qualified stock options may be granted to employees, non- employee directors and consultants. The maximum term of options granted under our 1998 stock option plan is ten years, however, the maximum term for incentive stock options granted to any person holding more than 10% of the voting power of all classes or our stock is five years. Our board of directors may amend our 1998 stock option plan at any time. Our 1998 stock option plan will terminate in 2008, unless terminated earlier by the board of directors. An option holder may exercise an option granted under our 1998 stock option plan in whole or in part at any time during the term of the option and the option holder's continuous service with us. Shares purchased under an option are subject to our right to repurchase them, to the extent that the shares have not yet vested, when the option holder's service with us ceases. An option granted under the plan generally vests over a four-year period, with 25% vesting after one year and the remaining shares vesting monthly over a three- year period. An option holder whose service with us ceases for any reason, other than upon death, disability or termination for cause, may exercise vested options in the 60-day period following termination, unless the options expire sooner by their terms. The 60-day period is extended by up to six months for terminations due to death or disability. An option holder whose service is terminated by us for cause may not exercise vested options after the date of termination. Employees who were offered positions of employment with us prior to March 1, 1999, also have an acceleration provision in their option agreement in the case of a change of control transaction. A change of control transaction is defined generally as a transaction or series of transactions in which our equity holders immediately prior to the change of control do not retain at least 50% of the voting power of and interest in the successor entity. In the case of a change of control, an additional 12.5% of the employee's shares covered by the option will immediately vest. This percentage will increase to 25% if the employee is employed by us immediately prior to the change of control and will be laid off by the successor entity as of the time of the change of control. 2000 Stock Incentive Plan Our 2000 stock incentive plan was adopted by our board of directors in January 2000. We expect to receive stockholder approval prior to the effectiveness of this offering. Our 2000 stock incentive plan provides for the grant of: . incentive stock options to our employees, including officers and employee directors; . non-qualified stock options to our employees, directors and consultants; . stock appreciation rights; and . other types of awards. Our 2000 stock incentive plan will be administered by our compensation committee which selects the optionees, determines the number of shares to be subject to each option, determines the exercise price of each option and determines the vesting and exercise periods of each option. Our 2000 stock incentive plan authorizes the issuance of an aggregate of up to 4,000,000 shares of common stock plus any remaining shares under the 1998 stock option plan. The 2000 stock incentive plan also provides for annual increases in the number of shares of common stock subject to the plan by the number of shares equal to 5% of the total number of shares outstanding or a lesser number of shares as determined by the compensation committee. We have not yet granted any options under this plan. 57 The exercise price of all incentive stock options granted under our 2000 stock incentive plan must be at least equal to the fair market value of the common stock on the date of grant. The exercise price of all non-qualified stock options granted under our 2000 stock incentive plan shall be determined by the compensation committee, but cannot be less than 85% of the fair market value on the date of grant unless otherwise determined by the compensation committee. With respect to any participant who owns stock possessing more than 10% of the voting power of all our classes of stock, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the grant date and the maximum term of any these options must not exceed five years. The term of all other awards granted under our 2000 stock incentive plan will be determined by the compensation committee. An option holder's initial grant will vest 25% at the first anniversary date and monthly thereafter, such that the option will be fully exercisable four years after its date of grant. Subsequent options will vest monthly commencing on the first month after the grant date, such that the option will be fully exercisable four years after the grant date. An option holder under our 2000 stock incentive plan whose services with us ceases for any reason, other than death or disability, may exercise vested options in the 90-day period following termination, unless the options expire sooner by their terms. For terminations caused by death or disability, the exercise period is 12 months. In the event of a change of control where the acquiror assumes options granted under the 2000 stock incentive plan, none of these options are subject to accelerated vesting. However, assumed options will automatically become fully vested if the grantee is terminated by the acquiror within six months of a change of control. In the event of a change of control where the acquiror does not assume options granted under the 2000 stock incentive plan, all of these options become fully vested upon the closing of the acquisition. Unless terminated earlier, our 2000 stock incentive plan will terminate in 2010. Our board of directors has authority to amend or terminate our 2000 stock incentive plan, provided that this action will not impair the rights of any participant without the written consent of that participant. 2000 Non-Employee Director Stock Option Program Our 2000 non-employee director stock option program was adopted by our board of directors pursuant to the 2000 stock incentive plan and is subject to the terms and conditions of the 2000 stock incentive plan. The non-employee director program provides for automatic option grants to non-employee directors. Our non-employee director program has been approved by our board of directors prior to the effectiveness of this offering. The non-employee director program is effective upon the effectiveness of this offering, and no options will be granted under this program until that time. The purpose of the non-employee director program is to enhance our ability to attract and retain the best available non-employee directors and to provide them additional incentives to promote the success of our business. Under this program, each non-employee director in office upon the effectiveness of this offering and each non-employee director first elected to our board of directors following the effectiveness of this offering will automatically be granted an option to acquire 25,000 shares of our common stock at an exercise price per share equal to the fair market value of our common stock at the date of grant. Twenty-five percent of the options will vest and become exercisable 12 months after the grant date, with the remaining option shares vesting monthly over the remaining three-year period and an additional 1/48 of the shares subject to the option will vest on each monthly anniversary of the grant date thereafter. Upon the date of each annual stockholders' meeting, each non-employee director who has been a member of our board of directors for at least 11 months prior to the date of the stockholders' meeting will receive an automatic option grant for 5,000 shares of our 58 common stock at an exercise price equal to the fair market value of our common stock at the date of grant. These options will vest monthly over a four-year period and become exercisable as to 1/48 of the shares subject to the option on each monthly anniversary of the grant date. The term of each automatic option grant and the extent to which it will be transferable will be provided in a stock option agreement. The option exercise price may be paid by cash, check, shares of our common stock, the assignment of part of the proceeds from the sale of shares acquired upon exercise of the option or any combination of these methods. The non-employee director program is administered by our board of directors or a committee designated by the board made up of two or more non- employee directors. The program administrator determines the terms and conditions of awards and interprets the terms of the program. Unless terminated earlier, the non-employee director program will terminate automatically in 2010 when the 2000 stock incentive plan terminates. Our board of directors has the authority to amend, suspend or terminate the non-employee director program provided that these actions do not affect awards to non-employee directors previously granted under the program unless agreed to by the affected non-employee directors. 2000 Employee Stock Purchase Plan Our employee stock purchase plan was adopted by our board of directors in January 2000. We expect to receive stockholder approval prior to the effectiveness of this offering. Our employee stock purchase plan is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code to provide our employees with an opportunity to purchase common stock through payroll deductions. An aggregate of 2,000,000 shares of common stock has been reserved for issuance and are available for purchase under our employee stock purchase plan, pending adjustment for a stock split, or any future stock dividend or other similar change in our common stock or our capital structure. The employee stock purchase plan provides for annual increases in the number of shares of common stock subject to the plan equal to the lesser of: . two million shares; . the number of shares equal to 1.75% of the total number of shares outstanding; or . a lesser number of shares as determined by the compensation committee. All of our employees who are regularly employed for more than five months in any calendar year and work more than 20 hours per week are eligible to participate in our employee stock purchase plan. Employees hired after the closing of this offering are eligible to participate in our employee stock purchase plan, subject to a ten-day waiting period after hiring. Non-employee directors, consultants, and employees subject to the rules or laws of a foreign jurisdiction that prohibit or make impractical their participation in our employee stock purchase plan are not eligible to participate in this plan. Our employee stock purchase plan designates offer periods, purchase periods and exercise dates. Offer periods are generally overlapping periods of 24 months. The initial offer period begins on the effective date of our employee stock purchase plan, which is the effective date of the registration statement relating to this offering, and ends on February 14, 2002. Additional offer periods will commence each February 15 and August 15. Purchase periods are generally six months in length, with the initial purchase period commencing on the effective date of our employee stock purchase plan and ending on August 14, 2000. Thereafter, purchase periods will commence each February 15 and August 15. Exercise dates are the last day of each purchase period. In the event we merge with or into another corporation, sell all or substantially all of our assets, or enter into other transactions in which all of our stockholders before the transaction own less than 50% of the total combined voting power of our outstanding securities following the transaction, the administrator of our employee stock purchase plan may elect to shorten the offer period then in progress. 59 On the first day of each offer period, a participating employee is granted a purchase right. A purchase right is a form of option to be automatically exercised on the forthcoming exercise dates within the offer period during which authorized deductions are to be made from the pay of participants and credited to their accounts under our employee stock purchase plan. When the purchase right is exercised, the participant's withheld salary is used to purchase shares of common stock. The price per share at which shares of common stock are to be purchased under our employee stock purchase plan during any purchase period is the lesser of 85% of the fair market value of the common stock on the date of the grant of the option, which is the commencement of the offer period, or 85% of the fair market value of the common stock on the exercise date, which is the last day of a purchase period. The participant's purchase right is exercised in this manner on each exercise date arising in the offer period unless, on the first day of any purchase period, the fair market value of the common stock is lower than the fair market value of the common stock on the first day of the offer period. If so, the participant's participation in the original offer period is terminated, and the participant is automatically enrolled in the new offer period effective the same date. Payroll deductions may range from 1% to 10% in whole percentage increments of a participant's regular base pay, exclusive of bonuses, overtime, shift-premiums, commissions, reimbursements or other expense allowances. Participants may not make direct cash payments to their accounts. The maximum number of shares of common stock that any employee may purchase under our employee stock purchase plan during a purchase period is 500 shares. The Internal Revenue Code imposes additional limitations on the amount of common stock that may be purchased during any calendar year. Our employee stock purchase plan will be administered by our board of directors or a committee designated by our Board, which will have the authority to terminate or amend our employee stock purchase plan, subject to specified restrictions, and otherwise to administer our employee stock purchase plan and to resolve all questions relating to the administration of the plan. 401K Plan In 1999, we implemented a 401(k) plan covering all employees. Pursuant to the 401(k) plan, employees may elect to reduce their current compensation up to the prescribed annual limit, which is $10,500 in 2000, and contribute these amounts to the 401(k) plan. Employees become fully vested in these contributions immediately, subject to limitations on access to the contributions during the duration of employment. The 401(k) plan is intended to qualify under Section 401 of the Internal Revenue Code so that contributions by employees or by us to the 401(k) plan, and income earned on the 401(k) plan contributions, are not taxable to employees until withdrawn from the 401(k) plan. Contributions by us, if any, will be deductible by us when made. We have not made any contributions under this plan. The trustee under the 401(k) plan, at the direction of each participant, invests the 401(k) plan employee salary deferrals in selected investment options. Limitation of Liability and Indemnification Matters The certificate of incorporation that we will adopt immediately prior to the effectiveness of this offering provides that, except to the extent prohibited by Delaware law, our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty as directors. Under Delaware law, the directors have a fiduciary duty to our company that is not eliminated by this provision of the certificate of incorporation and, in appropriate circumstances, equitable remedies including injunctive or other forms of nonmonetary relief will remain available. In addition, each director will continue to be subject to liability under the Delaware law for: . breach of the director's duty of loyalty; . acts or omissions which are found by a court of competent jurisdiction to be not in good faith or which involve intentional misconduct, or knowing violations of law; 60 . actions leading to improper personal benefit to the director; and . payment of dividends or approval of stock repurchases or redemptions that are prohibited by Delaware law. This provision also does not affect a director's responsibilities under any other laws, including the federal securities laws or state or federal environmental laws. Delaware law provides further that the indemnification permitted thereunder shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under the corporation's bylaws, any agreement, a vote of stockholders or otherwise. The certificate of incorporation provides that we will indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that the person is or was a director or officer, or is or was serving at our request as a director or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses, judgements, fines and amounts paid in settlement actually and reasonably incurred by the person in the action, suit or proceeding. We plan to enter into indemnification agreements with our directors and our executive officers containing provisions that may require us, among other things, to indemnify our directors and officers against liabilities that may arise by reason of their status of service as directors or officers other than liabilities arising from willful misconduct of a culpable nature, to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. We also intend to obtain directors and officers' liability insurance for our directors or officers. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent as to which indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding which may result in a claim for indemnification. The Securities and Exchange Commission is of the opinion that indemnification of directors, officers and persons controlling our company for violations of the Securities Act is against public policy as expressed in the Securities Act and is therefore unenforceable. 61 RELATED PARTY TRANSACTIONS In May 1998, we entered into restricted stock purchase agreements with our co-founders, Donald M. Kendall, Jr. and Eric Budin, under which they received shares of our securities in exchange for their entire membership interest in Nutrition Direct, LLC, our predecessor entity. Mr. Kendall received 1,449,834 shares of our common stock and 22,976 shares of our Series A convertible preferred stock. Mr. Budin received 989,526 shares of our common stock. Under the terms of these agreements, we have repurchase rights with respect to any unvested shares. Approximately 30% of their shares vested immediately and the remainder vest monthly over a 34-month period beginning in May 1998. In March 1999, the agreements were revised to amend the accelerated vesting provisions upon a change of control transaction and the subsequent termination of their employment. The following table sets forth information concerning option grants to our current executive officers and directors since our inception in January 1998. In each case, the exercise price for the options reflected the fair market value per share of our common stock as determined by our board of directors or its compensation committee.
Exercise Price Name Date of Grant Options Per Share - ---- ------------- ------- -------------- Bradford S. Oberwager...................... 12/18/1998 235,000 $0.166 10/8/1999 300,000 0.330 Laureen De Buono........................... 11/3/1999 375,000 3.620 Clarence A. Felong......................... 4/14/1999 419,207 0.166 12/15/1999 100,000 3.620 Bruce S. Mowery............................ 6/1/1999 227,078 0.166 12/15/1999 50,000 3.620 Samuel J. Salkin........................... 8/4/1998 144,000 0.109 5/25/1999 83,078 0.166 12/15/1999 50,000 3.620 Perk Perkins............................... 10/29/1998 30,000 0.166 John Sculley III........................... 10/29/1998 90,000 0.166
Mr. Oberwager's option to purchase 235,000 shares of our common stock vests over a 23-month period, which began in May 1999. Upon a change of control of our company, an additional 12.5% of the shares into which the options are exercisable immediately vest. Upon a change of control and a subsequent termination of employment, an additional 25% of the shares into which the options are exercisable immediately vests. Mr. Oberwager's option to purchase 300,000 shares of our common stock vests subject to the terms and conditions of our 1998 stock option plan. Upon a change of control of our company, an additional 12.5% of the shares into which the options are exercisable immediately vest. Upon a change of control and a subsequent termination of employment, an additional 25% of the shares into which the options are exercisable immediately vests. Solely upon the termination of employment without cause, 50% of the shares into which the options are exercisable immediately vest. Ms. De Buono's option to purchase 375,000 shares of our common stock vests subject to the terms and conditions of our 1998 stock option plan. Upon termination of employment for reasons other than those indicated in Ms. De Buono's employment offer letter, between six and 12 months from the start of her employment, 25% of the options immediately vest. Upon a change of control of our company, 12.5% of the shares into which the options are exercisable immediately vest, and upon a change of control and a subsequent termination of employment or diminution of duties, 37.5% of the shares into which the options are exercisable immediately vest. 62 Mr. Mowery's option to purchase 277,078 shares of our common stock and Mr. Felong's option to purchase 519,207 shares of our common stock vest subject to the terms and conditions of our 1998 stock option plan with no accelerated vesting. Mr. Salkin's option to purchase 144,000 shares of our common stock vests subject to the terms and conditions of our 1998 stock option plan. Upon a change of control of our company, 12.5% of the shares into which the options are exercisable immediately vest, and upon a change of control and a subsequent termination of employment or diminution of duties, 25% of the shares into which the options are exercisable immediately vest. Mr. Salkin's option to purchase 133,078 shares of our common stock vests subject to the terms and conditions of our 1998 stock option plan with no accelerated vesting. Mr. Perkins' option to purchase 30,000 shares of our common stock and Mr. Sculley's option to purchase 90,000 shares of our common stock vested immediately. In February 1998, we issued a warrant to purchase an aggregate of 14,634 shares of our Series A convertible preferred stock to Donald M. Kendall, Sr., father to Donald M. Kendall, Jr., our Chief Executive Officer. The warrant expires in May 2003, or immediately upon the occurrence of any of the following: . liquidation, dissolution or winding up of our business; . sale, lease or other disposition of all or substantially all of our assets; or . our merger or consolidation with or into any corporation or other entity where our equity holders immediately prior to such event do not retain at least 50% of the voting power of and interest in the successor entity. In August 1999, we entered into a stock purchase agreement with Bergen Brunswig Drug Company, our primary fulfillment provider of health products. In this agreement we issued 1,169,922 shares of our common stock to Bergen Brunswig in connection with transactions related to the prescription pharmaceuticals Internet fulfillment services agreement with Medi-Mail, a wholly owned subsidiary of Bergen Brunswig. In November 1999, we entered into a share purchase agreement with Roger Hardy and William Wrixon, who in the aggregate owned the entire equity interest in Clearly Contacts, now a division of our company. In exchange for Mr. Hardy's entire interest in Clearly Contacts, he received $262,500 and 165,000 shares of our common stock. In exchange for Mr. Wrixon's entire interest in Clearly Contacts, he received $87,500 and 55,000 shares of our common stock. As of December 31, 1999, we have issued shares of preferred stock in private placement transactions as follows: . an aggregate of 398,109 shares of Series A convertible preferred stock at $1.64 per share to five investors; . an aggregate of 1,528,000 shares of Series B mandatorily redeemable convertible preferred stock at $1.64 per share to four investors; . an aggregate of 6,611,446 shares of Series C mandatorily redeemable convertible preferred stock at $1.66 per share to seven investors; and . an aggregate of 9,233,864 shares of Series D mandatorily redeemable convertible preferred stock at $4.82 per share to 39 investors. The following table sets forth the number of shares of Series A convertible preferred stock and, Series B, Series C and Series D mandatorily redeemable convertible preferred stock purchased by our directors, 63 officers, five percent stockholders and their respective affiliates. Upon the completion of this offering, each share of the preferred stock converts into shares of our common stock. Each share of Series A convertible preferred stock and Series B mandatorily redeemable convertible preferred stock converts into one and one half shares of our common stock. Each share of Series C and D mandatorily redeemable preferred stock converts into one share of our common stock.
Series A Series B Series C Series D Holder Preferred Preferred Preferred Preferred - ------ --------- --------- --------- --------- Donald M. Kendall, Jr................. 22,976 46,000 12,169 18,520 Donald M. Kendall, Sr................. 250,384 -- -- -- John Sculley, III..................... -- 46,000 -- 41,493 21st Century Internet Fund, L.P....... -- 1,105,000 1,117,470 989,626 SOFTBANK Affiliates................... -- -- 1,746,988 1,659,751 Rho Management Trust I................ -- -- 1,987,952 1,360,995 Boston Millennia Limited Partnership and affiliates....................... -- -- -- 1,659,746 Health Business Partners, LLC and its affiliates........................... -- 331,000 391,566 636,203 HealthCare Ventures V, L.P............ -- -- 1,325,301 220,796
We have entered into a registration rights agreement with various preferred stockholders described above pursuant to which they will have specified registration rights with respect to their shares of common stock following this offering. Upon the completion of this offering, all shares of our outstanding preferred stock will be automatically converted into shares of common stock. We intend to enter into indemnification agreements with each of our directors and officers. These indemnification agreements will require us to indemnify these individuals to the fullest extent permitted by Delaware law. We will enter into compensation protection agreements with each of our executive officers. We believe that all of the transactions set forth above were made on terms no less favorable to us than could have been obtained from unaffiliated third parties. We intend that all future transactions, including loans, between us and our officers, directors, principal stockholders and their affiliates will be approved by a majority of our board of directors, including a majority of the independent and disinterested outside directors on our board of directors and will be on terms no less favorable to us than could be obtained from unaffiliated third parties. 64 PRINCIPAL STOCKHOLDERS The following table sets forth the beneficial ownership of our common stock as of December 31, 1999 and as adjusted to reflect the sale of the shares of common stock in this offering by: . each person or entity known by us to own beneficially more than 5% of our common stock; . our Chief Executive Officer, each of the executive officers named in the summary compensation table and each of our directors; and . all of our executive officers and directors as a group. The beneficial ownership is calculated based on 23,800,172 shares of our common stock issued and outstanding as of December 31, 1999, assuming the conversion of Series A convertible preferred stock and Series B, Series C and Series D mandatorily redeemable convertible preferred stock into common stock, which will occur automatically upon the effectiveness of this offering, and shares outstanding immediately following the completion of this offering. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares issuable upon the exercise of options that are currently exercisable or become exercisable within 60 days of December 31, 1999 are considered outstanding for the purpose of calculating the percentage of outstanding shares of our common stock held by the individual, but not for the purpose of calculating the percentage of outstanding shares of our common stock held by an other individual. Except as indicated in the footnotes to this table, and as affected by applicable community property laws, all persons listed have sole voting and investment power for all shares shown as beneficially owned by them. The address of each of the executive officers and directors is c/o more.com, Inc., 520 Third Street, Second Floor, San Francisco, California 94107.
Number of Percentage of Shares Shares Beneficially Owned Beneficially -------------------------------- Beneficial Owner Owned Prior to Offering After Offering - ---------------- ------------ ----------------- -------------- 21st Century Internet Fund, 3,764,596 15.8% L.P............................. John Neil Weintraut, Member 21st Century Internet Management Partners, LLC Two South Park, 2nd Floor, San Francisco, CA 94107 Rho Management Trust I........... 3,348,947 14.1% Mark Leschly, Managing Director Rho Management Company, Inc., Investment Advisor 152 W 57th Street, New York, NY 10019 SOFTBANK Affiliates (1).......... 3,406,739 14.3% E. Scott Russell 200 West Evelyn Ave., Suite 200, Mountain View, CA 94043 Boston Millennia Limited 1,314,315 5.5% Partnership and Affiliates (2).. Martin Hernon, General Partner Glen Partners Limited Partnership, General Partner 30 Rowes Wharf, Boston, MA 02110 HealthCare Ventures V, L.P....... 1,546,097 6.5% Jeffrey Steinberg Administrative Partner of HealthCare Partners V, L.P. The General Partner of HealthCare Partners V, L.P. 44 Nassau Street, Princeton, NJ 08542-4511
65
Number of Percentage of Shares Shares Beneficially Owned Beneficially -------------------------------- Beneficial Owner Owned Prior to Offering After Offering - ---------------- ------------ ----------------- -------------- Health Business Partners, LLC 1,524,269 6.4% and its Affiliates (3)......... Daniel Warshay, Member 5784 Post Road, Suite 5, Warwick, RI 02818 Donald M. Kendall, Jr. (4)...... 1,583,987 6.7% Eric Budin (5).................. 989,526 4.2% Bradford Oberwager (6).......... 820,375 3.4% Samuel Salkin (7)............... 277,078 1.2% Clarence A. Felong (8).......... 519,207 2.2% Mark Leschly (9)................ 3,348,947 14.1% Thomas A. Penn (10)............. 1,314,315 5.5% Perk Perkins (11)............... 30,000 * Donald R. Roden................. -- -- E. Scott Russell (12)........... 3,406,739 14.3% John Sculley III (13)........... 90,000 * John Neil Weintraut (14)........ 3,764,596 15.8% Executive officers and directors 16,796,848 70.6% as a group (11 persons) (15)...
- -------- (1) Consists of (a) 2,528,419 shares held by SOFTBANK Venture Capital IV, L.P.; (b) 48,445 shares held by SOFTBANK Technology Advisors Fund, L.P.; (c) 795,128 shares held by SOFTBANK Venture Capital V, L.P.; (d) 21,694 shares held by SOFTBANK Technology Advisors Fund V, L.P.; and (e) 13,053 shares held by SOFTBANK / Technology Entrepreneurs Fund V, L.P. (2) Consists of 1,293,230 shares held by Boston Millennia Limited Partnership and 21,085 shares held by Boston Millennia Associates I Partnership. (3) Consists of (a) 496,500 shares held by GreenTree Nutrition Investors, LLC; (b) 391,566 shares held by Greentree Nutrition Investors II, LLC; and (c) 636,203 shares held by Greentree Nutrition Investors IV, L.P. Health Business Partners, LLC is the general partner and administrator of the above funds. (4) Includes 463,843 shares subject to repurchase by us as of December 31, 1999. (5) Includes 309,227 shares subject to repurchase by us as of December 31, 1999. (6) Includes 163,478 shares subject to repurchase by us as of December 31, 1999 and an option to purchase 300,000 shares of common stock exercisable within 60 days of December 31, 1999. (7) Includes 96,000 shares subject to repurchase by us as of December 31, 1999 and an option to purchase 133,078 shares of common stock exercisable within 60 days of December 31, 1999. (8) Represents an option to purchase 519,207 shares of common stock exercisable within 60 days of December 31, 1999. (9) Mark Leschly, one of our directors, is a director of Rho Management Company, Inc. The shares represent shares held by Rho Management Company, Inc. Mr. Leschly disclaims beneficial ownership of these shares except to the extent of his pecuniary interest as a director. (10) Thomas A. Penn, one of our directors, is a Partner at Boston Millennia Partners. The shares represent shares held by Boston Millennia Limited Partnership and its affiliate. Mr. Penn disclaims beneficial ownership of these shares except to the extent of his pecuniary interest as a general partner. (11) Represents an option to purchase 30,000 shares of common stock exercisable within 60 days of December 31, 1999. 66 (12) E. Scott Russell, one of our directors, is a managing member of SOFTBANK Venture Capital. The shares represent shares held by SOFTBANK affiliates. Mr. Russell disclaims beneficial ownership of these shares except to the extent of his pecuniary interest as a managing member. (13) Represents an option to purchase 90,000 shares of common stock exercisable within 60 days of December 31, 1999. (14) John Neil Weintraut, one of our directors, is a partner at 21st Century Internet Venture Partners. The shares represent shares held by 21st Century Internet Ventures Partners. Mr. Weintraut disclaims beneficial ownership of these shares except to the extent of his pecuniary interest as a partner. (15) Includes (a) 11,834,597 shares deemed to be beneficially owned by certain of our directors as set forth in notes (2), (9), (10) and (11) above; and (b) 1,724,363 shares of common stock issuable upon exercise of stock options held by our executive officers and directors within 60 days of December 31, 1999. 67 DESCRIPTION OF CAPITAL STOCK The following description of our securities and of provisions of our certificate of incorporation and bylaws is merely a summary. A complete description of the rights and preferences is set forth in the provisions of our certificate of incorporation, our bylaws and applicable corporate laws. The description of common stock and preferred stock reflect changes to our capital structure that will occur upon the effectiveness of this offering in accordance with the terms of the certificate of incorporation that we will adopt immediately prior to the effectiveness of this offering. Upon the effectiveness of this offering, our authorized capital stock will consist of 100,000,000 shares of common stock, $0.001 par value per share and 10,000,000 shares of undesignated preferred stock, par value $0.001. Common Stock As of December 31, 1999, we are authorized to issue 30,000,000 shares of common stock. After giving effect to the conversion of all outstanding shares of our Series A convertible preferred stock and Series B, Series C and Series D mandatorily redeemable convertible preferred stock upon the completion of this offering, 23,800,172 shares of our common stock were issued and outstanding. The holders of our common stock are entitled to one vote for each share held of record upon such matters and in such manner as may be provided by law. Subject to preferences applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably dividends, if any, as may be declared by our board of directors out of funds legally available for dividend payments. In the event we liquidate, dissolve or wind up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and liquidation preferences of any outstanding shares of the preferred stock. Holders of common stock have no preemptive rights or rights to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and nonassessable. Preferred Stock As of December 31, 1999, we are authorized to issue 19,706,478 shares of our preferred stock. As of December 31, 1999, each of the 398,109 shares of our Series A convertible preferred stock and 1,528,000 shares of our Series B mandatorily redeemable convertible preferred stock will convert into one and one half shares of common stock. Each of the 6,611,446 shares of our Series C mandatorily redeemable convertible preferred stock and 9,233,864 shares of our Series D convertible preferred stock will convert into one share of common stock upon the effectiveness of this offering. Upon the effectiveness of this offering, our board of directors will be authorized, absent any limitations prescribed by law, without stockholder approval, to issue up to an aggregate of 10,000,000 shares of preferred stock, in one or more series, each of the series to have rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by our board of directors. The rights of the holders of common stock will be subject to, and maybe adversely affected by, the rights of holders of any preferred stock that maybe issued in the future. Issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of our outstanding voting stock. We have no present plans to issue any shares of preferred stock. Registration Rights After this offering, a number of holders of shares of our common stock will be entitled to registration rights with respect to their shares. Beginning 180 days after this offering, a number of holders may require us to register all or part of their shares. In addition, these holders may require us to include their shares in future 68 registration statements that we file and may require us to register their shares on Form S-3. Furthermore, beginning 180 days after this offering, other holders of our common stock may also require us to include their shares in future registration statements that we file. Upon registration, these shares will be freely tradable in the public market without restriction. All expenses in effecting these registrations, with the exception of underwriting discounts and selling commissions, will be borne by us. These registration rights are subject to certain conditions and limitations, among them the right of the underwriters of an offering to limit the number of shares included in the registration. We have agreed to indemnify the holders of these registration rights, and each selling holder has agreed to indemnify us, against liabilities under the Securities Act, the Securities Exchange Act or other applicable federal or state law. Warrants Series A Warrants We issued warrants to purchase an aggregate of 20,731 shares of Series A convertible preferred stock to all our Series A convertible preferred stock holders except Donald M. Kendall, Jr. The warrants expire in May 2003, or immediately upon the occurrence of any of the following: . liquidation, dissolution or winding up of our business; . sale, lease or other disposition of all or substantially all of our assets; or . our merger or consolidation with or into any corporation or other entity where our equity holders immediately prior to such event do not retain at least 50% of the voting power of and interest in the successor entity. Series C Warrants In connection with an equipment leasing facility, we issued warrants to purchase an aggregate of 48,192 shares of Series C convertible preferred stock with an exercise price of $1.66 per share. In general, the warrants expire on the later of ten years from issuance, or five years from the closing of an initial public offering by us. Anti-Takeover Provisions Provisions of Delaware law and our certificate of incorporation and bylaws could make our acquisition by means of a tender offer, a proxy contest or otherwise, and the removal of incumbent officers and directors more difficult. These provisions are expected to discourage types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control to first negotiate with us. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweighs the disadvantages of discouraging proposals, including proposals that are priced above the then current market value of our common stock, because, among other things, negotiation of these proposals could result in an improvement of their terms. Delaware Law We are subject to Section 203 of the Delaware General Corporation Law. This provision generally prohibits any Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date the stockholder became an interested stockholder, unless: . prior to that date the board of directors approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; 69 . upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock outstanding at the time the transaction began; or . on or following that date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines business combination to include: . any merger or consolidation involving the corporation and the interested stockholder; . any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; . subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; . any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or . the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by the entity or person. Certificate of Incorporation and Bylaws Our certificate of incorporation and bylaws will contain provisions that could have the effect of discouraging potential acquisition proposals or making a tender offer or delaying or preventing a change in control of our company. In particular, our certificate of incorporation and bylaws, as applicable, among other things: . provide that our board of directors will be divided into three classes of directors, as nearly equal in number as is reasonably possible, serving staggered terms so that directors' initial terms will expire at the first, second and third succeeding annual meeting of the stockholders following our initial public offering, respectively. At each such succeeding annual meeting, directors elected to succeed those directors whose terms are expiring at such meeting shall be elected for a three-year term of office. A vote of at least 80% of our capital stock would be required to amend this provision; . provide that special meetings of the stockholders may be called only by our president, our secretary or at the direction of the board. Advance written notice is required, which generally must be received by the secretary not less than 30 days nor more than 60 days prior to the meeting, by a stockholder of a proposal or director nomination that such stockholder desires to present at a meeting of stockholders. Any amendment of this provision would require a vote of at least 80% of our capital stock; . provide that our stockholders will not be permitted to act by written consent; . do not include a provision for cumulative voting in the election of directors. Under cumulative voting, a minority stockholder holding a sufficient number of shares may be able to ensure the election of one or more directors. The absence of cumulative voting may have the effect of 70 limiting the ability of minority stockholders to effect changes in the board and, as a result, may have the effect of deterring a hostile takeover or delaying or preventing changes in control or management of our company; . provide that vacancies on our board may be filled by a majority of directors in office, although less than a quorum, and not by the stockholders; and . allow us to issue up to 10,000,000 shares of undesignated preferred stock with rights senior to those of the common stock and that otherwise could adversely affect the rights and powers, including voting rights, of the holders of common stock. In certain circumstances, this issuance could have the effect of decreasing the market price of the common stock, as well as having the anti-takeover effect discussed above. These provisions are intended to enhance the likelihood of continuity and stability in the composition of our board and in the policies formulated by them, and to discourage certain types of transactions that may involve an actual or threatened change in control of our company. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal and to discouraging certain tactics that may be used in proxy fights. However, these provisions could have the effect of discouraging others from making tender offers for our shares that could result from actual or rumored takeover attempts. These provisions also may have the effect of preventing changes in our management. Transfer Agent and Registrar The transfer agent and registrar for our common stock is EquiServe. Its address is 150 Royall Street, Canton, Massachusetts 02021, and its telephone number is (781) 575-2469. 71 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the offering, we will have shares of common stock outstanding. Of this amount, the shares offered by this prospectus will be available for immediate sale in the public market as of the date of this prospectus. Following the expiration of 180-day lockup agreements with the representatives of the underwriters, shares will be available for sale in the public market, subject in some cases to compliance with the volume and other limitations of Rule 144 of the Securities Act.
Approximate Number Days after the Date of of Shares Eligible for this Prospectus Future Sale Comment - ------------------------ ---------------------- --------------------------------------------------------------- Upon effectiveness...... Freely tradable shares sold in this offering 180 days................ Lock-up released; shares saleable under Rule 144, 144(k) or 701
In general, under Rule 144 as currently in effect, a person who has beneficially owned shares for at least one year is entitled to sell, within any three-month period commencing 90 days after the date of this prospectus, a number of shares that does not exceed the greater of: . one percent of the then outstanding shares of common stock; or . the average weekly trading volume during the four calendar weeks preceding the sale, subject to the filing of a Form 144 with respect to the sale. A person who is not deemed to have been an affiliate of ours at any time during the 90 days immediately preceding the sale and who has beneficially owned his or her shares for at least two years is entitled to sell his or her shares under Rule 144(k) without regard to the limitations described above. Persons deemed to be affiliates must always sell under the limitations imposed by Rule 144, even after the applicable holding periods have been satisfied. We are unable to estimate the number of shares that will be sold under Rule 144 because this will depend on the market price for our common stock, the personal circumstances of the sellers and other factors. Prior to the offering, there has been no public market for the common stock, and there can be no assurance that a significant public market for the common stock will develop or be sustained after the offering. Any future sale of substantial amounts of the common stock in the open market may adversely affect the market price of the common stock offered by this prospectus. Our company and our directors, executive officers, stockholders with registration rights and other stockholders and option holders have agreed, under the purchase agreement and other agreements, that they will not sell any common stock without the prior written consent of Merrill Lynch for a period of 180 days from the date of this prospectus, except that we may, without consent, grant options and sell shares under our stock plans. Any employee or consultant who purchased his or her shares under a written compensatory plan or contract is entitled to rely on the resale provisions of Rule 701, which permits nonaffiliates to sell their Rule 701 shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144 and permits affiliates to sell their Rule 701 shares without having to comply with the Rule 144 holding period restrictions, in each case commencing 90 days after the date of this prospectus. As of December 31, 1999, the holders of options to purchase approximately shares of common stock will be eligible to sell their shares upon the expiration of the 180-day lockup period, subject to the vesting of those options. We intend to file a registration statement on Form S-8 under the Securities Act of 1933, as amended, as soon as practicable after the completion of this offering to register shares of common stock 72 subject to outstanding stock options or reserved for issuance under our stock plans. This registration will permit the resale of these shares by nonaffiliates in the public market without restriction under the Securities Act, upon completion of the lock-up period described above. Shares registered under the Form S-8 registration statement held by affiliates will be subject to Rule 144 volume limitations. 73 UNDERWRITING Merrill Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc. and U.S. Bancorp Piper Jaffray Inc. are acting as representatives of the underwriters named below. Subject to the terms and conditions described in a purchase agreement among us and the underwriters, we have agreed to sell to the underwriters, and the underwriters severally have agreed to purchase from us, the number of shares listed opposite their names below.
Number of Underwriters Shares ------------ --------- Merrill Lynch, Pierce, Fenner & Smith Incorporated................................................ Lehman Brothers Inc. ............................................ U.S. Bancorp Piper Jaffray Inc. ................................. ------ Total....................................................... ======
The underwriters have agreed to purchase all of the shares sold under the purchase agreement if any of these shares are purchased. If an underwriter defaults, the purchase agreement provides that the purchase commitments of the nondefaulting underwriters may be increased or the purchase agreement may be terminated. We have agreed to indemnify the underwriters against specified liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities. The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the shares, and other conditions contained in the purchase agreements, such as the receipt by the underwriters of officer's certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part. Commissions and Discounts The representatives have advised us that the underwriters propose initially to offer the shares to the public at the initial public offering price on the cover page of this prospectus and to dealers at that price less a concession not in excess of $ per share. The underwriters may allow, and the dealers may reallow, a discount not in excess of $ per share to other dealers. After the initial public offering, the public offering price, concession and discount may be changed. 74 The following table shows the public offering price, underwriting discount and proceeds before expenses to us. The information assumes either no exercise or full exercise by the underwriters of their over-allotment options.
Per Share Without Option With Option --------- -------------- ----------- Public offering price............... $ $ $ Underwriting discount............... $ $ $ Proceeds, before expenses, to more.com........................... $ $ $
The expenses of the offering, not including the underwriting discount, are estimated at $ million and are payable by us. Over-allotment Option We have granted options to the underwriters to purchase up to additional shares at the public offering price less the underwriting discount. The underwriters may exercise these options for 30 days from the date of this prospectus solely to cover any over-allotments. If the underwriters exercise these options, each will be obligated, subject to conditions contained in the purchase agreements, to purchase a number of additional shares proportionate to that underwriter's initial amount reflected in the above table. Reserved Shares At our request, the underwriters have reserved for sale, at the initial public offering price, up to 10% of the shares offered by this prospectus for sale to some of our directors, officers, employees, distributors, dealers, business associates and related persons. If these persons purchase reserved shares, this will reduce the number of shares available for sale to the general public. Any reserved shares that are not orally confirmed for purchase within one day of the pricing of this offering will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus. No Sales of Similar Securities We, our executive officers and directors and all existing stockholders have agreed, with exceptions, not to sell or transfer any common stock for 180 days after the date of this prospectus without first obtaining the written consent of Merrill Lynch. Specifically, these other individuals and we have agreed not to directly or indirectly: . offer, pledge, sell or contract to sell any common stock; . sell any option or contract to purchase any common stock; . purchase any option or contract to sell any common stock; . grant any option, right or warrant for the sale of any common stock; . lend or otherwise dispose of or transfer any common stock; . request or demand that we file a registration statement related to the common stock; or . enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any common stock whether any such swap or transaction is to be settled by delivery of shares or other securities, in cash or otherwise. This lockup provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition. 75 Quotation on the Nasdaq National Market We expect the shares to be approved for quotation on the Nasdaq National Market, subject to notice of issuance, under the symbol "MORE." Before this offering, there has been no public market for our common stock. The initial public offering price will be determined through negotiations among the representatives and us. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price are: . the valuation multiples of publicly traded companies that the representatives believe to be comparable to us; . our financial information; . the history of, and the prospects for, our company and the industry in which we compete; . an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues; . the present state of our development; and . the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours. An active trading market for the shares may not develop. It is also possible that after the offering the shares will not trade in the public market at or above the initial public offering price. The underwriters do not expect to sell more than 5% of the shares in the aggregate to accounts over which they exercise discretionary authority. Price Stabilization, Short Positions and Penalty Bids Until the distribution of the shares is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing our common stock. However, the representatives may engage in transactions that stabilize the price of the common stock, such as bids or purchases to peg, fix or maintain that price. If the underwriters create a short position in the common stock in connection with the offering, i.e., if they sell more shares than are listed on the cover of this prospectus, the representatives may reduce that short position by purchasing shares in the open market. The representatives may also elect to reduce any short position by exercising all or part of the over- allotment option described above. Purchases of the common stock to stabilize its price or to reduce a short position may cause the price of the common stock to be higher than it might be in the absence of such purchases. The representatives may also impose a penalty bid on underwriters and selling group members. This means that if the representatives purchase shares in the open market to reduce the underwriters' short position or to stabilize the price of such shares, they may reclaim the amount of the selling concession from the underwriters and selling group members who sold those shares. The imposition of a penalty bid may also affect the price of the shares in that it discourages resales of those shares. Neither we nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters makes any representation that the representatives will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice. 76 LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Morrison & Foerster LLP, San Francisco, California. Legal matters in connection with this offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Attorneys employed by Morrison & Foerster LLP will purchase shares in our directed share program. EXPERTS The consolidated financial statements of more.com, Inc. as of December 31, 1998 and 1999 and for the period from January 9, 1998 (inception) to December 31, 1998 and the year ended December 31, 1999, and the financial statements of Comfort Living, Inc. as of December 31, 1998 and 1999 and for each of the years then ended, included in this prospectus have been so included in reliance on the reports (which for Comfort Living, Inc. contains an explanatory paragraph relating to the ability of Comfort Living, Inc. to continue as a going concern as described in Note 1 to its financial statements) of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. CHANGE IN PRINCIPAL ACCOUNTANTS In January 2000, Ernst & Young LLP was dismissed, and PricewaterhouseCoopers LLP replaced Ernst & Young LLP as our independent accountants. The selection of PricewaterhouseCoopers LLP as our independent accountants was ratified by our audit committee in January 2000. During fiscal 1998 and fiscal 1999, we had no disagreement with our former accountants, Ernst & Young LLP, on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with their opinion to the subject matter of the disagreement. Ernst & Young LLP did not issue a report on our financial statements with respect to the year ended December 31, 1999. WHERE YOU CAN FIND MORE INFORMATION We have filed with Securities and Exchange Commission in Washington, D.C. a Registration Statement on Form S-1 under the Securities Act with respect to the common stock offered in this prospectus. This prospectus, filed as part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and its exhibits and schedules, portions of which have been omitted as permitted by the rules and regulations of the SEC. For further information about us and our common stock, we refer you to the Registration Statement and to its exhibits and schedules. Statements in this prospectus about the contents of any contract, agreement or other document are not necessarily complete and, in each instance, we refer you to the copy of such contract, agreement or document filed as an exhibit to the Registration Statement, with each such statement being qualified in all respects by reference to the document to which it refers. Anyone may inspect the Registration Statement and its exhibits and schedules without charge at the public reference facilities the SEC maintains at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the SEC located at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois, 60661. You may obtain copies of all or any part of these materials from the SEC upon the payment of certain fees prescribed by the SEC. You may also inspect these reports and other information without charge at a Web site maintained by the SEC. The address of this site is http://www.sec.gov. Upon completion of this offering, we will become subject to the informational requirements of the Exchange Act and will be required to file reports, proxy statements and other information with the SEC. You will be able to inspect and copy these reports, proxy statements and other information at the public reference 77 facilities maintained by the SEC and at the SEC's regional offices at the addresses noted above. You also will be able to obtain copies of this material from the Public Reference Section of the SEC as described above, or inspect them without charge at the SEC's Web site. We have applied for quotation of our common stock on the Nasdaq National Market. If we receive approval for quotation on the Nasdaq National Market, then you will be able to inspect reports, proxy and information statements and other information concerning us at the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006. 78 MORE.COM, INC. INDEX TO FINANCIAL STATEMENTS
Page ---- more.com, Inc. Consolidated Financial Statements Report of Independent Accountants.......................................... F-2 Consolidated Balance Sheets................................................ F-3 Consolidated Statements of Operations...................................... F-4 Consolidated Statements of Stockholders' Deficit........................... F-5 Consolidated Statements of Cash Flows...................................... F-6 Notes to Consolidated Financial Statements................................. F-7 Pro Forma Combined Consolidated Financial Information Overview................................................................... F-31 Pro Forma Combined Consolidated Balance Sheet.............................. F-32 Pro Forma Combined Consolidated Statement of Operations Information........ F-33 Notes to Pro Forma Combined Consolidated Financial Information............. F-34 Comfort Living, Inc. Report of Independent Accountants.......................................... F-35 Balance Sheets............................................................. F-36 Statements of Operations................................................... F-37 Statements of Stockholders' Equity (Net Capital Deficiency)................ F-38 Statements of Cash Flows................................................... F-39 Notes to Financial Statements.............................................. F-40
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of more.com, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' deficit and of cash flows present fairly, in all material respects, the financial position of more.com, Inc. and its subsidiaries at December 31, 1998 and 1999, and the results of their operations and their cash flows for the period from January 9, 1998 (inception) through December 31, 1998 and for the year ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. 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 of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP San Jose, California February 4, 2000 F-2 MORE.COM, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts)
Pro Forma Stockholders' Equity at December 31, December 31, December 31, 1998 1999 1999 ------------ ------------ ------------- (unaudited) ASSETS Current assets: Cash and cash equivalents............ $ 8,549 $ 24,655 Short-term investments............... 1,003 -- Accounts receivable, net............. 23 591 Inventories.......................... 22 175 Prepaid expenses and other current assets.............................. 172 641 -------- -------- Total current assets............... 9,769 26,062 Fixed assets, net...................... 300 6,452 Intangible assets, net................. 1,472 7,551 Other assets........................... -- 96 -------- -------- Total assets........................... $ 11,541 $ 40,161 ======== ======== LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable..................... $ 331 $ 1,421 Accrued liabilities.................. 466 6,174 Current portion of borrowings under lines of credit..................... 375 891 -------- -------- Total current liabilities.......... 1,172 8,486 -------- -------- Borrowings under lines of credit, less current portion....................... 225 1,376 Mandatorily redeemable convertible preferred stock (Note 6).............. 13,481 58,064 $ -- Commitments and contingencies (Note 8) Stockholders' equity (deficit): Preferred stock: issuable in series, $0.001 par value; 419 shares authorized, 398 shares issued and outstanding, actual; none issued and outstanding, pro forma.............. 10 10 -- Common stock: $0.001 par value; 30,000 shares authorized; 2,939 and 5,065 shares issued and outstanding, actual; 30,000 shares authorized, 23,800 shares issued and outstanding, pro forma.............. 3 5 24 Additional paid-in capital........... 2,190 16,698 74,753 Deferred stock-based compensation.... (371) (4,624) (4,624) Accumulated deficit.................. (5,169) (39,854) (39,854) -------- -------- -------- Total stockholders' equity (deficit)......................... (3,337) (27,765) $ 30,299 -------- -------- ======== $ 11,541 $ 40,161 ======== ========
The accompanying notes are an integral part of these financial statements F-3 MORE.COM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
Period from January 9, 1998 (inception) to Year ended December 31, 1998 December 31, 1999 ----------------- ----------------- Net revenues:.............................. $ 99 $ 2,923 Cost of net revenues (1)................. 143 3,753 ------- -------- Gross profit (loss).................... (44) (830) ------- -------- Operating expenses: Marketing and sales (2).................. 2,613 20,480 Product development (3).................. 1,387 3,254 General and administrative (4)........... 788 5,187 Amortization of deferred stock-based compensation............................ 404 5,061 ------- -------- Total operating expenses............... 5,192 33,982 ------- -------- Operating loss............................. (5,236) (34,812) Other income (expense): Interest income.......................... 107 482 Interest expense......................... (40) (355) ------- -------- Net loss................................... $(5,169) $(34,685) Accretion of discount on mandatorily redeemable convertible preferred stock.... (101) (1,597) ------- -------- Net loss available to common stockholders.. $(5,270) $(36,282) ======= ======== Basic and diluted net loss per share....... $ (5.90) $ (15.74) Pro forma basic and diluted net loss per share (unaudited)......................... $ (2.68) Weighted average shares outstanding used to compute basic and diluted net loss per share..................................... 893 2,305 Weighted average shares outstanding used to compute pro forma basic and diluted net loss per share (unaudited)................ 13,556
- -------- (1) Excludes stock-based compensation charges of $11 in 1998 and $31 in 1999. (2) Excludes stock-based compensation charges of $93 in 1998 and $1,619 in 1999. (3) Excludes stock-based compensation charges of $39 in 1998 and $1,986 in 1999. (4) Excludes stock-based compensation charges of $261 in 1998 and $1,425 in 1999. The accompanying notes are an integral part of these financial statements F-4 MORE.COM, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (in thousands)
Stockholders' Deficit ----------------------------------------------------------------------------- Series A Convertible Preferred Stock Common stock Additional Deferred Total ------------- ------------- Paid-in Stock-based Accumulated Stockholders' Shares Amount Shares Amount Capital Compensation Deficit Deficit ------ ------ ------ ------ ---------- ------------ ----------- ------------- Issuance of Common stock and Series A convertible preferred stock to founders upon incorporation.......... 23 $10 2,439 $ 2 $ 40 $ -- $ -- $ 52 Issuance of Common stock in connection with acquisition of Acumin.. -- -- 500 1 864 -- -- 865 Issuance of Series A convertible preferred stock and warrants in exchange for cancellation of notes payable................ 375 -- -- -- 612 -- -- 612 Deferred stock-based compensation related to stock options granted.. -- -- -- -- 775 (775) -- -- Amortization of deferred stock- based compensation........... -- -- -- -- -- 404 -- 404 Accretion of discount on Series B and Series C mandatorily redeemable convertible preferred stock.................. -- -- -- -- (101) -- -- (101) Net loss and comprehensive loss..... -- -- -- -- -- -- (5,169) (5,169) --- --- ----- --- ------- ------- -------- -------- Balance at December 31, 1998................... 398 10 2,939 3 2,190 (371) (5,169) (3,337) --- --- ----- --- ------- ------- -------- -------- Issuance of Common stock in connection with fulfillment agreement.. -- -- 1,170 1 4,550 -- -- 4,551 Exercise of stock options................ -- -- 736 1 146 -- -- 147 Options issued to consultants............ -- -- -- -- 375 -- -- 375 Deferred stock-based compensation related to stock options granted.. -- -- -- -- 9,314 (9,314) -- -- Amortization of deferred stock-based compensation........... -- -- -- -- -- 5,061 -- 5,061 Accretion of discount on Series D mandatorily redeemable convertible preferred stock........ -- -- -- -- (1,597) -- -- (1,597) Issuance of common stock in conjunction with acquisition of Clearly Contacts Lenses, Inc... -- -- 220 -- 1,720 -- -- 1,720 Net loss and comprehensive loss..... -- -- -- -- -- -- (34,685) (34,685) --- --- ----- --- ------- ------- -------- -------- Balance at December 31, 1999................... 398 $10 5,065 $ 5 $16,698 $(4,624) $(39,854) $(27,765) === === ===== === ======= ======= ======== ========
The accompanying notes are an integral part of these financial statements F-5 MORE.COM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Period from January 9, 1998 (inception) to Year ended December 31, December 31, 1998 1999 --------------- ------------ Cash flows from operating activities Net loss.......................................... $(5,169) $(34,685) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization expense........... 129 1,682 Interest expense related to converted notes payable........................................ 12 153 Amortization of deferred stock-based compensation................................... 404 5,061 Compensation expense recorded for consultants... -- 282 Changes in operating assets and liabilities, net of assets and liabilities acquired in a purchase business combinations: Accounts receivable........................... (23) (568) Inventories................................... 13 (112) Prepaid expenses and other current assets..... (172) (374) Other assets.................................. -- (96) Accounts payable.............................. 331 990 Accrued liabilities........................... 466 5,708 ------- -------- Net cash used in operating activities....... (4,009) (21,959) ------- -------- Cash flows from investing activities Purchases of fixed assets, net of acquired business......................................... (341) (5,762) Purchases of short-term investments............... (1,003) -- Sales of short-term investments................... -- 1,003 Acquisition of intangible assets.................. -- (323) Business combinations, net of cash acquired....... (730) (414) ------- -------- Net cash used in investing activities....... (2,074) (5,496) ------- -------- Cash flows from financing activities Borrowings under lines of credit.................. 600 1,350 Repayment of lines of credit...................... -- (769) Proceeds from issuance of convertible notes payable.......................................... 600 -- Proceeds from issuance of convertible subordinated notes payable.................................... -- 12,000 Net proceeds from issuance of mandatorily redeemable convertible preferred stock.................................. 13,380 30,833 Net proceeds from issuance of preferred and common stock............................................ 52 147 ------- -------- Net cash provided by financing activities......... 14,632 43,561 ------- -------- Net increase in cash and cash equivalents......... 8,549 16,106 Cash and cash equivalents at beginning of period.. -- 8,549 ------- -------- Cash and cash equivalents at end of period........ $ 8,549 $ 24,655 ======= ========
The accompanying notes are an integral part of these financial statements F-6 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company more.com, Inc. (the "Company" or "more.com") is an Internet health superstore. Its e-commerce Web site, www.more.com, was launched on August 17, 1999. The Company was incorporated on May 14, 1998 in Delaware. Prior to its incorporation, the Company operated as Nutrition Direct LLC, which was formed on January 9, 1998 by the founders who contributed a total of $52,000 in cash. Immediately after the Company's incorporation as more.com, the founders retained the same voting rights as they had possessed in Nutrition Direct LLC. The Company has derived substantially all of its revenue from sales in North America. The Company has incurred significant operating losses since inception of operations and has limited working capital. The Company has financed its operations to date through the issuance of debt and equity securities. Further development and establishment of the Company's business will require additional equity financing. The Company believes that financing can be obtained from existing or new investors. However, there can be no assurance that the Company will be able to obtain such equity financing on acceptable terms, if at all. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Business and Concentration Risks The Company operates in the e-commerce market, which is new, rapidly evolving and highly competitive. The Company competes with other Internet companies, established chain drugstores, mass market retailers, supermarkets, warehouse clubs, cosmetic departments at major department stores and mail-order pharmacies. The Company currently depends primarily on one vendor to provide order fulfillment. Although the Company believes that there are alternative vendors for order fulfillment, there can be no assurance that the Company will maintain its relationship with this vendor. The Company is heavily dependent upon a number of other third parties for credit card processing. In addition, the United Parcel Service of America, Inc. and the United States Postal Service deliver substantially all of the Company's products. Interruption of the services of any of these third parties could have a material adverse impact on the Company. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported results of operations during the reporting period. Actual results could differ from those estimates. F-7 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Fair Value of Financial Instruments Carrying amounts of certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities, approximate fair value due to their short maturities. Based upon borrowing rates currently available to the Company for loans with similar terms, the carrying value of capital lease obligations approximates fair value. Cash and Cash Equivalents The Company considers investments in highly liquid investments purchased with original maturities of 90 days or less to be cash equivalents. Cash equivalents are recorded at cost, which approximates fair value. The Company maintains its cash in depository accounts with high credit quality financial institutions. Short-Term Investments The Company has classified all short-term investments in debt securities as available-for-sale. Available-for-sale securities are carried at cost which approximates fair market value. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in interest income. Interest earned on securities classified as available-for- sale is also included in interest income. Concentrations of Credit Risk and Credit Evaluations The Company is subject to concentrations of credit risk from its holdings of cash, cash equivalents and short-term investments, which are held principally with two domestic financial institutions. The Company conducts business with individuals over the Internet. Sales to individuals are principally paid for via credit cards and the Company's accounts receivable are not significant. Inventories Inventories are carried at the lower of cost (determined on the specific identification basis) or market. Inventories consist of raw materials, work in process and nutritional products available for sale. Fixed Assets Fixed assets, including leasehold improvements, are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from two to five years. Leasehold improvements are amortized over the term of the lease or estimated useful lives, whichever is shorter. Maintenance and repair expenditures are charged to operations as incurred. In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). In accordance with SOP 98-1, the Company has capitalized certain purchased software costs and Web site development costs. SOP 98-1 requires the capitalization of certain costs incurred in connection with developing or obtaining software for internal use. F-8 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Intangible Assets Intangible assets relate to the Company's acquisition of certain intellectual property rights, and goodwill related to business acquisitions accounted for under the purchase method of accounting, and deferred fulfillment costs. Intellectual property rights and goodwill are amortized using the straight-line method over their estimated useful lives, ranging from 12 to 36 months. Deferred fulfillment costs are being amortized using the straight-line method over the term of the fulfillment arrangement, which is ten years. Long-Lived Assets Long-lived assets and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment is measured by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from use of the assets and their ultimate disposition. In circumstances where impairment is determined to exist, the Company will write down the asset to its fair value based on the present value of estimated expected future cash flows. To date, no such impairment has been indicated. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"), which requires the use of the liability method of accounting for income taxes. Under FAS 109, deferred tax assets and liabilities are measured based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Pro Forma Stockholders' Equity Effective upon the closing of the initial public offering of the Company's common stock, the outstanding shares of Series A convertible preferred stock and Series B, Series C and Series D mandatorily redeemable convertible preferred stock will automatically convert into 597,000, 2,292,000, 6,611,000 and 9,234,000 shares, respectively, of common stock. The Company has also issued Series A warrants and Series C warrants which will automatically convert into 31,097 and 48,192 shares, respectively, of common stock. The pro forma effects of these transactions are unaudited and have been reflected in the accompanying pro forma consolidated balance sheet at December 31, 1999. Net Loss Per Common Share The Company computes net loss per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS No. 128") and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of FAS No. 128 and SAB 98, basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per share gives effect to common stock equivalents; however, potential common shares are excluded if their effect is antidilutive. Potential common shares are composed of common stock subject to repurchase rights and incremental shares of common stock issuable upon the exercise of stock options and warrants and upon conversion of Series A convertible preferred stock and Series B, Series C and Series D mandatorily redeemable convertible preferred stock. Pro forma basic and diluted net loss per share is computed on the basis that all of the Series A convertible preferred stock and the Series B, Series C and Series D manditorily redeemable convertible preferred stock convert into common stock in accordance with their terms upon the closing of a "Qualified Offering" as described in Note 6. F-9 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table sets forth the computation of basic and diluted net loss per share and pro forma basic and diluted net loss per share for the periods indicated (in thousands, except per share amounts):
Period from January 9, 1998 Year ended (inception) to December 31, December 31, 1998 1999 ----------------- ------------ (in thousands) Numerator: Net loss available to common shareholders........................... $(5,270) $(36,282) ======= ======== Denominator: Weighted average common shares outstanding............................ 2,518 3,573 Less weighted average common shares issued subject to repurchase agreements............................. (1,625) (1,268) ------- -------- Denominator for basic and diluted calculation............................ 893 2,305 ------- Weighted average effect of pro forma conversion of securities: Series A preferred stock.............. 597 Series B preferred stock.............. 2,292 Series C preferred stock.............. 6,611 Series D preferred stock.............. 1,751 -------- Denominator for pro forma basic and diluted calculation (unaudited)...... 13,556 ======== Net loss per share: Basic and diluted....................... $ (5.90) $ (15.74) ======= ======== Pro forma basic and diluted (unaudited)............................ $ (2.68) ========
The following table sets forth common stock equivalents (potential common stock) that are not included in the diluted net loss per share calculation above because their effect would be antidilutive for the periods indicated (in thousands):
Period from January 9, 1998 (inception) to Year ended December 31, December 31, 1998 1999 ------------ ------------ Weighted average effect of common stock equivalents: Series A preferred stock..................... 379 597 Series B preferred stock..................... 1,455 2,292 Series C preferred stock..................... 1,162 6,611 Series D preferred stock..................... -- 1,751 Preferred stock warrants..................... 19 63 Unvested shares of common stock subject to repurchase.................................. 1,625 1,268 Stock options................................ 211 1,920 ----- ------ 4,851 14,502 ===== ======
F-10 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stock-Based Compensation The Company accounts for stock-based awards to employees under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and has adopted the disclosure-only alternative of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). APB 25 provides that the compensation expense relative to the Company's employee stock options is measured based on the intrinsic value of the stock option. FAS 123 requires companies that continue to follow APB 25 to provide a pro forma disclosure of the impact of applying the fair value method of FAS 123. The Company accounts for stock issued to nonemployees in accordance with the provisions of FAS 123 and the Emerging Issues Task Force consensus in Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services". Advertising Expenses The Company recognizes advertising expenses in accordance with Statement of Position 93-7, "Reporting on Advertising Costs." As such, the Company expenses the cost of communicating advertising in the period in which the advertising space or airtime is used. Advertising production costs are expensed as incurred. Advertising expenses totaled $2.0 million for the period from January 9, 1998 (inception) to December 31, 1998, and $13.4 million for the year ended December 31, 1999. Revenue Recognition Net revenues include product sales net of returns and allowances, and advertising sales and gross outbound standard shipping charges. The Company recognizes revenue from product sales, net of discounts, coupon redemption and estimated sales returns, when the products are shipped to customers. Gross outbound standard shipping and handling charges are included in net sales. The Company provides an allowance for sales returns, which is based on historical experience. For all product sales transactions with its customers, the Company acts as a principal, takes title to all products sold upon shipment, bears credit risk, and bears inventory risk of loss for returned products that are not eligible to be returned to suppliers, although these risks are mitigated through arrangements with credit card issuers and shippers. The Company recognizes revenue from advertising sales ratably over the term of the advertising campaigns. To the extent that advertising customers have paid the Company for advertisements that have yet to be published on the Company's Web site, the Company defers revenue recognition until such advertisements are delivered. In September 1999, the Company entered into an agreement with Bergen Brunswig Drug Company ("BBDC") for BBDC to become the Company's advertising agent. Under the terms of the agency agreement, BBDC will act as the Company's agent for finding third parties to place ads on the Company's Web site. BBDC will earn a commission based upon the advertising revenues that the Company earns. Under the terms of the contract, BBDC guaranteed minimum monthly advertising revenue to the Company in the first year of the contract, with the aggregate of the monthly minimums totaling $5.0 million by August 1, 2000. For the year ended December 31, 1999, the Company recognized $400,000, all of which related to the BBDC minimum monthly guarantee. The Company did not recognize any advertising revenue for the period from January 9, 1998 (inception) to December 31, 1998. Comprehensive Income The Company complies with the provisions of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for reporting comprehensive F-11 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non- owner sources. There is no difference between comprehensive loss and net loss for all periods presented. Recent Accounting Pronouncements In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires all costs related to the development of internal use software other than those incurred during the application development stage to be expensed as incurred. Costs incurred during the application development stage are required to be capitalized and amortized over the estimated useful life of the software. SOP 98-1 was adopted by the Company on January 1, 1999. In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 was adopted by the Company on January 1, 1999 and requires costs of start-up activities and organization costs to be expensed as incurred. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133, as amended by FAS 137, is effective for fiscal years beginning after June 15, 2000. FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income (loss) depending on whether a derivative is designed as part of a hedge transaction and, if so, the type of hedge transaction involved. The Company does not expect that adoption of FAS 133 will have a material impact on its consolidated financial position or results of operations as the Company does not currently hold any derivative financial instruments. NOTE 2--BALANCE SHEET COMPONENTS (IN THOUSANDS): Inventories Inventories are carried at the lower of cost (determined on the specific identification basis) or market. Inventories consist of raw materials, work in process and nutritional products available for sale as follows (in thousands):
December 31, December 31, 1998 1999 ------------ ------------ Raw Materials.................................... $-- $ 27 Work in Process.................................. -- 90 Finished Goods................................... 22 58 --- ---- Total.......................................... $22 $175 === ====
F-12 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Fixed Assets Fixed assets consist of the following (in thousands):
December 31, December 31, 1998 1999 ------------ ------------ Computers and equipment........................ $298 $1,698 Purchased software............................. -- 1,646 Web site development costs..................... -- 3,456 Furniture, fixtures and leasehold improvements.................................. 43 394 ---- ------ 341 7,194 Less: accumulated depreciation and amortization.................................. (41) (742) ---- ------ $300 $6,452 ==== ======
Intangible Assets The components of intangible assets are as follows (in thousands):
December 31, December 31, 1998 1999 ------------ ------------ Deferred fulfillment costs....................... $ -- $ 4,551 Goodwill......................................... 1,510 3,324 Customer base.................................... -- 243 Assembled workforce.............................. 50 304 Other............................................ -- 198 ------ ------- $1,560 $ 8,620 Less: Accumulated amortization................... (88) (1,069) ------ ------- $1,472 $ 7,551 ====== =======
Accrued Liabilities The components of accrued liabilities are as follows (in thousands):
December 31, December 31, 1998 1999 ------------ ------------ Accrued vacation................................. $ 12 $ 218 Loss on promotional program...................... -- 1,700 Advertising...................................... 219 1,455 Equipment purchase............................... -- 1,150 Other............................................ 235 1,651 ---- ------ $466 $6,174 ==== ======
F-13 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 3--FINANCING ARRANGEMENTS In June 1998, the Company entered into a line of credit agreement with a bank that provides for borrowings of up to $600,000. The agreement provides for two lines of credit: an Equipment Line of Credit and a Revolving Line of Credit. The maximum available to borrow under each line of credit is $300,000. The outstanding borrowings of $300,000 under the Revolving Line of Credit at December 31, 1998, which bore interest at the bank's prime rate plus 1.50%, were fully repaid in June 1999. In accordance with the terms of the agreement, the outstanding borrowings of $300,000 under the Equipment Line of Credit at December 31, 1998 were converted into a term note in June 1999. Under the term note, the unpaid principal will be repaid in 24 equal monthly installments commencing in July 1999 and will bear interest at the bank's prime rate (8.50% at December 31, 1999) plus 2.00%. At December 31, 1999, $225,000 was outstanding under this term note. Outstanding borrowings under this agreement are collateralized by substantially all of the Company's assets. This agreement prohibits cash dividends being paid by the Company without the bank's prior written consent. In May 1999, the Company entered into a $1.1 million financing agreement with a vendor for the purchase of the Company's enterprise resource planning system. The arrangement is composed of four financing contracts for $144,000, payable over 30 months, $212,000, payable over 30 months, $362,000, payable over 36 months, and $368,000, payable over 12 months. All four contracts are payable on a quarterly basis. Prepayment of any outstanding amounts is allowable, subject to certain penalties. At December 31, 1999, the Company had approximately $805,000 outstanding under these notes bearing interest at a rate of approximately 14.50% per annum. In July 1999, the Company entered into an equipment line of credit arrangement under a Senior Loan and Security Agreement with a financing institution, which provides for borrowings of up to $2.0 million. Under the terms of the agreement, the Company will enter into promissory notes for borrowings made to purchase certain equipment, machinery, fixtures and intangibles. Each note requires minimum payments of principal and interest over 42 months. Equipment, intangibles, and other assets of the Company are pledged as collateral for this agreement. Prepayments are subject to certain penalties. At December 31, 1999, the Company had approximately $1.2 million outstanding under this line of credit with an effective interest rate of approximately 15.00% per annum. In connection with the line of credit arrangement, the Company issued warrants to purchase 48,192 shares of Series C mandatorily redeemable convertible preferred stock at $1.66 per share. The warrants expire upon the earlier of 10 years or upon a merger or a sale of substantially all of the Company's assets. The fair value attributable to these warrants, calculated using the Black-Scholes option pricing model, was $76,000, which is being charged to interest expense over the term of the agreement. Future minimum payments under these financing arrangements are as follows (in thousands):
Year ending December 31, ------------------------ 2000.............................................................. $ 891 2001.............................................................. 673 2002.............................................................. 451 2003.............................................................. 252 ------ Total Payments...................................................... $2,267 ======
F-14 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 4--CONVERTIBLE SUBORDINATED PROMISSORY NOTES In February and March 1998, the Company issued convertible subordinated promissory notes to certain investors in exchange for $600,000 in cash. The notes bore interest at 10% per annum and were convertible into shares of capital stock sold in the next financing round with proceeds to the Company of at least $1.0 million. In May 1998, all promissory notes and accrued interest were converted into 375,133 shares of Series A convertible preferred stock. In connection with the issuance of the promissory notes, the Company issued warrants to purchase 20,731 shares of Series A convertible preferred stock at an exercise price of $1.64 per share. These warrants expire upon a liquidation, dissolution, sale, lease or disposition of substantially all of the assets of the Company, a merger, or five years from the issuance of the warrants. The fair value attributable to these warrants was not material. In July 1999, the Company issued convertible subordinated promissory notes to certain Series C convertible preferred stockholders for $7.0 million in cash. The notes bore interest at 10.00% per annum and all principal and accrued interest were due on January 29, 2000 for all but one note. Principal and accrued interest on the one note were due on February 18, 2000. The notes were subordinated to the June 1999 term note and to the July 1999 equipment line of credit. Upon a sale by the Company of the Company's preferred securities with proceeds to the Company of at least $15.0 million, outstanding principal and accrued interest under these convertible subordinated promissory notes automatically convert into such preferred securities at the preferred stock sale price per share. In October 1999, all outstanding principal and accrued interest was converted into 1,481,227 shares of Series D mandatorily redeemable convertible preferred stock. In October 1999, the Company issued additional convertible subordinated promissory notes to certain Series C convertible preferred stockholders for $5.0 million in cash. The notes bore interest at 10.00% per annum and all principal and accrued interest were due on April 8, 2000. The notes were subordinated to the June 1999 term note and to the July 1999 equipment line of credit. Upon a sale by the Company of its preferred securities with proceeds to the Company of at least $25.0 million, outstanding principal and accrued interest under these convertible subordinated promissory notes automatically convert into such preferred securities at the preferred stock sale price per share. In November 1999, all outstanding principal and accrued interest was converted into 1,040,044 shares of Series D mandatorily redeemable convertible preferred stock. NOTE 5--RELATED PARTY TRANSACTIONS Fulfillment Arrangement In April 1999, the Company entered into a letter of understanding with a vendor, which established the vendor as the Company's primary wholesale supplier of non-prescription products at specified fulfillment charges. In August 1999, the Company entered into a letter of intent to execute formal over-the-counter and prescription fulfillment agreements with the vendor. These agreements were executed in December 1999. In exchange for entering into the letter of intent, the Company issued 1,169,922 shares of its common stock to the vendor. These shares were deemed to have a fair value of $4.6 million, which has been recorded as an intangible asset that is being amortized as an operating expense over the term of the fulfillment agreement, which is ten years. F-15 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 6--STOCKHOLDERS' EQUITY The Company is authorized to issue 30,000,000 shares of common stock and 19,706,478 shares of preferred stock each with a par value of $0.001 per share. Common Stock Issued to Founders In May 1998, the Company incorporated in Delaware and acquired all of the outstanding equity interests of its predecessor, Nutrition Direct, LLC, a California limited liability company (the "LLC") in exchange for the issuance of 2,439,360 shares of common stock and 22,976 shares of Series A convertible preferred stock of the Company. Approximately one-third of the common shares and all of the preferred shares were immediately vested. The remaining common shares are subject to a repurchase right which expires ratably over a 34-month period which began in May 1998. The repurchase right allows the Company to repurchase unvested shares at a repurchase price of $0.11 per share, determined to be the value of the stock on the date of purchase, in the event of termination of employment, death or disability. Upon a change in control, an additional six months of unvested shares become immediately vested. Upon a change in control plus termination, an additional twelve months of unvested shares become immediately vested. At December 31, 1999, 721,539 shares were subject to the repurchase right. Preferred Stock Preferred stock at December 31, 1999 consists of the following (in thousands):
Shares Shares Issuance Liquidation Redemption Series Authorized Outstanding Price Amount Amount - ------ ---------- ----------- -------- ----------- ---------- A....................... 419 398 $1.64 $ 653 $ 653 B....................... 1,528 1,528 1.64 10,024 2,506 C....................... 6,660 6,611 1.66 43,900 10,975 D....................... 11,100 9,234 4.82 178,032 44,507 ------ ------ -------- ------- Total................. 19,707 17,771 $232,609 $58,641 ====== ====== ======== =======
The holders of Series A convertible preferred stock and Series B, Series C and Series D manditorily redeemable convertible preferred stock ("preferred stock") have various rights and preferences as follows: Conversion Each share of convertible preferred stock is convertible, at the option of the holder, into fully paid and nonassessable shares of common stock at the conversion rate. The conversion rate of the Series A convertible preferred stock and Series B mandatorily redeemable convertible preferred stock is 3:2. The conversion rate of the Series C and Series D mandatorily redeemable convertible preferred stock is 1:1. The conversion rates are subject to adjustment from time to time. The number of shares of common stock into which a share of a series of preferred stock is convertible is referred to as the conversion rate of such series. Each share of preferred stock will automatically be converted into shares of common stock, based on the then effective conversion rate, at any time upon the affirmative vote of the holders of at least a two-thirds majority of the outstanding shares of the Series A convertible preferred stock and the Series B mandatorily redeemable convertible preferred stock voting together as one class for those series or immediately upon a firmly underwritten public offering, as defined in the Company's Articles of Incorporation ("Qualified F-16 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Offering") at a price not less than $4.92 per share and not less than $20.0 million in the aggregate. Each share of the Series C and Series D mandatorily redeemable convertible preferred stock will be converted upon the affirmative vote of the holders of at least a two-thirds majority of the then outstanding shares of that series, or immediately upon the closing of a Qualified Offering at a price of not less than $4.98 per share and not less than $20.0 million in the aggregate and at a price not less than $12.05 per share and not less than $30.0 million in the aggregate, respectively. Dividends The holders of shares of Series A convertible preferred stock, in preference to the holders of common stock but only after dividends have been paid to the Series B, Series C and Series D mandatorily redeemable convertible preferred stock, are entitled to receive dividends at the rate of $0.1312 per annum on each outstanding share of Series A convertible preferred stock (as adjusted for any stock dividends, combinations or splits with respect to such shares). The holders of shares of Series B, Series C and Series D mandatorily redeemable convertible preferred stock, in preference to the holders of any other stock of the Company, are entitled to receive dividends at the rates of $0.1312, $0.1328, and $0.3856 per annum on each outstanding share of Series B, Series C and Series D mandatorily redeemable convertible preferred stock, respectively (as adjusted for any stock dividends, combinations or splits with respect to such shares). Such dividends are payable only when, as and if declared by the Board of Directors, but only out of funds that are legally available, and are noncumulative. Redemption Series A convertible preferred stock is not redeemable. Upon affirmative vote or written consent, the holders of not less than a majority of the outstanding shares of Series B, Series C and Series D mandatorily redeemable convertible preferred stock, voting together as a single class on an as-converted basis, may require the Company to redeem for cash all shares of Series B, Series C and Series D mandatorily redeemable convertible preferred stock outstanding on October 22, 2004. Redemption will be in two equal annual installments on the dates that are three months and fifteen months after the Company's receipt of a Redemption Election, as defined. The redemption price is the original issue price plus all declared but unpaid dividends. If the Company does not have sufficient funds legally available to redeem all the shares to be redeemed at the redemption date, then the Company will redeem such shares pro rata to the extent possible and will redeem the remaining shares to be redeemed as soon as sufficient funds are legally available. Liquidation Preference In the event of any liquidation, dissolution or winding up of the Company (which includes any transaction in which more than 50% of the Company's voting power is transferred, or the Company sells substantially all of its assets), whether voluntary or involuntary, the holders of convertible preferred stock are entitled to receive, prior and in preference to any distribution of the assets of the Company to the holders of common stock, by reason of their ownership, an amount equal to the sum of $1.64 for each share of Series A convertible preferred stock and Series B mandatorily redeemable convertible preferred stock, $1.66 for each share of Series C mandatorily redeemable convertible preferred stock, and $4.82 for each share of Series D F-17 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) mandatorily redeemable convertible preferred stock, plus any declared but unpaid dividends with respect to such shares. The remaining assets, if any, are to be distributed ratably to the holders of common and preferred stock on an as-if-converted to common stock basis until the holders of Series B, Series C and Series D mandatorily redeemable convertible preferred stock have received an aggregate of $6.56, $6.64 and $19.28 per share, respectively, at which time the remaining assets legally available for distribution will be paid on a pro rata basis to the holders of common stock. If, upon the occurrence of a liquidation event, the assets and funds distributed among the holders of the preferred stock are insufficient to permit the payment to holders of the full preferential amount, then all assets and funds of the Company legally available for distribution are to be distributed ratably among the holders of preferred stock, in proportion to the preferential amount each such holder is otherwise entitled to receive. Voting The holders of preferred stock are entitled to the number of votes equal to the number of shares of common stock into which each share of preferred stock could be converted. Antidilution Provisions The conversion price of the Company's preferred stock is subject to adjustment to prevent dilution in the event that the Company issues additional shares of preferred stock, common stock or common stock equivalents at a purchase price less than the then-effective conversion price, provided, however, that without triggering antidilution adjustments, the Company may issue to directors, officers, employees, or consultants shares of common stock that are reserved for issuance under the Company's stock option plan or in connection with financing or other transactions which involve consideration and which are approved by the Board of Directors. Convertible Preferred Stock and Mandatorily Redeemable Convertible Preferred Stock Warrants In connection with the issuance of promissory notes, the Company issued warrants to Series A convertible preferred stock investors to purchase shares of the Company's Series A convertible preferred stock. In connection with an equipment financing arrangement, the Company issued warrants to purchase shares of the Company's Series C mandatorily redeemable convertible preferred stock to a capital lessor. All warrants were immediately exercisable after issuance. The Series A warrants expire in May 2003, or immediately upon the occurrence of: (a) a liquidation, dissolution or winding up of the Company's business; (b) a sale, lease or other disposition of all or substantially all of the Company's assets; or, (c) a merger or consolidation where more than 50% of the voting interests are not retained by the Company. The Series C warrants expire on the later of ten years from issuance, or five years from the closing of an initial public offering by the Company. The Company estimated the fair value of the warrants using the Black-Scholes option pricing model. The fair value of the Series A preferred stock warrants was de minimus. The fair value of the Series C warrants was estimated to be $76,000. The Company records the expense related to these warrants over the life of the associated financing instrument as additional interest expense. The following table summarizes the outstanding warrants (in thousands, except per share amounts):
Date Exercise Fiscal Year Unamortized of Grant Shares Price of Expiration Amounts --------- ------ -------- ------------- ----------- Series A preferred stock warrants................. May 1998 21 $1.64 2003 $ -- Series C preferred stock warrants................. July 1999 48 1.66 2009 76
F-18 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At December 31, 1999, pursuant to the Company's issuances of convertible preferred and mandatorily redeemable convertible preferred stock and preferred stock warrants, the Company had reserved shares of common stock for future issuance as follows (in thousands):
December 31, 1999 ------------ Conversion of Series A mandatorily redeemable convertible preferred stock and warrants.................................... 628 Conversion of Series B mandatorily redeemable convertible preferred stock................................................. 2,292 Conversion of Series C mandatorily redeemable convertible preferred stock and warrants.................................... 6,660 Conversion of Series D mandatorily redeemable convertible preferred stock................................................. 9,234
NOTE 7--EMPLOYEE BENEFIT PLAN 401(k) Savings Plan The company has a savings plan (the "Savings Plan") which qualifies as a defined contribution arrangement under Section 401(a), 401(k) and 501(a) of the Internal Revenue Code. Under the Savings Plan, participating employees may defer a percentage (not to exceed 25%) of their eligible pretax earnings up to the Internal Revenue Service's annual contribution limit. All employees on the United States payroll of the Company are eligible to participate in the Plan. The Company will determine its contributions, if any, based on its current profits and/or retained earnings. No contributions have been made since the inception of the Savings Plan. Stock Option Plan The Company has reserved 4,117,500 shares of common stock under the Company's 1998 Stock Option Plan (the "Plan"). The Plan provides for incentive stock options, as defined by the Internal Revenue Code, to be granted to employees, at an exercise price not less than 100% of the fair value at the grant date as determined by the Board of Directors, unless the optionee is a 10% shareholder, in which case the option price will not be less than 110% of such fair market value. The Plan also provides for nonqualified stock options to be issued to nonemployee directors and consultants at an exercise price of not less than 85% of the fair value at the grant date. Option vesting schedules are determined by the Board of Directors at the time of issuance. Stock options generally vest 25% at the end of the first anniversary date and monthly thereafter up to a maximum of four years. Options granted under the Plan are exercisable over a maximum term of ten years from the date of grant. Upon a change of control, as defined in the Plan, 12.5% of outstanding options as of the date of the change in control become immediately exercisable, the percentage of which may increase to 25% if the option holder is employed immediately prior to the change in control and is terminated at time of change in control. As of December 31, 1999, 119,740 options to purchase shares of common stock were available for future grant under the Plan. F-19 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A summary of the stock option activity is as follows (in thousands, except per share amounts):
Weighted- Number Average of Exercise Shares Price ------ --------- Granted.................................................. 1,083 $ 0.14 Canceled................................................. (257) 0.11 ----- Outstanding at December 31, 1998......................... 826 0.15 Granted.................................................. 3,393 1.36 Exercised................................................ (736) 0.20 Canceled................................................. (222) 0.17 ----- Outstanding at December 31, 1999......................... 3,261 1.40 =====
The weighted-average fair value of options granted to employees during the period from January 9, 1998 (inception) to December 31, 1998 and the year ended December 31, 1999 were $1.18 and $3.07 per share, respectively. The following table summarizes information about stock options outstanding and exercisable as of December 31, 1999 (in thousands, except per share amounts):
Options Outstanding Options Exercisable ----------------------------------------- ------------------------------- Weighted- Range of Weighted-Average Average Exercise Number Remaining Exercise Number Weighted-Average Price Outstanding Contractual Life Price Outstanding Exercise Price -------- -------------- ---------------- --------- -------------- ---------------- (in thousands) (in thousands) $ 0.11 20 8.58 years $ 0.11 7 $ 0.11 $ 0.17 1,370 9.44 years $ 0.17 84 $ 0.17 $ 0.33 744 9.74 years $ 0.33 -- $ 0.33 $ 3.62 1,127 9.90 years $ 3.62 -- $ 3.62 ----- --- 3,261 91 ===== ===
The Company recorded deferred stock-based compensation of $775,000 during the period from January 9, 1998 (inception) to December 31, 1998 and $9.3 million during the year ended December 31, 1999, representing the difference between the exercise price and the deemed fair market value for financial accounting purposes of the Company's common stock on the grant date for certain of the Company's stock options granted to employees. These amounts are being amortized by charges to operations over the vesting periods of the individual stock options. Such amortization amounted to $404,000 for the period from January 9, 1998 (inception) to December 31, 1998 and $5.1 million for the year ended December 31, 1999. Options Issued to Consultants Included in the tables above are options granted to consultants to purchase 49,632 and 211,390 shares of common stock during the period from January 9, 1998 (inception) to December 31, 1998 and during the year ended December 31, 1999, respectively. These options were granted in exchange for consulting services. Amounts allocated to consulting expense during the period from January 9, 1998 (inception) to December 31, 1998 were not material. Amounts charged to consulting expense under the consulting arrangements is $282,000 during the year ended December 31, 1999. The value attributable to options granted to consultants during the F-20 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) period from January 9, 1998 (inception) to December 31, 1998 and during the year ended December 31, 1999 were de minimis and $375,000, respectively. Pro Forma Disclosure of the Effect of Stock-Based Compensation The Company has elected to follow APB 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FAS 123 requires the use of option valuation models that were not developed for use in valuing employee stock options. Pro forma information regarding net loss is required by FAS 123. This information is required to be determined as if the Company has accounted for its employee stock options under the fair value method of FAS 123. Under this method, the estimated fair value of the options is amortized to expense over the options' vesting period. The fair value for these options was estimated at the date of grant using the minimum value method with the following weighted-average assumptions:
Period from January 9, 1998 (inception) to Year Ended December 31, December 31, 1998 1999 --------------- ------------ Risk-free interest rate....................... 4.81% 5.91% Expected life of the option................... 5 years 5 years Expected dividend yield....................... 0% 0%
The option valuation models used under FAS 123 were developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility and expected life of the option. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The effect of applying the FAS 123 fair value method to the Company's stock-based awards results in net loss as follows (in thousands):
Period from January 9, 1998 (inception) to Year ended December 31, December 31, 1998 1999 --------------- ------------ Net loss, as reported........................ $(5,169) $(34,685) Net loss, pro forma.......................... $(5,170) $(34,726)
F-21 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 8--COMMITMENTS AND CONTINGENCIES Leases The Company leases facilities and equipment under noncancelable operating leases with various expiration dates through 2002. The following are the minimum lease obligations under these leases at December 31, 1999 (in thousands):
Year ending December 31, ------------ 2000.......................................................... $398 2001.......................................................... 188 2002.......................................................... 133 ---- Total minimum lease payments.............................. $719 ====
Rent expense under operating lease arrangements for the period from January 9, 1998 (inception) to December 31, 1998 totaled $84,000 and the year ended December 31, 1999 totaled $281,000. Advertising Contracts The Company has entered into various online advertising and promotional program agreements. The following are the future minimum commitments owed by the Company under the non-cancelable agreements at December 31, 1999 (in thousands): 2000................................................................ $ 597 2001................................................................ 250 ----- Total minimum payments.......................................... $ 847 =====
Charter Customer Promotion The Company established a charter customer promotion beginning with the launch of its Web site, August 17, 1999, through January 26, 2000 (the "Promotion Period"). The purpose of the promotion was to attract and retain customers. At the end of the promotion, approximately 85,000 customers were charter customers. The program allows a charter customer to purchase those products that they purchased during the Promotion Period, for the life of the charter member, at the prices that prevailed during the Promotion Period. The program applies only to products which the charter customer purchased during the Promotion Period. The program also allows a charter customer to receive free shipping with future purchases, as long as the purchase includes at least one charter customer product. For all but seven $1 promotion items, all products sold under the charter customer program were sold at a gross profit. Terms and conditions of the promotion require the charter customer to purchase each product on the customer's list at least once annually and to purchase the products only for personal use. The Company reserves the right to establish a minimum order requirement for charter customers to qualify for free shipping, to limit quantities, and to disqualify any individual who tampers, disrupts, or interferes with the promotion. If the manufacturer stops making a specific charter customer product or the Company discontinues selling the charter customer product, no substitutions are permitted. The Company reserves the right to modify or terminate the charter customer promotion if the promotion cannot run as planned due to computer bugs, viruses, tampering, unauthorized intervention, fraud, technical failures, or any other causes beyond its control, or if the Company undergoes a change in ownership, or if the promotion violates applicable law in any jurisdiction. F-22 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company has recorded a liability of $1.7 million for estimated future losses attributable to the charter customer promotion through December 31, 1999. The expense was recorded in marketing and sales. The Company has also deferred revenue of $120,000 in 1999 which represents the estimated value of this promotion to charter customers. The deferred revenue will be amortized into revenue over an estimated life of the benefit to the customer of five years. These amounts were determined based on the Company's historical records of charter customer transactions, third party industry data on comparable product life cycles, third party industry data on consumer purchasing patterns for products sold by the Company, estimated inflation rates and terms and conditions of the charter customer promotion. The Company will continue to assess its exposure to loss for these products and adjust such reserves as necessary. A significant change in actual consumer purchasing patterns, inflation, or product life cycles, could have a material effect on the required reserve and results of operations. Contingencies From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. In the opinion of management, there are no pending claims of which the outcome is expected to result in a material adverse effect on the financial position or results of operations or cash flows of the Company. NOTE 9--INCOME TAXES The Company was formed as a limited liability company ("LLC") in January 1998, and converted to a C corporation in May 1998. Net operating losses and tax credits generated prior to the Company's incorporation as a C Corporation were passed through to the owners of the LLC. At December 31, 1999, the Company had net operating loss carryforwards of approximately $32.0 million and $31.4 million for both federal and state income tax purposes, respectively, which begin to expire in the years 2018 and 2006. At December 31, 1999, the Company had research credit carryforwards of approximately $39,000 and $33,000 for federal and state income tax purposes, respectively. The federal credit, if not utilized, will expire in the year 2018. Pursuant to Section 382 of the Internal Revenue Code, due to changes in the Company's ownership, future utilization of a portion of these net operating loss and credit carryforwards will be subject to a limitation of approximately $250,000 per year. The components of the net deferred tax assets and liabilities are presented below (in thousands):
1998 1999 ------- -------- Net operating loss carryforwards........................ $ 1,893 $ 12,701 Tax credit carryforwards................................ 0 61 Accruals and reserves................................... 0 979 Fixed assets............................................ 0 (15) ------- -------- 1,893 13,726 Less: Valuation allowance............................... (1,893) (13,726) ------- -------- Net deferred tax asset.................................. $ 0 $ 0 ======= ========
Due to the uncertainty surrounding the realization of the favorable tax attributes in future tax returns, the Company has placed a valuation allowance against its net deferred tax asset. The valuation allowance recorded for the period ended December 31, 1998 and the year December 31, 1999 increased by $1.9 million and $11.8 million, respectively. F-23 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The difference between the income tax benefit at the statutory rate of 34% and the Company's effective tax rate is due primarily to the valuation allowance established to offset the net deferred tax asset. The provision for income taxes is different than the amount computed using the applicable statutory federal income tax rate with the difference for each year summarized below:
1998 1999 ---- ---- Federal tax benefit at statutory rate.......................... (34) (34) State taxes, net of federal benefit............................ (6) (6) Adjustment due to the increase in valuation allowance.......... 40 35 Other.......................................................... 0 5 --- --- Provision for income taxes..................................... 0 0 === ===
NOTE 10--SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information and non-cash activities for 1998 and 1999 (in thousands):
Period from January 9, 1998 (inception) to Year ended December 31, December 31, 1998 1999 --------------- ------------ Supplemental cash flow disclosure Cash paid for interest........................... $ 20 $ 142 Supplemental disclosure of noncash investing and financing activities Common stock issued in connection with acquisitions.................................... $ 865 $ 1,720 Series A convertible preferred stock and warrants issued in exchange for cancellation of notes payable and related accrued interest............ $ 612 $ -- Note payable assumed from software vendor........ $ 1,086 Series D mandatory redeemable convertible preferred stock issued in exchange for cancellation of convertible notes payable and related accrued interest........................ $12,153 Common stock issued in connection with fulfillment and advertising arrangement......... $ -- $ 4,551 Accretion of discount on mandatorily redeemable convertible preferred stock..................... $ 101 $ 1,597 Deferred stock-based compensation related to options granted................................. $ 775 $ 9,314 Deferred consulting related to options granted to consultants..................................... $ -- $ 375 Fixed assets acquired and included in accounts payable......................................... $ -- $ 375 Period from January 9, 1998 (inception) to Year ended December 31, December 31, 1998 1999 --------------- ------------ Acquired net assets associated with acquisitions: Fair value of net tangible assets.............. $ 35 $ (19) Fair value of assembled workforce.............. 50 254 Fair value of customer base.................... -- 118 Goodwill....................................... 1,510 1,814 ------- ------- $ 1,595 $ 2,167 ======= =======
F-24 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 11--BUSINESS COMBINATIONS AND ASSET PURCHASES In November 1998, the Company acquired all of the outstanding capital stock of Acumin Corporation ("Acumin") in a transaction which was accounted for under the purchase method of accounting. Acumin is a producer of custom blended vitamins that are personalized to the individual health needs of its customers. The purchase consideration was $1.6 million, consisting of $730,000 in cash and 500,000 shares of the Company's common stock with a fair value of $1.73 per share based upon the fair value of the Company's common stock as determined based upon concurrent equity transactions with unrelated parties. The Company also entered into an escrow agreement with the seller of Acumin whereby the seller would be paid $100,000 subject to the seller's continuing employment with the Company for twelve months following the closing date of the purchase transaction. This amount has been recognized as compensation expense over the twelve month period (i.e., $17,000 and $83,000 recognized in the period ended December 31, 1998 and the year ended December 31, 1999, respectively) and was fully paid in November 1998. The purchase consideration was allocated to the acquired assets based on fair values as follows (in thousands): Net tangible assets................................................ $ 35 Assembled workforce................................................ 50 Goodwill........................................................... 1,510 ------ Total purchase consideration..................................... $1,595 ======
In January 1999, the Company acquired customer lists from Vitasave, Inc. for $125,000 in cash. The intangible assets acquired are being amortized over three years. In June 1999, the Company paid $130,000 for ownership rights to the more.com domain name. In December, 1999, the Company acquired all of the outstanding capital stock of Clearly Contacts Lenses, Inc. ("Clearly Contacts"). Clearly Contacts sells contact lenses to customers worldwide through their Internet Web site. The aggregate purchase price of the acquisition was $2.2 million. The consideration for the acquisition consisted of $350,000 of cash, 220,000 shares of the Company's common stock, with an estimated value of $7.82 per share based upon the fair value of the Company's common stock as determined based upon concurrent equity transactions with unrelated parties. Additionally, the Company incurred approximately $97,000 of transaction costs, including legal and other advisory services. The Clearly Contacts acquisition was accounted for under the purchase method of accounting, and its results of operations are included in the Company's consolidated financial statements from the date of acquisition. The purchase consideration was allocated to the acquired assets based on fair values as follows (in thousands): Assembled workforce................................................ $ 254 Customer base...................................................... 118 Goodwill........................................................... 1,814 Net tangible liabilities........................................... (19) ------ Total purchase consideration..................................... $2,167 ======
F-25 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The unaudited pro forma consolidated financial information reflect the results that would have occurred had the acquisitions occurred at the beginning of each of the periods presented (in thousands, except per share amounts):
Period from January 9, 1998 (inception) to Year ended December 31, December 31, 1998 1999 --------------- ------------ Net revenues................................ $ 300 $ 3,205 Net loss.................................... $(6,871) $(35,706) Basic and diluted weighted-average net loss per share.................................. $ (5.16) $ (14.88)
The pro forma net losses include additional amortization of goodwill and purchased intangibles of approximately $1.6 million and $1.0 million for the period ended December 31, 1998 and the year ended December 31, 1999. This unaudited pro forma combined consolidated financial information is presented for illustrative purposes only and is not necessarily indicative of the consolidated results of operations in future periods or the results that actually would have been realized. NOTE 12--SUBSEQUENT EVENTS Initial public offering The Company's Board of Directors authorized management to file a registration statement with the Securities and Exchange Commission to permit the Company to sell shares of its common stock to the public. Pending Comfort Living Acquisition In January 2000, the Company signed a letter of intent to acquire all of the outstanding capital stock of Comfort Living, Inc. ("Comfort Living"). The acquisition is subject to the approval of Comfort Living's stockholders. The Company's management believes the acquisition is probable. The acquisition will be accounted for using the purchase method of accounting and, accordingly, the net assets and results of operations of Comfort Living will be included in the Company's consolidated financial statements subsequent to the acquisition date. Comfort Living reported net revenues and a net loss for the year ended December 31, 1999 of $4.6 million and $543,000, respectively. The purchase consideration includes $2.5 million of cash and 1,500,000 shares of the Company's common stock, valued at $14.9 million based on the deemed per share value of the Company's common stock. The Company also expects to incur approximately $500,000 in acquisition related expenses, including legal and other advisory related services. Additionally, the Company's Board of Directors has approved 357,000 stock option grants to employees of Comfort Living to be issued subsequent to the closing of the acquisition. The options have an exercise price of $4.82 per share and the Company will record additional deferred stock-based compensation of approximately $1.8 million. F-26 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The total purchase price of $17.9 million will be allocated to net assets acquired, including tangible and intangible assets, and liabilities assumed, based on their respective estimated fair values at the acquisition date. The estimate of fair value of the net assets acquired is expected to be allocated as follows (in thousands): Fair value of net tangible liabilities.......................... $ (195) Fair value of assembled workforce (to be amortized over 2 years)......................................................... 1,516 Fair value of customer base (to be amortized over 2 years)...... 812 Goodwill (to be amortized over 2 years)......................... 15,717 ------- $17,850 =======
The acquisition has been structured as a tax-free exchange of stock. The differences between the recognized fair values of acquired net assets, including tangible and intangible net assets, and their historical tax bases are not deductible for tax purposes. Retailer Arrangement On January 20, 2000, the Company entered into a five year agreement with Phar-Mor.com, Inc. ("Phar-Mor.com"), a chain of discount retail drugstores, to become an exclusive online provider of health, beauty and wellness products. As part of the agreement, Phar-Mor.com will prominently promote the Company's Web site via a unique URL on its own Web sites, and will promote the Company in all of its marketing and promotional materials, including prescription bags, shopping bags, circulars, print advertising, Internet and other online advertising, newsletters, and placement of signs at physical locations. In addition, Phar-Mor.com has committed to purchase between $1.0 million and $2.0 million of third party advertising during each year of the agreement based on a percentage of revenues generated from its unique URL, and has agreed not to sell on any of its sites any products of the types currently offered on the Company's Web site. Included as part of the agreement is an arrangement by which the Company has agreed to pay to Phar-Mor.com a referral fee equal to 49% of the Company's gross profit from each product (excluding prescription drugs) sold on the Company's site to customers who reached the site using Phar-Mor.com's unique URL. Phar-Mor.com also purchased 1,037,345 shares of the Company's Series D mandatorily redeemable convertible preferred stock at $4.82 per share, totaling $5.0 million. Given the timing between this issuance and the Company's public offering, the difference between the value of the Company's common stock and the issuance price of $4.82 per share represents a deemed discount on the mandatorily redeemable convertible preferred stock which will be accounted for as deferred marketing costs and amortized to marketing and sales over the five year term of the arrangement. In association with this transaction, an outside consultant earned a placement fee of $150,000 and vested 125,000 common stock options which had a deemed fair value of $1.2 million, determined using the Black-Scholes option pricing model, which will be expensed in the first quarter of 2000. 2000 Non-Employee Director Option Program In January 2000 the Board of Directors adopted and in February 2000 the stockholders approved the 2000 Non-Employee Director Option Program ("Director Program") under the provisions of the 2000 Plan, which will become effective upon the effective date of the initial public offering. Members of the Board who F-27 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) are not employees of the Company are eligible to participate in the Director Program. The option grants under the Director Program are automatic and nondiscretionary, and the exercise price of the options must be 100% of the fair market value of the common stock on the date of grant. Each eligible director who first becomes a member of the Board will initially be granted an option to purchase 25,000 shares on the date such director first becomes a director. Those directors who are members of the Board upon the effective date of the initial public offering will initially be granted an option to purchase 25,000 shares on such date. Immediately following each annual meeting of the Company, beginning in 2001, each eligible director will automatically be granted an additional option to purchase 5,000 shares if such director has served continuously as a member of the board for at least eleven months. The options have a term of ten years, provided that they will terminate three months following the date the director ceases to be a director or other service provider of the Company (twelve months if the termination is due to death or disability). The initial options for 25,000 shares will vest 25% at the first anniversary date and monthly thereafter, such that the Option will be fully exercisable four years after its date of grant. The subsequent options for 5,000 shares will vest monthly commencing on the first month after the grant date, such that the Option will be fully exercisable four years after the grant date. 2000 Stock Incentive Plan In January 2000 the Board of Directors adopted and in February 2000 the stockholders approved the 2000 Stock Incentive Plan (the "2000 Plan"). Under the 2000 Plan, 4,000,000 shares are reserved of the Company's common stock, plus the aggregate number of remaining shares available under the 1998 Plan on the effective date of the initial public offering. In January 2001 and every year thereafter until the year 2009, shares reserved for issuance will automatically increase by a number equal to 5% of the total number of shares of common stock outstanding or a lesser number of shares determined by the 2000 Plan administrator. The 2000 Plan provides for the award of options, stock appreciation rights, sales or bonuses of restricted stock, dividend equivalent rights, performance units or performance shares (the "Awards"). Options granted under the 2000 Plan may be either incentive stock options ("ISO") or nonqualified stock options ("NSO"). ISOs may be granted only to Company employees (including officers and directors who are also employees and employees of any subsidiaries and parent companies). NSOs may be granted to employees, outside directors, and consultants of the Company or any related entity. Options under the 2000 Plan may be granted for periods of up to ten years and at prices no less than 85% of the estimated fair value of the shares on the date of grant as determined by the Board of Directors unless otherwise determined by the 2000 Plan administrator, provided, however, that (i) the exercise price of an ISO may not be less than 100% of the fair market value of the shares on the date of grant, and (ii) the exercise price of an ISO granted to a 10% shareholder may not be less than 110% of the fair value of the shares on the date of grant. Each initial grant will vest 25% at the first anniversary date and monthly thereafter, such that the Option will be fully exercisable four years after its date of grant. Subsequent options will vest monthly commencing on the first month after the grant date, such that the Option will be fully exercisable four years after the grant date. In the event of a change of control where the acquiror assumes options granted under the 2000 Plan, none of these options are subject to accelerated vesting. However, assumed options will automatically become fully vested if the grantee is terminated by the acquiror within six months of a change of control. In the event of a change of control where the acquiror does not assume options granted under the 2000 Plan, all of these options become fully vested upon the closing of the acquisition. Employee Stock Purchase Plan In January 2000 the Board of Directors adopted and in February 2000 the stockholders approved the Employee Stock Purchase Plan (the "ESPP"), which will become effective upon the effective date of the initial F-28 MORE.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) public offering. Under the ESPP 2,000,000 shares of common stock are reserved for issuance thereunder. On each January and every year thereafter beginning in 2001, the aggregate number of shares reserved for issuance under the ESPP will be increased automatically to the lesser of 1.75% of the total number of common shares outstanding and 2,000,000 shares or a lesser number of shares determined by the ESPP Administrator. Employees generally will be eligible to participate in the ESPP if they are customarily employed by the Company for more than 20 hours per week and more than five months in a calendar year and are not (and would not become as a result of being granted an option under the ESPP) 5% stockholders of the Company. Under the ESPP, eligible employees may select a rate of payroll deduction up to 10% of their W-2 cash compensation subject to certain maximum purchase limitations. The first offering period is expected to begin on the effective date of the initial public offering. Depending on the effective date, the first Purchase Period within the first offering period may be more or less than six months long. Offering periods thereafter will begin on February 15 and August 15. Purchases will occur on each February 14 and August 14. The price at which the common stock is purchased under the ESPP is 85% of the lesser of the fair market value of the Company's common stock on the date before the first day of the applicable offering period or on the date before the stock is purchased. Stock Option Grants On January 27, 2000, the Company approved an additional 4,000,000 shares for issuance under the 1998 Stock Option Plan. During the period from January 1, 2000 through February 2, 2000 the Company granted stock options to employees and consultants to purchase an aggregate of 196,900 shares of common stock for $4.82 per share. The Company has recorded $1.2 million of deferred stock-based compensation related to these grants. Authorization of Shares In connection with the approval of the various plans, the Board approved an amendment to the certificate of incorporation on January 27, 2000 to increase the total authorized number of preferred and common stock to 62,000,000 shares. Compensation Protection Agreements The Company will enter into compensation protection agreements with each of our executive officers. These agreements are for a term of three years commencing in January 2000 and are subject to automatic annual extensions. If within 12 months of a change of control of our company, an executive officer's employment with us is terminated by us other than for cause or by the officer personally for good reason, excluding by reason of the officer's disability, death or retirement, then we must pay that officer: (a) his or her accrued compensation, including unpaid base salary, pro rata bonus, and vacation pay; and (b) an amount equal to two times the sum of the officer's highest annual base salary and annual bonus in effect immediately prior to the change of control. In addition, until the third anniversary of the officer's termination we will provide the officer with the maximum benefits provided to that officer between the effective date of the agreement and 90 days preceding the date of the change of control. The officer will also receive immediate vesting and removal of all restrictions on any outstanding incentive awards granted under our stock option and other stock incentive plans, excluding our employee stock purchase plan, or any other arrangement, unless the accelerated vesting would cause pooling of interest accounting to be unavailable and the Board would determine that such change in control would be accounted for as a pooling of interest. However, such acceleration shall occur regardless of whether it would render pooling of interest accounting unavailable if that officer entered into any employment agreement, offer letter, stock option or other equity-based compensation protection agreement providing for acceleration prior to the effective date of entering into the compensation protection agreement F-29 with us. The compensation protection agreements further provide that the executive officers will not be required to mitigate the amounts due to them as a result of their termination. Subsequent Events Issuance of Series E Mandatorily Redeemable Convertible Preferred Stock In January 2000, the Company authorized the sale of up to 4,000,000 shares of Series E mandatorily redeemable convertible preferred stock ("preferred stock") at a price of $7.50 per share. In February 2000, the Company issued 3,399,991 shares raising approximately $25.5 million from various new and existing investors. The Series E preferred stock carries substantially the same terms as the Series B, Series C and Series D mandatorily redeemable convertible preferred stock and is convertible into common stock at a one-to-one ratio upon an initial public offering subject to certain conditions ("Qualified IPO"). If the Company consummates a Qualified IPO on or before January 31, 2001 at a price less than $10.125 then the conversion price for each share of Series E Stock shall be adjusted to a price equal to 74.074% of the IPO Price, provided however, that in no event shall the Conversion Price be adjusted below $4.82. Dividends are payable when and as declared on Series E preferred stock at the rate of $0.60 per share per annum. F-30 MORE.COM, INC. PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION Overview In January, 2000, the Company signed a merger agreement to acquire all of the outstanding capital stock of Comfort Living, Inc. ("Comfort Living"). Although the acquisition is subject to the approval of Comfort Living's stockholders, the Company's management believes the acquisition is probable. The acquisition will be accounted for using the purchase method of accounting and, accordingly, the net assets and results of operations of Comfort Living will be included in the Company's consolidated financial statements subsequent to the acquisition date. The purchase consideration includes $2.5 million of cash and 1,500,000 shares of the Company's common stock, valued at $14.9 mllion based on the deemed per share value of the Company's common stock. The Company also expects to incur approximately $500,000 in acquisition related expenses, including legal and other advisory related services. The total purchase price of $17.9 million will be allocated to net assets acquired, including tangible and intangible assets, and liabilities assumed, based on their respective estimated fair values at the acquisition date. The estimate of fair value of the net assets acquired is based on management estimates. The total purchase price was allocated as follows (in thousands): Fair value of net tangible liabilities........................... $ (195) Fair value of assembled workforce................................ 1,516 Fair value of customer base...................................... 812 Goodwill......................................................... 15,717 ------- $17,850 =======
The acquisition has been structured as a tax-free exchange of stock. The differences between the recognized fair values of acquired net assets, including tangible and intangible net assets, and their historical tax bases are not deductible for tax purposes. The following unaudited pro forma combined consolidated statement of operations gives effect to this acquisition as if it had occurred as of January 1, 1999, by consolidating the results of operations of Comfort Living with the results operations of the Company for the twelve months ended December 31, 1999. The unaudited pro forma consolidated statement of operations is not necessarily indicative of the operating results that would have been achieved had the transaction been in effect as of the beginning of the period presented and should not be construed as being a representation of future operating results. The historical consolidated financial statements for the Company and Comfort Living are included elsewhere in this offering memorandum and the unaudited pro forma consolidated financial information presented herein should be read in conjunction with those consolidated financial statements and related notes. The accompanying notes are an integral part of these financial statements F-31 MORE.COM, INC. PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET (amounts in thousands) (unaudited)
December 31, 1999 --------------------------------------------- Comfort more.com, Living, Pro Inc. Inc. Adjustments Forma --------- ------- ----------- -------- ASSETS Current assets: Cash and cash equivalents.... $ 24,655 $ 80 $(3,000)(A) $ 21,735 Accounts receivable, net..... 591 -- -- 591 Inventories.................. 175 468 -- 643 Prepaid expenses and other current assets.............. 641 30 -- 671 -------- ------ ------- -------- Total current assets....... 26,062 578 (3,000) 23,640 Fixed assets, net.............. 6,452 333 -- 6,785 Intangible assets, net......... 7,551 -- 18,045 (B) 25,596 Other assets................... 96 11 -- 107 -------- ------ ------- -------- Total assets................... $ 40,161 $ 922 $15,045 $ 56,128 ======== ====== ======= ======== LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable............. $ 1,421 $ 410 $ -- $ 1,831 Accounts payable to related party....................... -- 49 -- 49 Deferred revenue............. -- 109 -- 109 Accrued liabilities.......... 6,174 376 -- 6,550 Current portion of borrowings under lines of credit....... 891 150 -- 1,041 Capital lease obligations, current..................... -- 6 -- 6 -------- ------ ------- -------- Total current liabilities.. 8,486 1,100 -- 9,586 -------- ------ ------- -------- Borrowings under lines of credit, less current portion.. 1,376 -- -- 1,376 Capital lease obligations, long-term..................... -- 17 -- 17 Mandatorily redeemable convertible preferred stock (Note 6)...................... 58,064 -- -- 58,064 Commitments and contingencies (Note 8) Stockholders' equity (deficit): Preferred stock.............. 10 -- -- 10 Common stock................. 5 -- 2 (A) 7 Additional paid-in capital... 16,698 615 14,233 (A)(C) 31,546 Deferred stock-based compensation................ (4,624) -- -- (4,624) Accumulated deficit (39,854) (810) 810 (C) (39,854) -------- ------ ------- -------- Total stockholders' equity (deficit)................. (27,765) (195) 15,045 (12,915) -------- ------ ------- -------- $ 40,161 $ 922 $15,045 $ 56,128 ======== ====== ======= ========
See accompanying notes to Pro Forma Combined Consolidated Financial Information F-32 MORE.COM, INC. PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS INFORMATION (In Thousands, Except Per Share Amounts)
Year ended December 31, 1999 ----------------------------------------------- more.com, Comfort Inc. Living, Inc. Adjustments Pro Forma --------- ------------ ----------- --------- (unaudited) Net revenues: $ 2,923 $4,628 -- $ 7,551 Cost of net revenues..... 3,753 3,551 -- 7,304 -------- ------ ------- -------- Gross profit (loss).... (830) 1,077 -- 247 -------- ------ ------- -------- Operating expenses: Marketing and sales...... 20,480 254 -- 20,734 Product development...... 3,254 -- -- 3,254 General and administrative.......... 5,187 1,336 9,023 (D) 15,546 Amortization of stock- based compensation...... 5,061 -- -- 5,061 -------- ------ ------- -------- Total operating expenses.............. 33,982 1,590 9,023 44,595 -------- ------ ------- -------- Operating loss............. (34,812) (513) (9,023) (44,348) Other income (expense): Other.................... -- (13) -- (13) Interest income.......... 482 -- -- 482 Interest expense......... (355) (17) -- (372) -------- ------ ------- -------- Net loss................... $(34,685) $ (543) $(9,023) $(44,251) ======== ====== ======= ======== Accretion of discount on mandatorily redeemable convertible preferred stock..................... (1,597) -- -- (1,597) -------- ------ ------- -------- Net loss available to common stockholders....... $(36,282) $ (543) $(9,023) $(45,848) ======== ====== ======= ======== Basic and diluted net loss per share................. $ (15.74) $ (12.05) Pro forma basic and diluted net loss per share........ $ (2.68) $ (3.05) Weighted average shares outstanding used to compute basic and diluted net loss per share........ 2,305 1,500 3,805 (E) Weighted average shares outstanding used to compute pro forma basic and diluted net loss per share..................... 13,556 1,500 15,056 (E)
See accompanying notes to Pro Forma Combined Consolidated Financial Information F-33 MORE.COM, INC. NOTES TO PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION (unaudited) NOTE 1--BASIS OF PRESENTATION The unaudited pro forma combined consolidated statement of operations has been prepared to reflect the probable acquisition of Comfort Living Inc. by the Company as if the acquisition had occurred as of January 1, 1999 by combining the separate historical statement of operations of more.com, Inc. and Comfort Living Inc. for the year ended December 31, 1999. The unaudited pro forma combined consolidated balance sheet has been prepared to reflect the probable acquisition of Comfort Living Inc. by the Company as if the acquisition had occurred on December 31, 1999 by combining the historical balance sheets of the Company and Comfort Living Inc. as of December 31, 1999. NOTE 2--PRO FORMA ADJUSTMENTS The following adjustments were applied to the historical statement of operations and balance sheet to arrive at the pro forma combined consolidated statement of operations and balance sheet: (A) Reflects the cash and equity consideration for the acquisition of Comfort Living. (B) To record the intangible assets acquired pursuant to the acquisition. (C) Reflects the elimination of Comfort Living's stockholders' deficit. (D) Reflects the amortization expense related to assembled workforce and customer base and goodwill to be acquired in the acquisition for the period January 1, 1999 through December 31, 1999. (E) For the year ended December 31, 1999, basic and diluted net loss per share includes the common shares to be issued as consideration for the acquisition. These shares are assumed to be outstanding as of January 1, 1999. Pro forma basic and diluted net loss per share for the year ended December 31, 1999 is computed using the weighted average number of common shares outstanding, including the pro forma effects of the automatic conversion of the Company's Series A, Series B, Series C and Series D preferred stock and preferred stock warrants into shares of the Company's common stock effective upon the closing of the Company's initial public offering as if such conversion occurred on January 1, 1999, or at date of original issuance, if later. Pro forma diluted net loss per share excludes potential shares of common stock, consisting of options, as their effect would be antidilutive. F-34 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Comfort Living, Inc. In our opinion, the accompanying balance sheets and the related statements of operations, stockholders' equity (net capital deficiency) and cash flows present fairly, in all material respects, the financial position of Comfort Living, Inc. (the "Company") at December 31, 1998 and 1999 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. 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 of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has experienced a net loss of approximately $543,000 and net cash outflows from operations of approximately $151,000 for the year ended December 31, 1999. The Company also has an accumulated deficit of approximately $195,000 and a working capital deficit of approximately $178,000 at December 31, 1999. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are partially described in Note 1. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. In January 2000, the Company entered into a letter of intent to be acquired by more.com, Inc. in a purchase transaction. /s/ PricewaterhouseCoopers LLP McLean, Virginia January 27, 2000 F-35 COMFORT LIVING, INC. BALANCE SHEETS
December 31, -------------------- 1998 1999 --------- ---------- ASSETS Current assets: Cash and cash equivalents............................... $ 98,316 $ 79,954 Inventories............................................. 85,531 467,769 Prepaid expenses........................................ 3,094 29,949 --------- ---------- Total current assets.................................. 186,941 577,672 Furniture and equipment, net.............................. 30,202 332,542 Other assets.............................................. 1,352 11,663 --------- ---------- Total assets.......................................... $ 218,495 $ 921,877 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) Current liabilities: Accounts payable........................................ $ 80,411 $ 410,217 Accounts payable to related party....................... -- 49,242 Accrued payroll......................................... 10,364 181,194 Accrued liabilities..................................... 45,775 194,933 Deferred revenue........................................ 48,576 109,367 Current portion of borrowings under line of credit ..... -- 150,000 Capital lease obligations, current...................... 4,161 5,399 --------- ---------- Total current liabilities............................. 189,287 1,100,352 Capital lease obligations, long-term...................... 11,392 16,135 --------- ---------- Total liabilities..................................... 200,679 1,116,487 --------- ---------- Commitments (Note 7) Stockholders' equity (net capital deficiency): Common Stock: no par value; Authorized shares--1,000 at December 31, 1998 and 1,500 at December 31, 1999; issued and outstanding 1,000 at December 31, 1998 and 1,078.125 at December 31, 1999... -- 615,225 Accumulated earnings (deficit).......................... 17,816 (809,835) --------- ---------- Total stockholders' equity (net capital deficiency)... 17,816 (194,610) --------- ---------- Total liabilities and stockholders' equity (net capital deficiency)................................ $ 218,495 $ 921,877 ========= ==========
F-36 COMFORT LIVING, INC. STATEMENTS OF OPERATIONS
For the Years Ended December 31, --------------------- 1998 1999 ---------- ---------- Net revenues............................................ $1,520,072 $4,627,942 Costs of goods sold..................................... 1,038,258 3,550,564 ---------- ---------- Gross profit............................................ 481,814 1,077,378 ---------- ---------- Operating expenses: Sales and marketing..................................... 57,710 253,571 General and administrative.............................. 220,531 1,297,910 Depreciation and amortization........................... 3,802 38,716 ---------- ---------- Total operating expenses............................ 282,043 1,590,197 ---------- ---------- Operating income (loss)................................. 199,771 (512,819) Other expense: Interest expense...................................... 4,782 17,228 Other................................................. -- 12,848 ---------- ---------- Total other expense................................. 4,782 30,076 ---------- ---------- Net income (loss)....................................... $ 194,989 $ (542,895) ========== ========== Net income (loss) per share: Basic and dilutive.................................... $ 194.99 $ (540.19) Weighted average number of shares outstanding........... 1,000 1,005
F-37 COMFORT LIVING, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Total Stockholders Common Stock Accumulated Equity (Net ------------------ Earnings Capital Shares Amount (Deficit) Deficiency) --------- -------- ----------- ------------ Balance, January 1, 1998........... 1,000 $ -- $ (24,519) $ (24,519) Distributions...................... -- -- (152,654) (152,654) Net income......................... -- -- 194,989 194,989 --------- -------- --------- --------- Balance at December 31, 1998....... 1,000 -- 17,816 17,816 Issuance of common stock for $8,000 per share (net of issuance costs of $9,775)........................ 78,125 615,225 -- 615,225 Distributions...................... -- -- (284,756) (284,756) Net loss........................... -- -- (542,895) (542,895) --------- -------- --------- --------- Balance at December 31, 1999....... 1,078,125 $615,225 $(809,835) $(194,610) ========= ======== ========= =========
F-38 COMFORT LIVING, INC. STATEMENTS OF CASH FLOWS
For the Years Ended December 31, ------------------- 1998 1999 -------- --------- Cash flows from operating activities: Net income (loss)........................................ $194,989 $(542,895) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.......................... 3,802 38,716 Loss on sale of furniture and equipment ............... -- 12,848 Provision for obsolete inventory....................... 32,268 110,344 Changes in current assets and liabilities: Accounts receivable.................................. 1,567 -- Inventories.......................................... (91,465) (492,582) Prepaid expenses..................................... (3,094) (26,855) Other assets......................................... (1,352) (10,311) Accounts payable..................................... 37,410 329,806 Accounts payable to related party.................... -- 49,242 Accrued payroll...................................... 7,495 170,830 Accrued liabilities.................................. 40,799 149,158 Deferred revenues.................................... 48,576 60,791 -------- --------- Net cash provided by (used in) operating activities........................................ 270,995 (150,908) -------- --------- Cash flows from investing activities: Purchases of furniture and equipment..................... (9,531) (344,950) -------- --------- Net cash used in investing activities.............. (9,531) (344,950) -------- --------- Cash flows from financing activities: Proceeds from issuance of stock, net..................... -- 615,225 Principal payments on line of credit..................... (7,871) -- Borrowings under line of credit.......................... -- 150,000 Principal payments on capital leases..................... (7,923) (2,973) Distribution to stockholders............................. (152,654) (284,756) -------- --------- Net cash provided by (used in) financing activities........................................ (168,448) 477,496 -------- --------- Net increase (decrease) in cash and cash equivalents..... 93,016 (18,362) Cash and cash equivalents, beginning of period........... 5,300 98,316 -------- --------- Cash and cash equivalents, end of period................. $ 98,316 $ 79,954 ======== ========= Supplemental cash flow information: Cash paid during the year for interest................... $ 4,782 $ 16,506 ======== ========= Noncash investing and financing activities: Furniture and equipment acquired under capital leases.... $ 14,412 $ 8,954 ======== =========
F-39 COMFORT LIVING, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1--ORGANIZATION Comfort Living, Inc. (the "Company") is an online retailer of health and comfort products, offering many brand name products. Its eCommerce web site, www.ComfortLiving.com, was launched in January 1996. The Company's product line includes personal comfort products, back pain products, baby products, maternity products, and allergy control products. The Company was incorporated in Maryland on March 25, 1988 as Allergy Home Care Products, Inc. The Company's name was changed to Comfort Living, Inc, on November 12, 1999. The Company has derived substantially all of its revenue from sales in the United States. The Company experienced a net loss of approximately $543,000 and net cash outflows from operations of approximately $151,000 for the year ended December 31, 1999. The Company also had an accumulated deficit of approximately $195,000 and a working capital deficit of approximately $178,000 at December 31, 1999. The Company's near and long-term operating strategies focus on exploiting existing and potential competitive advantages while concentrating on reducing costs, beginning with the cost of maintaining inventory by moving towards a fully integrated drop ship system and including controlling the cost of payroll as a percentage of sales. Management continues to focus on increasing sales by identifying ways to increase market share and diversify its products. In order for the Company to maintain operations into 2001, the Company must improve its financial condition by increasing operating cash flows, obtaining additional equity financing or consummating the sale of the Company to more.com, Inc. or another company. In January 2000, the Company entered into a letter of intent to be acquired by more.com, Inc. in a purchase transaction. NOTE 2--SIGNIFICANT ACCOUNTING POLICIES Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported results of operations during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents Cash equivalents, which consist of a demand deposit and money market account, are recorded at cost, which approximate fair value. The Company maintains its cash in depository accounts with one financial institution. At times, such balances may be in excess of the FDIC limit. The Company considers investments in highly liquid instruments purchased with original maturities of 90 days or less to be cash equivalents. Concentrations of credit risk and credit evaluations The Company is subject to concentrations of credit risk from its holdings of cash and cash equivalents, which are held at one domestic financial institution. The Company conducts business with individuals over the Internet. Sales to individuals are principally paid for via credit cards and the Company's accounts receivable are F-40 COMFORT LIVING, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) not significant. In addition to the concentration disclosed in Note 4, the Company purchased $445,000 of products from one vendor for the year ended December 31, 1999, which represents approximately 13% of cost of goods sold. Inventories Inventories are carried at the lower of cost (determined on average cost, which approximates the first-in first-out basis) or market. Inventories consist of products purchased for resale. Furniture and equipment Furniture and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Leasehold improvements are amortized over the lesser of the estimated useful life or the life of the lease. Long-lived assets Long-lived assets and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment is measured by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from use of the assets and their ultimate disposition. In circumstances where impairment is determined to exist, the Company will write down the asset to its fair value based on the present value of estimated expected future cash flows. To date, no such impairment has been indicated. Income taxes The Company has elected to be taxed as an S corporation. Accordingly, federal and state income taxes are the personal responsibility of the stockholders, and no provision for income taxes has been provided in the statements of operations. Advertising expense The Company recognizes advertising expense in accordance with Statement of Position 93-7, "Reporting on Advertising Costs." As such, the Company expenses the cost of communicating advertising in the period in which the advertising space or airtime is used. Advertising production costs are expensed as incurred. For the year ended December 31, 1998 and 1999, advertising expense totaled $12,000 and $23,000, respectively. Revenue recognition The Company recognizes revenue when the products are shipped to customers (FOB Shipping Point). The Company provides for potential product returns in the period of the sale. Product returns have not been material to date. Revenues from drop shipment sales are recorded in net sales when the products are shipped to customers (FOB Shipping Point) as the Company retains the risk of loss on the products. The revenue and associated cost of outbound shipping and handling charges are included in net sales and cost of goods sold, respectively. F-41 COMFORT LIVING, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Segment reporting Effective January 1, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards (FAS) No. 131, "Disclosures about Segments of Enterprise and Related Information." During each of the years ended December 31, 1998 and 1999, the Company focused its business activities on the marketing and sale of their products over the Internet. Since management's primary form of internal reporting is aligned with the marketing and sale of their products, the Company believes it operates in one segment. Fair value of financial instruments The Company's financial instruments, including cash, cash equivalents, accounts receivable, accounts payable, line of credit and capital lease obligations are carried at cost, which approximates their fair value because of the short-term maturity of these instruments. Comprehensive income Effective January 1, 1998, the Company adopted the provisions of FAS No. 130, "Reporting Comprehensive Income." FAS No. 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from nonowner sources. To date, the Company has not had any transactions that are required to be reported in comprehensive income (loss) as compared to its reported net income (loss). NOTE 3--FURNITURE AND EQUIPMENT Furniture and equipment consist of the following at December 31:
Estimated Life 1998 1999 (in years) ------- -------- -------------- Computers and equipment................ $19,112 $ 87,903 3 Purchased software..................... -- 197,862 3 Furniture and fixtures................. 2,849 56,071 7 Leasehold improvements................. -- 30,228 5 Auto................................... 12,920 -- 5 ------- -------- 34,881 372,064 Less: Accumulated depreciation and amortization.......................... (4,679) (39,522) ------- -------- $30,202 $332,542 ======= ========
The cost and accumulated depreciation of items under capital lease at December 31, 1998 is $5,000 and $1,000, respectively. The cost and accumulated depreciation of items under capital lease at December 31, 1999 is $28,000 and $6,000, respectively. NOTE 4--RELATED PARTY TRANSACTIONS AND BALANCES Under an informal agreement starting January 1999, the Company purchased certain products through J. Inc., a company owned by a stockholder and employee. During the year ended December 31, 1999, the Company purchased $1.0 million of products from this related party which represents approximately 28% of cost of goods sold. At December 31, 1999, the Company owed $49,000 to J. Inc. F-42 COMFORT LIVING, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) NOTE 5--BORROWINGS UNDER LINES OF CREDIT On June 14, 1999, the Company obtained a $150,000 line of credit from Crestar Bank that expires June 14, 2004 for working capital purposes. Borrowings under this line of credit at December 31, 1999 amounted to $150,000. Interest is payable at prime plus two percent per annum (10.5% at December 31, 1999). The line of credit is collateralized by substantially all of assets of the Company. NOTE 6--STOCKHOLDERS' EQUITY On November 12, 1999, the Board of Directors authorized an increase in the number of authorized shares of common stock with no par value from 1,000 to 1,500 shares. In December 1999, the Company held a private placement offering in which 78.125 shares were sold at $8,000 per share to family and friends of stockholders and employees. During 1999, the Company exchanged promises of equity participation for certain consulting services. The value of the consulting services of approximately $161,000 is reflected in 1999 results of operations and accrued liabilities at December 31, 1999. The Company expects to settle the promises of equity participation in connection with the acquisition of the Company. During 1998 and 1999, the Company promised stock options to certain employees. Because no stock option plan had been adopted, no measurement date occurred for accounting purposes. The Company expects to settle the promises through the issuance of equity instruments in connection with the acquisition of the Company. At that time, a compensation charge of approximately $2.4 million is expected to result. NOTE 7--COMMITMENTS The Company leases its facilities under a noncancelable operating lease that expires May 2004. The Company also leases various equipment under four capital leases that expire from July 2000 to December 2003. The following are the minimum lease obligations under these leases at December 31, 1999:
Years Ended December 31, Operating Capital Total ------------ --------- ------- -------- 2000........................................ $ 36,420 $ 9,221 $ 45,641 2001........................................ 37,513 8,175 45,688 2002........................................ 38,638 8,175 46,813 2003........................................ 39,798 5,589 45,387 2004........................................ 15,089 -- 15,089 -------- ------- -------- Total....................................... $167,458 31,160 $198,618 ======== ======== Less: Amount attributed to interest......... (9,626) ------- Net present value of capital lease commitments (including $5,399 considered current)................................... $21,534 =======
Rent expense under operating leases for the years ended December 31, 1998 and 1999 totaled $23,000 and $52,000, respectively. F-43 Inside Back Cover ----------------- [Screen shot of more.com's web page for checkout] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ---------------- PROSPECTUS ---------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Through and including , 2000 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. Shares [more.com Logo] Common Stock Merrill Lynch & Co. Lehman Brothers U.S. Bancorp Piper Jaffray , 2000 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The expenses to be paid by the Registrant in connection with the distribution of the securities being registered, other than underwriting discounts and commissions, are as follows:
Amount* ------- Securities and Exchange Commission Filing Fee........................... $ NASD Filing Fee......................................................... Nasdaq National Market Listing Fee...................................... Accounting Fees and Expenses............................................ Blue Sky Fees and Expenses.............................................. Legal Fees and Expenses................................................. Transfer Agent and Registrar Fees and Expenses.......................... Printing Expenses....................................................... Miscellaneous Expenses.................................................. ----- Total................................................................. $ =====
- -------- * All amounts are estimates except the SEC filing fee, the NASD filing fee and the Nasdaq National Market listing fee. Item 14. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board of directors to grant, indemnity to officers, directors and other corporate agents under certain circumstances and subject to certain limitations. Our certificate of incorporation and bylaws provide that we shall indemnify our directors, officers, employees and agents to the full extent permitted by Delaware General Corporation Law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. In addition, we intend to enter into separate indemnification agreements with our directors, officers and certain employees which would require us, among other things, to indemnify them against certain liabilities which may arise by reason of their status as directors, officers or certain other employees. We also intend to maintain director and officer liability insurance, if available on reasonable terms. These indemnification provisions and the indemnification agreement to be entered into between us and our officers and directors may be sufficiently broad to permit indemnification of our officers and directors for liabilities, including reimbursement of expenses incurred, arising under the Securities Act. The underwriting agreement filed as Exhibit 1.1 to this registration statement provides for indemnification by the underwriters of us and our officers and directors for certain liabilities arising under the Securities Act, or otherwise. Item 15. Recent Sales of Unregistered Securities From our incorporation to December 31, 1999, we have granted or issued and sold the following unregistered securities: 1. Stock options to employees, officers, directors and consultants under our amended and restated 1998 stock option plan exercisable for up to an aggregate of 3,997,761 shares of our common stock, at a weighted average exercise price of $1.40 per share.
II-1 2. On May 14, 1998, we issued to Donald M. Kendall, Jr. 1,449,834 shares of our common stock and 22,976 shares of our Series A convertible preferred stock in exchange for his entire membership interest in Nutrition Direct, LLC, our predecessor entity. 3. On May 14, 1998, we issued to Eric Budin 989,526 shares of our common stock in exchange for his entire membership interest in Nutrition Direct, LLC, our predecessor entity. 4. On August 18, 1999, we issued to Bergen Brunswig Drug Company 1,169,922 shares of our common stock in connection with transactions relating to the Prescription Pharmaceuticals Internet Fulfillment Services Agreement with Medi-Mail, Inc., a wholly owned subsidiary of Bergen Brunswig. 5. On November 30, 1999, we issued to Roger Hardy 165,000 shares of our common stock in exchange for 75 shares of common stock in Clearly Contacts Lenses, Inc., now a division of more.com. 6. On November 30, 1999, we issued to William Wrixon 55,000 shares of our common stock in exchange for 25 shares of common stock in Clearly Contacts Lenses, Inc., now a division of more.com. 7. On February 5, 1998, we issued to North Hollywood Restaurants, Inc. a warrant to purchase 3,659 shares of our Series A convertible preferred stock at $1.64 per share for approximately $6,001.00. 8. On February 5, 1998, we issued to Donald M. Kendall, Jr., a warrant to purchase 14,634 shares of our Series A convertible preferred stock at $1.64 per share for approximately $24,000.00. 9. On March 2, 1998, we issued to Peter M. Flanigan a warrant to purchase 1,219 shares of our Series A convertible preferred stock at $1.64 per share for approximately $1,999.00. 10. On March 5, 1998, we issued to Nikolaus V. Huetz a warrant to purchase 1,219 shares of our Series A convertible preferred stock at $1.64 per share for approximately $1,999.00. 11. On May 14, 1998, we sold to Donald M. Kendall, Sr. 250,384 shares of our Series A convertible preferred stock at $1.64 per share for approximately $410,630.00. 12. On May 14, 1998, we sold to Peter M. Flanigan 31,089 shares of our Series A convertible preferred stock at $1.64 per share for approximately $50,986.00. 13. On May 14, 1998, we sold to North Hollywood Restaurants, Inc. 62,596 shares of our Series A convertible preferred stock at $1.64 per share for approximately $102,657.00 14. On May 14, 1998, we sold to Nikolaus von Heutz 31,064 shares of our Series A convertible preferred stock at $1.64 per share for approximately $50,945.00. 15. On May 14, 1998, we sold to 21st Century Internet Fund, L.P. 1,105,000 shares of our Series B mandatorily redeemable convertible preferred stock at $1.64 per share for approximately $1,812,200.00. 16. On May 14, 1998, we sold to GreenTree Nutrition Investors, LLC 331,000 shares of our Series B mandatorily redeemable convertible preferred stock at $1.64 per share for approximately $542,840.00. 17. On May 27, 1998, we sold to Donald M. Kendall, Jr. 46,000 shares of our Series B mandatorily redeemable convertible preferred stock at $1.64 per share for approximately $75,440.00. 18. On May 27, 1998, we sold to John Sculley, III 46,000 shares of our Series B mandatorily redeemable convertible preferred stock at $1.64 per share for approximately $75,440.00. 19. On July 14, 1999, we issued to Phoenix Leasing Incorporated a warrant to purchase 26,506 shares of our Series C mandatorily redeemable convertible preferred stock at $1.66 per share for approximately $44,000.00.
II-2 20. On July 14, 1999, we issued to Robert Kingsbook a warrant to purchase 21,686 shares of our Series C mandatorily redeemable convertible preferred stock at $1.66 per share for approximately $35,999.00. 21. On October 28, 1998, we sold to RHO Management Trust I 1,987,952 shares of our Series C mandatorily redeemable convertible preferred stock at $1.66 per share for approximately $3,300,000.00. 22. On October 28, 1998, we sold to Healthcare Ventures V, L.P. 1,325,301 shares of our Series C mandatorily redeemable convertible preferred stock at $1.66 per share for approximately $2,200,000.00. 23. On October 28, 1998, we sold to SOFTBANK Venture Capital IV, L.P. 1,714,145 shares of our Series C mandatorily redeemable convertible preferred stock at $1.66 per share for approximately $2,845,481.00. 24. On October 28, 1998, we sold to SOFTBANK Technology Advisors Fund, L.P. 32,843 shares of our Series C mandatorily redeemable convertible preferred stock at $1.66 per share for approximately $54,519.00. 25. On October 28, 1998, we sold to 21st Century Internet Fund, L.P. 1,117,470 shares of our Series C mandatorily redeemable convertible preferred stock at $1.66 per share for approximately $1,855,000.00. 26. On October 28, 1998, we sold to GreenTree Nutrition Investors, II, LLC 391,566 shares of our Series C mandatorily redeemable convertible preferred stock at $1.66 per share for approximately $650,000.00. 27. On October 28, 1998, we sold to Donald M. Kendall Jr. 42,169 shares of our Series C mandatorily redeemable convertible preferred stock at $1.66 per share for approximately $70,001.00. 28. On October 22, 1999, we sold to 21st Century Internet Fund, L.P. 989,626 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $4,770,000.00. 29. On October 22, 1999, we sold to Rho Management 1,360,995 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $6,560,000.00. 30. On October 22, 1999, we sold to SOFTBANK Venture Capital IV 814,274 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $3,924,800.00. 31. On October 22, 1999, we sold to SOFTBANK Technology Advisors 15,602 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $75,202.00. 32. On October 22, 1999, we sold to SOFTBANK Venture Capital V, L.P. 795,128 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $3,832,517.00. 33. On October 22, 1999, we sold to SOFTBANK Technology Advisors V, L.P. 21,694 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $104,565.00. 34. On October 22, 1999, we sold to SOFTBANK Technology Entrepreneurs Fund 13,053 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $62,915.00.
II-3 35. On October 22, 1999, we sold to Healthcare Ventures V, L.P. 220,796 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $1,064,237.00. 36. On October 22, 1999, we sold to Boston Millennia Partners Limited Partnership 1,293,230 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $6,233,368.00. 37. On October 22, 1999, we sold to Boston Millennia Associates I Partnership 21,085 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $101,634.00. 38. On October 22, 1999, we sold to FIMA Finance Management, Inc. 207,468 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $1,000,000.00. 39. On October 22, 1999, we sold to Allyn Woodward 8,298 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $40,000.00. 40. On October 22, 1999, we sold to Josef von Rickenbach 5,186 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $24,998.00. 41. On October 22, 1999, we sold to Leon Seynave 20,746 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $100,001.00. 42. On October 22, 1999, we sold to South Ferry #2 L.P. 103,733 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $499,998.00. 43. On October 22, 1999, we sold to Swander Pace Capital Fund, L.P. 595,990 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $2,872,672.00. 44. On October 22, 1999, we sold to SPC GP Fund, LLC 9,913 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $47,781.00. 45. On October 22, 1999, we sold to SPC Executive Advisors Fund, LLC 9,872 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $47,583.00. 46. On October 22, 1999, we sold to SPC Associates Fund, LLC 6,632 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $31,966.00. 47. On October 22, 1999, we sold to Seligman New Technologies Fund, Inc. 672,198 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $3,239,999.00. 48. On October 22, 1999, we sold to Seligman Investment Opportunities Fund 157,676 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $759,998.00. 49. On October 22, 1999, we sold to Seligman Communications and Information Fund, Inc. 207,468 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $1,000,001,00. 50. On October 22, 1999, we sold to Bayview 99 1, LP 16,856 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $81,246.00. 51. On October 22, 1999, we sold to Bayview 99 II, LP 14,264 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $68,752.00.
II-4 52. On October 22, 1999, we sold to Peter Vidmar 20,746 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $100,000.00. 53. On October 22, 1999, we sold to Donald M. Kendall, Jr. 18,520 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $89,270.00. 54. On October 22, 1999, we sold to John Sculley, III 41,493 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $200,000.00. 55. On October 22, 1999, we sold to Diane Woolf 2,074 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $10,000.00 56. On October 22, 1999, we sold to Yash Pal Talreja 18,672 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $89,999.00. 57. On October 22, 1999, we sold to Steven Cash 25,933 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $124,997.00. 58. On October 22, 1999, we sold to Gordon Friedman 10,000 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $48,200.00. 59. On October 22, 1999, we sold to Clark Callander 5,186 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $24,997.00. 60. On October 22, 1999, we sold to Steve Abbott 500 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $2,410.00. 61. On November 5, 1999, we sold to GreenTree Nutrition Investors IV, L.P. 636,203 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $3,066,498.00. 62. On November 5, 1999, we sold to Star Growth Enterprise 394,191 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $1,900,001.00. 63. On November 5, 1999, we sold to SVM Star Ventures Managementgesellschaft mbH Nr. 3, 20,747 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $100,001.00. 64. On November 5, 1999, we sold to Galen Partners III, L.P. 379,073 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $1,827,132.00. 65. On November 5, 1999, we sold to Galen Partners International III, L.P. 34,313 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $165,389.00. 66. On November 5, 1999, we sold to Galen Employee Fund III, L.P. 1,552 shares of our Series D mandatorily redeemable convertible preferred stock at $4.82 per share for approximately $7,481.00.
The issuances of the securities in all of the above transactions were deemed to be exempt from registration under the Securities Act in reliance on: (a) Section 4(2) of the Securities Act by an issuer not involving a public offering, where the purchasers represented their intention to acquire the securities for investment only and not with a view to distribution and received or had access to adequate information about the Registrant; (b) Registration S promulgated under the Securities Act for sell of securities outside the United States in offshore transactions to purchasers who are non-"U.S. Persons"; or (c) Rule 701 promulgated under the Securities Act for transactions pursuant to a compensatory benefit plan or written compensation contract. II-5 On November 4, 1998, we issued 500,000 shares of our common stock in exchange for the substantial business assets of Acumin Corporation, now a division of more.com, Inc. The issuance of such securities was exempt from the registration requirements of the Securities Act due to the exemptions from registration provided by Sections 3(b) and 4(2) thereof. Appropriate legends were affixed to the stock certificates issued in the above transactions. Similar legends were imposed in connection with any subsequent sales of any such securities. No underwriters were employed in any of the above transactions. Item 16. Exhibits and Financial Statement Schedules (a) Exhibits The exhibits are as set forth in the Exhibit Index. (b) Financial Statement Schedules All schedules have been omitted since they are not required or are not applicable or the required information is shown in the financial statements or related notes. Item 17. Undertakings We hereby undertake to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by one of our directors, officers or controlling persons in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. We hereby undertake that: (1) For purposes of any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, more.com, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Francisco, State of California on the 11th day of February, 2000. MORE.COM, INC. By: /s/ Donald M. Kendall, Jr. ------------------------------------- Donald M. Kendall, Jr. Chief Executive Officer and Director POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Donald Kendall, Jr. and Laureen De Buono, and each of them, as their true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for them and in their name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, and to sign any registration statement for the same offering covered by the registration statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in- fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Donald M. Kendall, Jr. Chief Executive Officer February 11, 2000 ______________________________________ and Director (Principal Donald M. Kendall, Jr. Executive Officer) /s/ Laureen De Buono Chief Financial Officer February 11, 2000 ______________________________________ and Secretary (Principal Laureen De Buono Financial, Accounting Officer) /s/ Mark Leschly Director February 11, 2000 ______________________________________ Mark Leschly /s/ Thomas A. Penn Director February 11, 2000 ______________________________________ Thomas A. Penn Director February 11, 2000 ______________________________________ Perk Perkins
II-7
Signature Title Date --------- ----- ---- /s/ Donald R. Roden Director February 11, 2000 ______________________________________ Donald R. Roden /s/ E. Scott Russell Director February 11, 2000 ______________________________________ E. Scott Russell /s/ John Sculley III Director February 11, 2000 ______________________________________ John Sculley III /s/ John Neil Weintraut Director February 11, 2000 ______________________________________ John Neil Weintraut
II-8 EXHIBIT INDEX
Sequentially Exhibit Numbered Number Document Page ------- -------- ------------ 1.1 Form of Underwriting Agreement*......................... 3.1 Amended and Restated Certificate of Incorporation of more.com*............................................... 3.2 Bylaws of more.com*..................................... 4.1 Reference is made to Exhibits 3.1 and 3.2*.............. 4.2 Specimen Stock Certificate of more.com*................. 4.3 Restricted Stock Purchase Agreement between Registrant and Donald M. Kendall, dated May 14, 1998............... 4.4 Restricted Stock Purchase Agreement between Registrant and Eric Budin, dated May 14, 1998 and an amendment thereof, dated March 15, 1999........................... 4.5 Amended and Restated Investors' Rights Agreement between Registrant and the holders of our Series B, Series C, Series D and Series E convertible preferred stock dated February 11, 2000*...................................... 4.6 Form of Registration Rights Agreement between Registrant and certain holders of common stock..................... 5.1 Opinion of Morrison & Foerster LLP as to the legality of the common stock*....................................... 10.1 Form of Indemnification Agreement between Registrant and each of its executive officers and directors............ 10.2 Registrant's Amended and Restated 1998 Stock Option Plan, as amended and restated, including forms of agreements thereunder................................... 10.3 Registrant's 2000 Stock Incentive Plan, including forms and agreements thereunder............................... 10.5 Registrant's 2000 Employee Stock Purchase Plan, including forms and agreements thereunder............... 10.6 Form of Compensation Protection Agreements between Registrant and each of its executive officers........... 10.7 Lease for 520 Third Street, Second Floor, San Francisco, California 94107, dated August 1, 1999.................. 10.8 Lease for 485 Third Street, San Francisco, California 94107, dated October 29, 1999........................... 10.9 Lease for 495 Third Street, San Francisco, California 94107, dated October 29, 1999........................... 10.10 Lease for 3401 Market Street, Philadelphia, Pennsylvania 19104, dated February 13, 1997 and amendments thereunder.............................................. 10.11 Internet Fulfillment Services Agreement between Registrant and Bergen Brunswig Drug Company, dated July 1, 1999................................................. 10.12 Prescription Pharmaceuticals Internet Fulfillment Services Agreement between Registrant and Medi-Mail, Inc., dated August 18, 1999............................. 10.13 Service Mark License and Access Agreement between Registrant and Bergen Brunswig Drug Company, dated August 18, 1999......................................... 10.14 Advertising Representative Agreement between Registrant and Bergen Brunswig Drug Company, dated September 30, 1999....................................................
Sequentially Exhibit Numbered Number Document Page ------- -------- ------------ 10.15 Database License and Supply and Purchase Agreement between Registrant and Lens Express, Inc., dated January 17, 2000................................................ 23.1 Consent of Morrison & Foerster LLP. Reference is made to Exhibit 5.1*............................................ 23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants............................................. 24.1 Powers of Attorney. Reference is made to Page [II-4].... 27.1 Financial Data Schedule.................................
- -------- * To be filed by amendment EX-4.3 2 RESTRICTED STOCK PURCHASE AGREEMENT - KENDALL Exhibit 4.3 GREENTREE NUTRITION, INC. RESTRICTED STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT is made as of May 14, 1998, by and between, GreenTree Nutrition, Inc., a Delaware corporation (the "Company"), and Don Kendall (the "Founder"). In consideration of the mutual promises and covenants set forth herein, the parties hereto hereby agree as follows (capitalized terms are defined in the Appendix attached hereto): A. SALE OF STOCK 1. Sale, Payment. Founder hereby purchases from the Company, ------------- subject to the terms hereof, 966,556 shares of Common Stock (the "Common Stock Purchased Shares") and 22,976 shares of Series A Preferred Stock (the "Series A Preferred Stock Purchased Shares" and, with the Common Stock Purchased Shares, the "Purchased Shares") of the Company. In exchange for the Purchased Shares, the Founder hereby assigns to the Company all right, title and interest in and to the Founder's membership interest (as defined in Section 17001(z) of the California Limited Liability Company Act) (the "Interest" or "Purchase Price") in Nutrition Direct, LLC, a California limited liability company (the "LLC") operating pursuant to that certain limited liability company operating agreement among the Founder and the other members signed on or about January 9, 1998 (the "LLC Agreement"). The Company and the Founder agree that the fair market value of the Interest is approximately equal to the Fair Market Value of the Purchased Shares. 2. Issuance of Certificates. Upon receipt by the Company of a duly- ------------------------ executed blank Assignment Separate from Certificate (in the form attached hereto as Exhibit 11), the Company shall issue a duly executed certificate(s) representing the Purchased Shares. Such certificate(s) shall be held in escrow in accordance with the provisions of this Agreement. 3. Representations and Warranties of Founder. Founder hereby ----------------------------------------- represents and warrants that: (a) (i) the Interest, including, without limitation, that number of shares appearing opposite Founder's name in Exhibit I attached hereto, constitutes Founder's entire interest in the LLC, (ii) that this assignment of the Interest constitutes a valid and legally binding obligation, enforceable in accordance with its terms; (iii) the Founder has full power and authority to assign the Interest; and (iv) as to the assignment of the Interest, the execution and delivery of this Stock Purchase Agreement does not (A) violate any provision of law applicable to the Founder, (B) conflict with any document, agreement, or instrument to which the Founder is a party, other than the LLC Agreement, or (C) other than pursuant to the terms of the LLC Agreement, require the 1 Founder to obtain any consent or approval of, or give notice to, any person except for notices, approvals, and consents that have previously been made or obtained. (b) The Purchased Shares are being acquired for Founder's own account for investment purposes only, and not as a nominee or agent, and not with a view to the resale or distribution of all or any part of the Purchased Shares. Founder is prepared to hold the Purchased Shares for an indefinite period and has no present intention of selling, granting any participation in, or otherwise distributing any of the Purchased Shares. Founder does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant a participating interest in, any of the Purchased Shares. Founder has no present plan or intention to engage in a sale, exchange, transfer, distribution, redemption, reduction 'in any way of its risk of ownership by short sale or otherwise, or other disposition, directly or indirectly of the Purchased Shares. (c) Founder has been furnished with, and has had access to, such information as he considers necessary or appropriate for deciding whether to invest in the Purchased Shares, and Founder has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the issuance of the Purchased Shares. (d) Founder is able to fend for himself in the transactions contemplated by this Agreement, can bear the economic risk of investment in the Purchased Shares and has such knowledge and experience in financial or business matters to be capable of evaluating the merits and risks of the investment in the Purchased Shares. B. SECURITIES LAW COMPLIANCE 1. Restricted Securities. The Purchased Shares have not been --------------------- registered under the 1933 Act, on the ground that the sale provided for in this Agreement is exempt from the requirements of the 1933 Act and the Company's reliance on such exemptions is predicated on Founder's representations herein. Founder hereby confirms that Founder has been informed that the Purchased Shares are restricted securities under the 1933 Act and may not be resold or transferred unless the Purchased Shares are first registered under the federal securities laws or unless an exemption from such registration is available. Accordingly, Founder hereby acknowledges that Founder is prepared to hold the Purchased Shares for an indefinite period and that Founder is aware that SEC Rule 144 under the 1933 Act, which exempts certain resales of unrestricted securities, is not presently available to exempt the resale of the Purchased Shares from the registration requirements of the 1933 Act. 2. Restrictions on Disposition of Purchased Shares. Founder shall ----------------------------------------------- make no disposition of the Purchased Shares (other than a Permitted Transfer) unless and until there is compliance with all requirements of this Agreement and any applicable laws. The Company shall not be required (i) to transfer on its books any Purchased Shares which have been sold or transferred in violation of the provisions of this 2 Agreement or (ii) to treat as the owner of the Purchased Shares, any transferee to whom the Purchased Shares have been transferred in contravention of this Agreement. 3. Restrictive Legends. The stock certificate(s) for the Purchased ------------------- Shares shall be endorsed with one or more of the following restrictive legends: (a) "The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares may not be sold or offered for sale in the absence of (i) an effective registration statement for the shares under such Act, (ii) a 'no action' letter of the Securities and Exchange Commission with respect to such sale or offer, or (iii) satisfactory assurances to the Company that registration under such Act is not required with respect to such sale or offer." (b) "The shares represented by this certificate are unvested and subject to certain repurchase rights granted to the Company and accordingly may not be sold, assigned, transferred, encumbered, or in any manner disposed of except in conformity with the terms of a written agreement dated May 14,1998, between the Company and the registered holder of the shares (or the predecessor in interest to the shares). A copy of such agreement is maintained at the Company's principal corporate offices." (c) "The Shares represented by this certificate are subject to a right of first refusal option in favor of the Company, as provided by the Bylaws of the Company. Copies of the Company's Bylaws may be obtained upon written request to the secretary of the Company." 4. Condition to Issuance. THE SALE OF THE PURCHASED SHARES HAS NOT --------------------- BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, AND THE ISSUANCE OF SUCH SHARES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS THE SALE OF SUCH SHARES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UNLESS THE SALE IS SO EXEMPT. C. TRANSFER RESTRICTIONS 1. Restriction on Transfer. Except for any Permitted Transfer, ----------------------- Founder shall not transfer, assign, encumber or otherwise dispose of any of the Purchased Shares that are subject to the Repurchase Right. 2. Transferee Obligations. Each person (other than the Company) to ---------------------- whom the Purchased Shares are transferred by means of a Permitted Transfer must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Company that such person is bound by the provisions of this Agreement and that the transferred shares are subject to (i) the Repurchase Right, (ii) the Right of First Refusal, 3 (iii) the Market Stand-Off, and (iv) the securities restrictions set forth in section B above, to the same extent such shares would be so subject if retained by Founder. 3. Market Stand-Off. ---------------- (a) In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the 1933 Act, including, the Company's initial public offering, Owner shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any Purchased Shares without the prior written consent of the Company or its underwriters. Such restriction (the "Market Stand-Off") shall be in effect for such period of time from and after the effective date of the final prospectus for the offering as may be requested by the Company or such underwriters. In no event, however, shall such period exceed one hundred eighty (180) days and the Market StandOff shall in all events terminate two (2) years after the effective date of the Company's initial public offering. (b) Any new, substituted or additional securities that are by reason of any Recapitalization or Reorganization distributed with respect to the Purchased Shares shall be immediately subject to the Market Stand-Off, to the same extent the Purchased Shares are at such time covered by such provisions. (c) In order to enforce the Market Stand-Off, the Company may impose stop-transfer instructions with respect to the Purchased Shares until the end of the applicable standoff period. D. REPURCHASE RIGHT 1. Grant. The Company is hereby granted the right (the "Repurchase ----- Right"), exercisable at any time during the thirty (30) day period following the date Founder ceases for any reason to remain in Service, to repurchase for $0.16 per share, all or any portion of the Purchased Shares in which Founder is not, at the time of his cessation of Service, vested. 2. Exercise of the Repurchase Right. The Repurchase Right shall be -------------------------------- exercisable by written notice delivered to each Owner prior to the expiration of the thirty (30) day exercise period. The notice shall indicate the number of Unvested Shares to be repurchased and the date on which the repurchase is to be effected, such date to be not more than thirty (30) days after the date of such notice. The certificates representing the Unvested Shares to be repurchased shall be delivered to the Company prior to the close of business on the date specified for the repurchase. Concurrently with the receipt of such stock certificates, the Company shall pay to Owner, by Company check (or cancellation of any purchase-money indebtedness), an amount equal to $0.16 per share. 3. Termination of the Repurchase Right. The Repurchase Right shall ----------------------------------- terminate with respect to any Unvested Shares for which it is not timely exercised under Paragraph D.2 herein. In addition, the Repurchase Right shall terminate and cease to be 4 exercisable with respect to any and all Purchased Shares in which Founder vests in accordance with the following vesting schedule (the "Vesting Schedule"): Founder shall have a fully vested interest in 265,637 shares of the Company's Common Stock Purchased Shares and 22,976 shares of Series A Preferred Stock Purchased Shares. Founder shall acquire a vested interest and the Company's Repurchase Right shall lapse in the remaining Purchased Shares in 34 successive equal monthly installments upon Founder's completion of each full month of Service, measured from and after May 1, 1998. In the event that Founder is terminated without Cause, the Repurchase Right shall be deemed to have lapsed with respect to fifty percent (50%) of the shares to which the Repurchase Right applies immediately prior to the Founder's termination of service to the Company. 4. Recapitalization/Reorganization. Any new, substituted or ------------------------------- additional securities or other property (including cash paid other than as a regular cash dividend), which is by reason of any Recapitalization distributed with respect to the Purchased Shares, shall be immediately subject to the Repurchase Right, but only to the extent the Purchased Shares are at the time covered by such right. Appropriate adjustments to reflect such distribution shall be made to the number and/or class of Purchased Shares subject to this Agreement and to the price per share to be paid upon the exercise of the Repurchase Right in order to reflect the effect of any such Recapitalization upon the Company's capital structure, In the event of a Reorganization, other than a Change in Control, the Repurchase Right shall remain in full force and effect and shall apply to the new capital stock or other property received in exchange for the Purchased Shares in consummation of the Reorganization, but only to the extent the Purchase Shares are at the time covered by such night. 5. Change in Control. ----------------- (a) In the event that a Change in Control occurs such Repurchase Right will be deemed to have lapsed, and Founder will have obtained a vested interest in a portion of the Purchased Shares, as if Founder had completed thereafter an additional six (6) months of Service. (b) In the event that a Change in Control occurs and Founder is later terminated without Cause, such Repurchase Right will be deemed to have lapsed and Founder will have obtained a vested interest in a portion of the Purchased Shares, as if Founder had completed thereafter one (1) additional year of Service. (c) In addition to the foregoing, in the event that a Change of Control occurs and after giving effect to Sections D.5(a) or D.5(b) above, some of the Purchased Shares would remain subject to vesting pursuant to Section D.3 above, such 5 remaining Purchased Shares shall also vest fully, and the Repurchase Right shall automatically lapse in its entirety, unless (i) the Repurchase Right is expressly assigned by the Company to the successor entity (or Parent thereof) in such Change in Control and (ii) the consideration issued and delivered by such successor entity (or Parent thereof) with respect to such unvested Purchased Shares continue to vest in accordance with the remaining vesting schedule provided for in Section D.3 above based on Founder's continued Service for the Company or such successor entity (or Parent thereof). (d) To the extent the Repurchase Right remains in effect following a Change in Control, such right shall apply to the new capital stock or other property (including any cash payment) received by Founder in exchange for the Purchased Shares in consummation of the Change in Control, but only to the extent the Purchased Shares are at the time covered by such right. Appropriate adjustments shall be made to the number and/or kind of Purchased Shares subject to this Agreement and to the price per share payable upon exercise of the Repurchase Right to reflect the effect of the Change in Control upon the Company's capital structure; Provided, however, that the aggregate repurchase price shall remain the same. E. RIGHT OF FIRST REFUSAL The Shares purchased hereunder are subject to the Right of First Refusal set. forth in the Company's Bylaws. F. ESCROW 1. Deposit. Upon issuance, the certificates for the Purchased ------- Shares that are subject to the Repurchase Right shall be deposited in escrow with the Company to be held in accordance with the provisions of this Article F. The deposited certificates, together with any other assets or securities from time to time deposited with the Company pursuant to the requirements of this Agreement, shall remain in escrow until such time or times as the certificates (or other assets and securities) are to be released or otherwise surrendered for cancellation in accordance with Paragraph F.3. Upon delivery of the certificates (or other assets and securities) to the Company, Founder shall be issued a receipt acknowledging the number of Purchased Shares (or other assets and securities) delivered in escrow. 2. Recapitalization/Reorganization. Any new, substituted or ------------------------------- additional securities or other property which is by reason of any Recapitalization or Reorganization distributed with respect to the Purchased Shares (other than regular cash dividends) shall be immediately delivered to the Company to be held in escrow under this Article F, but only to the extent the Purchased Shares are at the time subject to the escrow requirements hereunder. 3. Release/Surrender. The Purchased Shares, together with any other ----------------- assets or securities held in escrow hereunder, shall be subject to the following terms relating to their release from escrow or their surrender to the Company for repurchase and cancellation: 6 (a) Should the Company elect to exercise the Repurchase Right with respect to any Unvested Shares, then the escrowed certificates for those Unvested Shares (together with any other assets or securities attributable thereto) shall be surrendered to the Company. (b) Should the Company elect to exercise the First Refusal Right with respect to any Target Shares held at the time in escrow hereunder, then the escrowed certificates for those Target Shares (together with any other assets or securities attributable thereto) shall be surrendered to the Company. (c) Should the Company elect not to exercise the Repurchase Right with respect to any Unvested Shares or the First Refusal Right with respect to any Target Shares held at the time in escrow hereunder, then the escrowed certificates for those shares (together with any other assets or securities attributable thereto) shall be immediately released to Owner. (d) As the Purchased Shares (or any other assets or securities attributable thereto) vest in accordance with the Vesting Schedule, the certificates for those vested shares (as well as all other vested assets and securities) shall be released from escrow upon Owner's request, but not more frequently than once every six (6) months. (e) All Purchased Shares that vest (and any other vested assets and securities attributable thereto) shall be released within thirty (30) days after the earlier to occur of (i) Owner's cessation of Service or (ii) the lapse of the First Refusal Right. G. SPECIAL TAX ELECTION The acquisition of the Purchased Shares may result in adverse tax consequences that may be avoided or mitigated by filing an election under Code Section 83(b). Such election must be filed within thirty (30) days after the date of this Agreement. A description of the tax consequences applicable to the acquisition of the Purchased Shares and the form for making the Code Section 83(b) election are set forth in Exhibit III. FOUNDER SHOULD CONSULT WITH HIS ------- TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES OF ACQUIRING THE PURCHASED SHARES AND THE ADVANTAGES AND DISADVANTAGES OF FILING THE CODE SECTION 83(b) ELECTION. FOUNDER ACKNOWLEDGES THAT IT IS FOUNDER'S SOLE RESPONSIBILITY, AND NOT THE COMPANY'S, TO FILE A TIMELY ELECTION UNDER CODE SECTION 83(b), EVEN IF FOUNDER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS BEHALF. H. GENERAL PROVISIONS 1. No Employment or Service Contract. Nothing in this Agreement --------------------------------- shall confer upon Founder any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company (or 7 any Parent or Subsidiary employing or retaining Founder) or of Founder, which rights are hereby expressly reserved by each, to terminate Founder's Service at any time for any reason, with or without cause. 2. Notices. Any notice required or permitted to be given under this ------- Agreement shall be given in writing and shall be deemed effective upon personal delivery, upon delivery by confirmed facsimile or electronic transmission (with duplicate original sent by U.S. mail) or upon deposit in the U.S. mail, registered or certified, postage prepaid and properly addressed to the party to be notified at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by ten (10) days advance written notice (under the terms of this paragraph) to all other parties to this Agreement. 3. No Waiver. The failure of the Company in any instance to --------- exercise the Repurchase Right or the First Refusal Right shall not constitute a waiver of any other repurchase rights and/or rights of first refusal that may subsequently anise under the provisions of this Agreement or any other agreement between the Company and Founder. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature. 4. Cancellation of Shares. If the Company shall make available, at ---------------------- the time and place and in the amount and form provided in this Agreement, the consideration for the Purchased Shares to be repurchased in accordance with the provisions of this Agreement, then from and after such time, the person from whom such shares are to be repurchased shall no longer have any rights as a holder of such shares (other than the right to receive payment of such consideration in accordance with this Agreement). Such shares shall be deemed purchased in accordance with the applicable provisions hereof, and the Company shall be deemed the owner and holder of such shares, whether or not the certificates therefor have been delivered as required by this Agreement. I. MISCELLANEOUS PROVISIONS 1. Further Actions. The parties hereby agree to take whatever --------------- additional actions and execute whatever additional documents they may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either of them or on the Purchased Shares pursuant to the provisions of this Agreement. 2. Amendments and Waivers. This Agreement represents the entire ---------------------- understanding of the parties with respect to the subject matter hereof and supersedes all previous understandings, whether written or oral 3. Governing Law. This Agreement shall be governed by, and ------------- construed in accordance with, the laws of the State of California without resort to that State's conflict-of-laws rules. 8 4. Counterparts. This Agreement may be executed in counterparts, ------------ each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 5. Successors and Assigns. The terms and provisions of this ---------------------- Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and upon Founder, Founder's permitted assigns and legal representatives, heirs and legatees of Founder's estate, whether or not any such person shall have become a party to this Agreement and have agreed in writing to join herein and be bound by the terms hereof 6. Titles and Subtitles. The titles and subtitles used in this -------------------- Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 7. Severability. If one or more provisions of this Agreement are ------------ held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 8. Capitalized Terms. Capitalized terms used herein but not defined ----------------- herein shall have the meanings given such terms in the Appendix attached hereto. 9 IN WITNESS WHEREOF, the parties have executed this Agreement on the date first indicated above. GREENTREE NUTRITION, INC. By: /s/ Eric Budin Eric Budin, President Address: c/o GreenTree Nutrition, Inc. 520 Third Street, Suite 245 San Francisco, CA 94107 FOUNDER:/1/ DON KENDALL /s/ Donald M. Kendall Address: c/o GreenTree Nutrition, Inc. 520 Third Street, Suite 245 San Francisco, CA 94107 _____________________ /1/ I have received the Section 83(b) election that was attached hereto as an Exhibit. I understand that I, and not the Company, will be responsible for --- completing the form and filing the election with the appropriate office of the federal and state tax authorities and that if such filing is not completed within thirty (30) days after the date of this Agreement, I will forfeit the opportunity to use Section 83(b). EXHIBIT I FOUNDER'S INTEREST Founder LLC Shares Amount of Shares - ------------------------------------------------------------------ Don Kendall Class A Common Stock 640,000 Class B Common Stock 320,000 EXHIBIT II ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, __________ hereby sells, assigns and transfers unto GreenTree Nutrition, Inc. (the "Company") _________________ (________) shares of the Common Stock of the Company standing in his/her name on the books of the Company represented by Certificate Number(s) ____________ herewith and does hereby irrevocably constitute and appoint _____________________________ his/her attorney-in-fact to transfer such stock on the books of the Company with full power of substitution in the premises. Dated: May 14, 1998 /s/Donald M Kendall ---------------------------- Signature This Assignment Separate from Certificate was executed in conjunction with the terms of the Stock Purchase Agreement by and between the above assignor and GreenTree, Inc. dated May 14, 1998. Instruction to Exhibit 11: Please do not fill in any blanks other than the ---------- signature line. Please sign exactly as you would like your name to appear on the issued stock certificate. The purpose of this assignment is to enable the Company to exercise the Repurchase Right without requiring additional signatures on the part of Founder. EXHIBIT III FEDERAL INCOME TAX CONSEQUENCES AND SECTION 83(b) TAX ELECTION Federal Income Tax Consequences and Section 83(b) Election. Under Section ---------------------------------------------------------- 83 of the Internal Revenue Code of 1986, as amended (the "Code"), the excess of the fair market value of the Purchased Shares, on the date any forfeiture restrictions applicable to such shares lapse, over the Purchase Price paid for such shares will be reportable as ordinary income on the lapse date. For this purpose, the term "forfeiture restrictions" includes the right of the Company to repurchase the Purchased Shares pursuant to the Repurchase Right. However, Founder may elect under Code Section 83(b) to be taxed at the time the Purchased Shares are acquired, rather than when and as such Purchased Shares cease to be subject to such forfeiture restrictions. Such election must be filed with the Internal Revenue Service within thirty (30) days after the date of the Agreement. Even if the fair market value of the Purchased Shares on the date of the Agreement equals the Purchase Price paid (and thus no tax is payable), the election must be made to avoid adverse tax consequences in the future. The form for making this election is attached as an Exhibit. FAILURE TO MAKE THIS FILING ------- WITHIN THE APPLICABLE THIRTY (30) DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME BY FOUNDER AS THE FORFEITURE RESTRICTIONS LAPSE. APPENDIX The following definitions shall be in effect under the Agreement: Agreement shall mean this Stock Purchase Agreement. --------- Board shall mean the Company's Board of Directors. ----- Cause shall mean Founder's deliberate and consistent refusal to perform ----- Founder's duties or deliberate and consistent refusal to conform to or follow any reasonable policy adopted by the Company's Board, Founder's unauthorized use or disclosure of the confidential information or trade secrets of the Company, Founder's conviction of a felony under the laws of the United States or any state thereof, or Founder's gross misconduct. Change in Control shall mean: ----------------- (a) A merger or consolidation in which securities possessing more than 50% of the total combined voting power of the Company's outstanding securities are transferred to one or more persons who were not stockholders of the Company immediately before such merger or consolidation; (b) Any other transaction after which one or more persons who were not stockholders of the Company immediately before such transaction beneficially own more than 50% of the total combined voting power of the Company's outstanding securities; (c) The sale, transfer or other disposition of all or substantially all of the Company's assets; or (d) The complete liquidation or dissolution of the Company. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company's securities immediately before such transaction. Code shall mean the Internal Revenue Code of 1986, as amended. ---- Common Stock shall mean the Company's common stock. ------------ Company shall mean Promatory Communications, Inc., a Delaware corporation. ------- Market Stand-Off shall mean the market stand-off restriction specified in ---------------- Paragraph C.3. 1933 Act shall mean the Securities Act of 1933, as amended. -------- Owner shall mean Founder and all subsequent holders of the Purchased Shares ----- who derive their chain of ownership through a Permitted Transfer from Founder. Parent shall mean any corporation (other than the Company) in an unbroken ------ chain of corporations ending with the Company, provided each corporation in the unbroken chain (other than the Company) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Permitted Transfer shall mean (i) a gratuitous transfer of the Purchased ------------------ Shares, provided and only if Founder obtains the Company's prior written consent to such transfer, (ii) a transfer of title to the Purchased Shares effected pursuant to Founder's will or the laws of intestate succession following Founder's death or (iii) a transfer to the Company in pledge as security for any purchase-money indebtedness incurred by Founder in connection with the acquisition of the Purchased Shares. Purchase Price shall have the meaning assigned to such term in Paragraph -------------- A.1. Purchased Shares shall have the meaning assigned to such term in Paragraph ---------------- A.1. Recapitalization shall mean any stock split, stock dividend, ---------------- recapitalization, combination of shares, exchange of shares or other change affecting the Company's outstanding Common Stock as a class without the Company's receipt of consideration. Reorganization shall mean any of the following transactions: -------------- (i) a merger or consolidation in which the Company is not the surviving entity; (ii) a sale, transfer or other disposition of all or substantially all of the Company's assets; (iii) a reverse merger in which the Company is the surviving entity but in which the Company's outstanding voting securities are transferred in whole or in part to a person or persons different from the persons holding those securities immediately prior to the merger; or (iv) any transaction effected primarily to change the state in which the Company is incorporated or to create a holding company structure. Repurchase Right shall mean the right granted to the Company in accordance ---------------- with Article D. SEC shall mean the Securities and Exchange Commission. --- Service shall mean the provision of services to the Company (or any Parent ------- or Subsidiary) by a person in his or her capacity as (a) an employee, subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance, (b) a non-employee member of the Board of Directors or (c) as a consultant. Subsidiary shall mean any corporation (other than the Company) in an ---------- unbroken chain of corporations beginning with the Company, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Vesting Schedule shall mean the vesting schedule specified in Paragraph D- ---------------- 3. Unvested Shares shall mean Purchased Shares in which Purchaser has not vested in - --------------- accordance with Paragraphs D.1 and D.5. EX-4.4 3 RESTRICTED STOCK PURCHASE AGREEMENT - BUDIN Exhibit 4.4 GREENTREE, INC. RESTRICTED STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT is made as of May 14, 1998, by and between, GreenTree, Inc., a Delaware corporation (the "Company"), and Eric Budin (the "Founder"). In consideration of the mutual promises and covenants set forth herein, the parties hereto hereby agree as follows (capitalized terms are defined in the Appendix attached hereto): A. SALE OF STOCK 1. Sale, Payment. Founder hereby purchases from the Company, ------------- subject to the terms hereof, 659,684 shares of Common Stock (the "Common Stock Purchased Shares" or the "Purchased Shares") of the Company. In exchange for the Purchased Shares, the Founder hereby assigns to the Company all right, title and interest and to the Founder's membership interest (as defined in Section 17001(z) of the California Limited Liability Company Act) (the "Interest" or "Purchase Price") in Nutrition Direct, LLC, a California limited liability company (the "LLC") operating pursuant to that certain limited liability company operating agreement among the Founder and the other members signed on or about January 9, 1998 (the "LLC Agreement"). The Company and the Founder agree that the fair market value of the Interest is approximately equal to the Fair Market Value of the Purchased Shares. 2. Issuance of Certificates. Upon receipt by the Company of a duly- ------------------------ executed blank Assignment Separate from Certificate (in the form attached hereto as Exhibit 11), the Company shall issue a duly executed certificate(s) representing the Purchased Shares. Such certificate(s) shall be held in escrow in accordance with the provisions of this Agreement. 3. Representations and Warranties of Founder. Founder hereby ----------------------------------------- represents and warrants that: (a) (i) the Interest, including, without limitation, that number of shares appearing opposite Founder's name in Exhibit I attached hereto, constitutes Founder's entire interest in the LLC, (ii) that this assignment of the Interest constitutes a valid and legally binding obligation, enforceable in accordance with its terms; (iii) the Founder has full power and authority to assign the Interest; and (iv) as to the assignment of the Interest, the execution and delivery of this Stock Purchase Agreement does not (A) violate any provision of law applicable to the Founder, (B) conflict with any document, agreement, or instrument to which the Founder is a party, other than the LLC Agreement, or (C) other than pursuant to the terms of the LLC Agreement, require the Founder to obtain any consent or approval of, or give notice to, any person except for notices, approvals, and consents that have previously been made or obtained. 1 (b) The Purchased Shares are being acquired for Founder's own account for investment purposes only, and not as a nominee or agent, and not with a view to the resale or distribution of all or any part of the Purchased Shares. Founder is prepared to hold the Purchased Shares for an indefinite period and has no present intention of selling, granting any participation in, or otherwise distributing any of the Purchased Shares. Founder does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant a participating interest in, any of the Purchased Shares. Founder has no present plan or intention to engage in a sale, exchange, transfer, distribution, redemption, reduction in any way of its risk of ownership by short sale or otherwise, or other disposition, directly or indirectly of the Purchased Shares. (c) Founder has been furnished with, and has had access to, such information as he considers necessary or appropriate for deciding whether to invest in the Purchased Shares, and Founder has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the issuance of the Purchased Shares. (d) Founder is able to fend for himself in the transactions contemplated by this Agreement, can bear the economic risk of investment in the Purchased Shares and has such knowledge and experience in financial or business matters to be capable of evaluating the merits and risks of the investment in the Purchased Shares. B. SECURITIES LAW COMPLIANCE 1. Restricted Securities. The Purchased Shares have not been --------------------- registered under the 1933 Act, on the ground that the sale provided for in this Agreement is exempt from the requirements of the 1933 Act and the Company's reliance on such exemptions is predicated on Founder's representations herein. Founder hereby confirms that Founder has been informed that the Purchased Shares are restricted securities under the 1933 Act and may not be resold or transferred unless the Purchased Shares are first registered under the federal securities laws or unless an exemption from such registration is available. Accordingly, Founder hereby acknowledges that Founder is prepared to hold the Purchased Shares for an indefinite period and that Founder is aware that SEC Rule 144 under the 1933 Act, which exempts certain resales of unrestricted securities, is not presently available to exempt the resale of the Purchased Shares from the registration requirements of the 1933 Act. 2. Restrictions on Disposition of Purchased Shares. Founder shall ----------------------------------------------- make no disposition of the Purchased Shares (other than a Permitted Transfer) unless and until there is compliance with all requirements of this Agreement and any applicable laws. The Company shall not be required (i) to transfer on its books any Purchased Shares which have been sold or transferred in violation of the provisions of this Agreement or (ii) to treat as the owner of the Purchased Shares, any transferee to whom the Purchased Shares have been transferred in contravention of this Agreement. 2 3. Restrictive Legends. The stock certificate(s) for the Purchased ------------------- Shares shall be endorsed with one or more of the following restrictive legends: (a) "The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares may not be sold or offered for sale in the absence of (i) an effective registration statement for the shares under such Act, (ii) a 'no action' letter of the Securities and Exchange Commission with respect to such sale or offer, or (iii) satisfactory assurances to the Company that registration under such Act is not required with respect to such sale or offer." (b) "The shares represented by this certificate are unvested and subject to certain repurchase rights granted to the Company and accordingly may not be sold, assigned, transferred, encumbered, or in manner disposed of except in conformity with the terms of a written agreement dated May 14, 1998, between the Company and the registered holder of the shares (or the predecessor in interest to the shares). A copy of such agreement is maintained at the Company's principal corporate offices." (c) "The Shares represented by this certificate are subject to a right of first refusal option in favor of the Company, as provided by the Bylaws of the Company. Copies of the Company's Bylaws may be obtained upon written request to the secretary of the Company." 4. Condition to Issuance. THE SALE OF THE PURCHASED SHARES HAS NOT --------------------- BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, AND THE ISSUANCE OF SUCH SHARES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS THE SALE OF SUCH SHARES IS EXEMPT FROM QUALIFICATION BY SECTIONS 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UNLESS THE SALE IS SO EXEMPT. C. TRANSFER RESTRICTIONS 1. Restriction on Transfer. Except for any Permitted Transfer, ----------------------- Founder shall not transfer, assign, encumber or otherwise dispose of any of the Purchased Shares that are subject to the Repurchase Right. 2. Transferee Obligations. Each person (other than the Company) to ---------------------- whom the Purchased Shares are transferred by means of a Permitted Transfer must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Company that such person is bound by the provisions of this Agreement and that the transferred shares are subject to (i) the Repurchase Right, (ii) the Right of First Refusal, (iii) the Market Stand-Off, and (iv) the securities restrictions set forth in Section B above, to the same extent such shares would be so subject if retained by Founder. 3 3. Market Stand-Off. ---------------- (a) In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the 1933 Act, including, the Company's initial public offering, Owner shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any Purchased Shares without the prior written consent of the Company or its underwriters. Such restriction (the "Market Stand-Off") shall be in effect for such period of time from and after the effective date of the final prospectus for the offering as may be requested by the Company or such underwriters. In no event, however, shall such period exceed one hundred eighty (180) days and the Market Stand-Off shall in all events terminate two (2) years after the effective date of the Company's initial public offering. (b) Any new, substituted or additional securities that are by reason of any Recapitalization or Reorganization distributed with respect to the Purchased Shares shall be immediately subject to the Market Stand-Off, to the same extent the Purchased Shares are at such time covered by such provisions. (c) In order to enforce the Market Stand-Off, the Company may impose stop-transfer instructions with respect to the Purchased Shares until the end of the applicable standoff period. D. REPURCHASE RIGHT 1. Grant. The Company is hereby granted the right (the "Repurchase ----- Right"), exercisable at any time during the thirty (30) day period following the date Founder ceases for any reason to remain in Service, to repurchase for $0.16 per share, all or any portion of the Purchased Shares in which Founder is not, at the time of his cessation of Service, vested. 2. Exercise of the Repurchase Right. The Repurchase Right shall be -------------------------------- exercisable by written notice delivered to each Owner prior to the expiration of the thirty (30) day exercise period. The notice shall indicate the number of Unvested Shares to be repurchased and the date on which the repurchase is to be effected, such date to be not more than thirty (30) days after the date of such notice. The certificates representing the Unvested Shares to be repurchased shall be delivered to the Company prior to the close of business on the date specified for the repurchase. Concurrently with the receipt of such stock certificates, the Company shall pay to Owner, by Company check (or cancellation of any purchase-money indebtedness), an amount equal to $0.16 per share. 3. Termination of the Repurchase Right. The Repurchase Right shall ----------------------------------- terminate with respect to any Unvested Shares for which it is not timely exercised under Paragraph D.2 herein. In addition, the Repurchase Right shall terminate and cease to be exercisable with respect to any and all Purchased Shares in which Founder vests in accordance with the following vesting schedule (the "Vesting Schedule"): 4 Founder shall have a fully vested interest in 192,407 shares of the Company's Common Stock Purchased Shares. Founder shall acquire a vested interest and the Company's Repurchase Right shall lapse in the remaining Purchased Shares in 34 successive equal monthly installments upon Founder's completion of each full month of Service, measured from and after May 1, 1998. In the event that Founder is terminated without Cause, the Repurchase Right shall be deemed to have lapsed with respect to fifty percent (50%) of the shares to which the Repurchase Right applies immediately prior to the Founder's termination of service to the Company. 4. Recapitalization/Reorganization. Any new, substituted or ------------------------------- additional securities or other property (including cash paid other than as a regular cash dividend), which is by reason of any Recapitalization distributed with respect to the Purchased Shares, shall be immediately subject to the Repurchase Right, but only to the extent the Purchased Shares are at the time covered by such right. Appropriate adjustments to reflect such distribution shall be made to the number and/or class of Purchased Shares subject to this Agreement and to the price per share to be paid upon the exercise of the Repurchase Right in order to reflect the effect of any such Recapitalization upon the Company's capital structure. In the event of a Reorganization, other than a Change in Control, the Repurchase Right shall remain in full force and effect and shall apply to the new capital stock or other property received in exchange for the Purchased Shares in consummation of the Reorganization, but only to the extent the Purchase Shares are at the time covered by such right. 5. Change in Control. ----------------- (a) In the event that a Change in Control occurs such Repurchase Right will be deemed to have lapsed, and Founder will have obtained a vested interest in a portion of the Purchased Shares, as if Founder had completed thereafter an additional six (6) months of Service. (b) In the event that a Change in Control occurs and Founder is later terminated without Cause, such Repurchase Right will be deemed to have lapsed and Founder will have obtained a vested interest in a portion of the Purchased Shares, as if Founder had completed thereafter one (1) additional year of Service. (c) In addition to the foregoing, in the event that a Change of Control occurs and after giving effect to Sections D.5(a) or D.5(b) above, some of the Purchased Shares would remain subject to vesting pursuant to Section D.3 above, such remaining Purchased Shares shall also vest fully, and the Repurchase Right shall automatically lapse in its entirety, unless (i) the Repurchase Right is expressly assigned by the Company to the successor entity (or Parent thereof) in such Change in Control and (ii) the consideration issued and delivered by such successor entity (or Parent thereof) 5 with respect to such unvested Purchased Shares continue to vest in accordance with the remaining vesting schedule provided for in Section D.3 above based on Founder's continued Service for the Company or such successor entity (or Parent thereof). (d) To the extent the Repurchase Right remains in effect following a Change in Control, such right shall apply to the new capital stock or other property (including any cash payment) received by Founder in exchange for the Purchased Shares in consummation of the Change in Control, but only to the extent the Purchased Shares are at the time covered by such right. Appropriate adjustments shall be made to the number and/or kind of Purchased Shares subject to this Agreement and to the price per share payable upon exercise of the Repurchase Right to reflect the effect of the Change in Control upon the Company's capital structure; provided, however, that the aggregate repurchase price shall remain the same. E. RIGHT OF FIRST REFUSAL The Shares purchased hereunder are subject to the Right of First Refusal set forth in the Company's Bylaws. F. ESCROW 1. Deposit. Upon issuance, the certificates for the Purchased ------- Shares that are subject to the Repurchase Right shall be deposited in escrow with the Company to be held in accordance with the provisions of this Article F. The deposited certificates, together with any other assets or securities from time to time deposited with the Company pursuant to the requirements of this Agreement, shall remain in escrow until such time or times as the certificates (or other assets and securities) are to be released or otherwise surrendered for cancellation in accordance with Paragraph F.3. Upon delivery of the certificates (or other assets and securities) to the Company, Founder shall be issued a receipt acknowledging the number of Purchased Shares (or other assets and securities) delivered in escrow. 2. Recapitalization/Reorganization. Any new, substituted or ------------------------------- additional securities or other property which is by reason of any Recapitalization or Reorganization distributed with respect to the Purchased Shares (other than regular cash dividends) shall be immediately delivered to the Company to be held in escrow under this Article F, but only to the extent the Purchased Shares are at the time subject to the escrow requirements hereunder. 3. Release/Surrender. The Purchased Shares, together with any other ----------------- assets or securities held in escrow hereunder, shall be subject to the following terms relating to their release from escrow or their surrender to the Company for repurchase and cancellation: (a) Should the Company elect to exercise the Repurchase Right with respect to any Unvested Shares, then the escrowed certificates for those Unvested Shares (together with any other assets or securities attributable thereto) shall be surrendered to the Company. 6 (b) Should the Company elect to exercise the First Refusal Right with respect to any Target Shares held at the time in escrow hereunder, then the escrowed certificates for those Target Shares (together with any other assets or securities attributable thereto) shall be surrendered to the Company. (c) Should the Company elect not to exercise the Repurchase Right with respect to any Unvested Shares or the First Refusal Right with respect to any Target Shares held at the time in escrow hereunder, then the escrowed certificates for those shares (together with any other assets or securities attributable thereto) shall be immediately released to Owner. (d) As the Purchased Shares (or any other assets or securities attributable thereto) vest in accordance with the Vesting Schedule, the certificates for those vested shares (as well as all other vested assets and securities) shall be released from escrow upon Owner's request, but not more frequently than once every six (6) months. (e) All Purchased Shares that vest (and any other vested assets and securities attributable thereto) shall be released within thirty (30) days after the earlier to occur of (i) Owner's cessation of Service or (ii) the lapse of the First Refusal Right. G. SPECIAL TAX ELECTION The acquisition of the Purchased Shares may result in adverse tax consequences that may be avoided or mitigated by filing an election under Code Section 83(b). Such election must be filed within thirty (30) days after the date of this Agreement. A description of the tax consequences applicable to the acquisition of the Purchased Shares and the form for making the Code Section 83(b) election are set forth in Exhibit III. FOUNDER SHOULD CONSULT WITH HIS TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES OF ACQUIRING THE PURCHASED SHARES AND THE ADVANTAGES AND DISADVANTAGES OF FILING THE CODE SECTION 83(b) ELECTION. FOUNDER ACKNOWLEDGES THAT IT IS FOUNDER'S SOLE RESPONSIBILITY, AND NOT THE COMPANY'S, TO FILE A TIMELY ELECTION UNDER CODE SECTION 83(b), EVEN IF FOUNDER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS BEHALF. H. GENERAL PROVISIONS 1. No Employment or Service Contract. Nothing in this Agreement --------------------------------- shall confer upon Founder any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company (or any Parent or Subsidiary employing or retaining Founder) or of Founder, which rights are hereby expressly reserved by each, to terminate Founder's Service at any time for any reason, with or without cause. 7 2. Notices. Any notice required or permitted to be given under this ------- Agreement shall be given in writing and shall be deemed effective upon personal delivery, upon delivery by confirmed facsimile or electronic transmission (with duplicate original sent by U.S. mail) or upon deposit in the U.S. mail, registered or certified, postage prepaid and properly addressed to the party to be notified at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by ten (10) days advance written notice (under the terms of this paragraph) to all other parties to this Agreement. 3. No Waiver. The failure of the Company in any instance to --------- exercise the Repurchase Right or the First Refusal Right shall not constitute a waiver of any other repurchase rights and/or rights of first refusal that may subsequently arise under the provisions of this Agreement or any other agreement between the Company and Founder. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature. 4. Cancellation of Shares. If the Company shall make available, at ---------------------- the time and place and in the amount and form provided in this Agreement, the consideration for the Purchased Shares to be repurchased in accordance with the provisions of this Agreement, then from and after such time, the person from whom such shares are to be repurchased shall no longer have any rights as a holder of such shares (other than the right to receive payment of such consideration in accordance with this Agreement). Such shares shall be deemed purchased in accordance with the applicable provisions hereof, and the Company shall be deemed the owner and holder of such shares, whether or not the certificates therefor have been delivered as required by this Agreement. I. MISCELLANEOUS PROVISIONS 1. Further Actions. The parties hereby agree to take whatever --------------- additional actions and execute whatever additional documents they may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either of them or on the Purchased Shares pursuant to the provisions of this Agreement. 2. Amendments and Waivers. This Agreement represents the entire ---------------------- understanding of the parties with respect to the subject matter hereof and supersedes all previous understandings, whether written or oral 3. Governing Law. This Agreement shall be governed by, and ------------- construed in accordance with, the laws of the State of California without resort to that State's conflict-of-laws rules. 4. Counterparts. This Agreement may be executed in counterparts, ------------ each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 8 5. Successors and Assigns. The terms and provisions of this ---------------------- Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and upon Founder, Founder's permitted assigns and legal representatives, heirs and legatees of Founder's estate, whether or not any such person shall have become a party to this Agreement and have agreed in writing to join herein and be bound by the terms hereof. 6. Titles and Subtitles. The titles and subtitles used in this -------------------- Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 7. Severability. If one or more provisions of this Agreement are ------------ held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 8. Capitalized Terms. Capitalized terms used herein but not defined ----------------- herein shall have the meanings given such terms in the Appendix attached hereto. 9 IN WITNESS WHEREOF, the parties have executed this Agreement on the date first indicated above. GREENTREE, INC. By: /s/ Donald M. Kendall Don Kendall, Chief Executive Officer Address: c/o GreenTree Nutrition, Inc. 520 Third Street, Suite 245 San Francisco, CA 94107 FOUNDER:/1/ ERIC BUDIN /s/ Eric Budin Address: c/o GreenTree Nutrition, Inc. 520 Third Street, Suite 245 San Francisco, CA 94107 ____________________ /1/ I have received the Section 83(b) election that was attached hereto as an Exhibit. I understand that I, and not the Company, will be responsible for --- completing the form and filing the election with the appropriate office of the federal and state tax authorities and that if such filing is not completed within thirty (30) days after the date of this Agreement, I will forfeit the opportunity to use Section 83(b). 10 EXHIBIT I FOUNDER'S INTEREST Founder LLC Shares Amount of Shares - ------------------------------------------------------------------------- Eric Budin Common Stock 640,000 11 EXHIBIT II ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, __________ hereby sells, assigns and transfers unto GreenTree, Inc. (the "Company") _________________ (________) shares of the Common Stock of the Company standing in his/her name on the books of the Company represented by Certificate Number(s) ____________ herewith and does hereby irrevocably constitute and appoint _____________________________ his/her attorney-in-fact to transfer such stock on the books of the Company with full power of substitution in the premises. Dated: May 14, 1998 /s/Eric Budin ------------------------ Signature This Assignment Separate from Certificate was executed in conjunction with the terms of the Stock Purchase Agreement by and between the above assignor and GreenTree, Inc. dated May 14, 1998. Instruction to Exhibit 11: Please do not fill in any blanks other than the ---------- signature line. Please sign exactly as you would like your name to appear on the issued stock certificate. The purpose of this assignment is to enable the Company to exercise the Repurchase Right without requiring additional signatures on the part of Founder. 12 EXHIBIT III FEDERAL INCOME TAX CONSEQUENCES AND SECTION 83(b) TAX ELECTION Federal Income Tax Consequences and Section 83(b) Election. Under Section ---------------------------------------------------------- 83 of the Internal Revenue Code of 1986, as amended (the "Code"), the excess of the fair market value of the Purchased Shares, on the date any forfeiture restrictions applicable to such shares lapse, over the Purchase Price paid for such shares will be reportable as ordinary income on the lapse date. For this purpose, the term "forfeiture restrictions" includes the right of the Company to repurchase the Purchased Shares pursuant to the Repurchase Right. However, Founder may elect under Code Section 83(b) to be taxed at the time the Purchased Shares are acquired, rather than when and as such Purchased Shares cease to be subject to such forfeiture restrictions. Such election must be filed with the Internal Revenue Service within thirty (30) days after the date of the Agreement. Even if the fair market value of the Purchased Shares on the date of the Agreement equals the Purchase Price paid (and thus no tax is payable), the election must be made to avoid adverse tax consequences in the future. The form for making this election is attached as an Exhibit. FAILURE TO MAKE THIS FILING ------- WITHIN THE APPLICABLE THIRTY (30) DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME BY FOUNDER AS THE FORFEITURE RESTRICTIONS LAPSE. 13 APPENDIX The following definitions shall be in effect under the Agreement: Agreement shall mean this Stock Purchase Agreement. --------- Board shall mean the Company's Board of Directors. ----- Cause shall mean Founder's deliberate and consistent refusal to perform ----- Founder's duties or deliberate and consistent refusal to conform to or follow any reasonable policy adopted by the Company's Board, Founder's unauthorized use or disclosure of the confidential information or trade secrets of the Company, Founder's conviction of a felony under the laws of the United States or any state thereof, or Founder's gross misconduct. Change in Control shall mean: ----------------- (a) A merger or consolidation in which securities possessing more than 50% of the total combined voting power of the Company's outstanding securities are transferred to one or more persons who were not stockholders of the Company immediately before such merger or consolidation; (b) Any other transaction after which one or more persons who were not stockholders of the Company immediately before such transaction beneficially own more than 50% of the total combined voting power of the Company's outstanding securities; (c) The sale, transfer or other disposition of all or substantially all of the Company's assets; or (d) The complete liquidation or dissolution of the Company. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company's securities immediately before such transaction. Code shall mean the Internal Revenue Code of 1986, as amended. ---- Common Stock shall mean the Company's common stock. ------------ Company shall mean Promatory Communications, Inc., a Delaware corporation. ------- Market Stand-Off shall mean the market stand-off restriction specified in ---------------- Paragraph C.3. 1933 Act shall mean the Securities Act of 1933, as amended. -------- 14 Owner shall mean Founder and all subsequent holders of the Purchased Shares ----- who derive their chain of ownership through a Permitted Transfer from Founder. Parent shall mean any corporation (other than the Company) in an unbroken ------ chain of corporations ending with the Company, provided each corporation in the unbroken chain (other than the Company) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Permitted Transfer shall mean (i) a gratuitous transfer of the Purchased ------------------ Shares, provided and only if Founder obtains the Company's prior written consent to such transfer, (ii) a transfer of title to the Purchased Shares effected pursuant to Founder's will or the laws of intestate succession following Founder's death or (iii) a transfer to the Company in pledge as security for any purchase-money indebtedness incurred by Founder in connection with the acquisition of the Purchased Shares. Purchase Price shall have the meaning assigned to such term in Paragraph -------------- A.1. Purchased Shares shall have the meaning assigned to such term in Paragraph ---------------- A.1. Recapitalization shall mean any stock split, stock dividend, ---------------- recapitalization, combination of shares, exchange of shares or other change affecting the Company's outstanding Common Stock as a class without the Company's receipt of consideration. Reorganization shall mean any of the following transactions: -------------- (i) a merger or consolidation in which the Company is not the surviving entity; (ii) a sale, transfer or other disposition of all or substantially all of the Company's assets; (iii) a reverse merger in which the Company is the surviving entity but in which the Company's outstanding voting securities are transferred in whole or in part to a person or persons different from the persons holding those securities immediately prior to the merger; or (iv) any transaction effected primarily to change the state in which the Company is incorporated or to create a holding company structure. Repurchase Right shall mean the right granted to the Company in accordance ---------------- with Article D. SEC shall mean the Securities and Exchange Commission. --- Service shall mean the provision of services to the Company (or any Parent ------- or Subsidiary) by a person in his or her capacity as (a) an employee, subject to the control 15 and direction of the employer entity as to both the work to be performed and the manner and method of performance, (b) a non-employee member of the Board of Directors or (c) as a consultant. Subsidiary shall mean any corporation (other than the Company) in an ---------- unbroken chain of corporations beginning with the Company, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Vesting Schedule shall mean the vesting schedule specified in Paragraph D- ---------------- 3. Unvested Shares shall mean Purchased Shares in which Purchaser has not --------------- vested in accordance with Paragraphs D.1 and D.5. 16 EX-4.6 4 FORM OF REGISTRATION RIGHTS AGREEMENT EXHIBIT 4.6 ----------- REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is entered into as of --------- February __, 2000, by and between more.com, Inc., a Delaware corporation (the "Company"), and the undersigned individual ("Stockholder"). ------- ----------- RECITALS A. This Agreement is entered into in connection with the Agreement and Plan of Merger, dated as of February 7, 2000 and by and among the Company, a wholly-owned subsidiary of the Company and Comfort Living, Inc., a Maryland corporation ("ComfortLiving"), and which ------------- provides for the acquisition of ComfortLiving by the Company (the "Merger Agreement", and such acquisition, the "Merger"). ---------------- ------ Capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings ascribed to them in the Merger Agreement. B. Stockholder is the record and beneficial owner of shares of the capital stock of the Company and/or is the holder of Rights pertaining to the Company Common Stock. C. Pursuant to the Merger Agreement, at the effective time of the Merger (the "Effective Time"), each outstanding share of the -------------- capital stock of the Company will be converted into, and each outstanding Right pertaining to the Company Common Stock will be terminated in exchange for, the right to receive shares of the common stock of Parent ("Shares") and cash. ------ AGREEMENT NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in this Agreement, the parties mutually agree as follows: 1. Piggyback Registration Rights. ----------------------------- 1.1 If, at any time after 180 days following the date of the closing of Parent's initial public offering of shares of its common stock ("Common ------ Stock") pursuant to a registration statement on Form S-1 under the Securities - ----- Act of 1933, as amended (the "Securities Act")(if any), the Company proposes -------------- to register Common Stock under the Securities Act in connection with any offering of Common Stock (other than a registration statement on Form S-8 or Form S-4, or their successors, or any other form for a limited purpose or which otherwise does not include at least substantially the same information as would be required to be included in a registration statement covering the sale of registrable securities, or any registration statement covering only securities proposed to be issued in exchange for securities or assets of another 1 entity), whether or not for its own account, the Company shall furnish prompt (but in no event later than fourteen (14) days prior to the filing of the applicable registration statement) written notice to Stockholder of its intention to effect such registration and the intended method of distribution in connection therewith. Upon the written request of Stockholder made to the Company within fourteen (14) days after the furnishing such notice by the Company, the Company shall include in such registration the requested number of Shares (the "Registrable Securities"), subject to the provisions hereof and ---------------------- other customary terms, conditions, limitations and cut-backs relating to the registration of securities generally and any restrictions on transfer of Shares pursuant to any agreement between Stockholder and the Company; provided, that all rights granted to Stockholder pursuant to this Section 1 - -------- shall terminate with respect to any Registrable Securities held by Stockholder upon the earliest to occur of (i) the time when all of the Registrable Securities may immediately be sold pursuant to Rule 144 under the Securities Act within any ninety (90) day period, (ii) upon any sale of the Registrable Securities pursuant to a registration statement or Rule 144 under the Securities Act or (iii) the date two (2) years after the date hereof. 1.2 Nothing in this Section 1 shall create any liability on the part of the Company or any other person to Stockholder if the Company or any other person should, for any reason, decide not to file a registration statement proposed to be filed or to withdraw such registration statement subsequent to its filing, regardless of any action whatsoever that Stockholder may have taken, whether as a result of the issuance by the Company of any notice under this Section 1 or otherwise. 1.3 It shall be a condition precedent to the obligation of the Company to include any Registrable Securities in a registration statement pursuant to this Section 1 that Stockholder shall furnish to the Company such information regarding himself, the Registrable Securities held by him, and the intended method of disposition of such securities as shall be required to effect the registration of the Registrable Securities held by Stockholder. Any such information, or any comments on any such information included in a draft of a registration statement provided to Stockholder for his comment, shall be provided to the Company within any reasonable time period requested by the Company. 1.4 The Company may suspend any applicable registration statement and require that Stockholder immediately cease the sale of Shares pursuant to the registration statement in any period during which the Company is engaged in any activity or transaction or preparations or negotiations for any activity or transaction (the "Company Activity") that the Company in good ---------------- faith desires to keep confidential for business reasons, if the Company determines in good faith (and so certifies to Stockholder) that the public disclosure requirements imposed on the Company under the Securities Act in connection with the registration statement would require disclosure of the Company Activity, or during which there exists any other material non-public information relating to the Company which the Company determines in good faith should not be disclosed; provided that (i) the Company shall use commercially -------- reasonable efforts to minimize the length of any such period of suspension, and (ii) any such suspension shall be applied in the same manner to any other registration statement or proposed offering of the Company's securities proposed or then in effect. 2 1.5 Stockholder shall notify the Company, at any time when a prospectus is required to be delivered under applicable law, of the happening of any event as a result of which the prospectus included in the applicable registration statement, as then in effect, with respect to information provided or confirmed by Stockholder, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. Stockholder shall immediately upon the occurrence of any such event cease using such prospectus. If so requested by the Company, Stockholder promptly shall return to the Company any copies of any prospectus in its possession (other than permanent file copies) that contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. 1.6 The Company shall bear and pay all reasonable expenses incurred by it in connection with any registration, filing or qualification of the Registrable Securities pursuant to this Section 1, including (without limitation) all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company, but excluding underwriting discounts and commissions relating to the Registrable Securities. The Company shall not be responsible for any costs, fees or expenses of any counsel separately retained to act on behalf of Stockholder in connection with any registration, filing or qualification hereunder. 1.7 In connection with any underwritten offering of securities, the Company shall not be required under this Section 1 to register any of the Registrable Securities in connection with such underwritten offering unless Stockholder accepts the underwriters selected by the Company and executes an underwriting agreement with such underwriters containing such provisions as are customary in an underwritten offering that includes shares held by a stockholder. Registrable Securities shall be sold in such offering only in such quantity as the lead managing underwriter determines, in its sole discretion, will not jeopardize the success of the offering by the Company. To the extent that the lead managing underwriter determines that attempting to sell all of the securities sought to be registered may jeopardize the success of the offering, the securities to be included shall be apportioned as follows: (i) first, the Company and any holders of securities of the Company exercising any demand registration rights granted to such holders shall be entitled to register all securities that the Company or such other holders propose to sell for their own accounts, in such proportion as they shall agree upon; (ii) second, any holders of the Company securities exercising piggyback registration rights as and to the extent that such registration rights have priority over the registration rights granted to Stockholder hereunder; and (iii) lastly, Stockholder, together with any holders of other the Company securities exercising piggyback registration rights as and to the extent that such registration rights rank pari passu with the piggyback registration ---- ----- rights hereunder, shall be entitled to register, on a pro rata basis, up to --- ---- that number of Registrable Securities and other shares of Common Stock that is equal to the remaining shares of Common Stock that the lead managing underwriter will permit to be registered after giving effect to the apportionment set forth in clauses (i) and (ii) above, in connection with such offering. 1.8 The Company shall use its best efforts to register or qualify the Registrable Securities under the securities laws of such states as Stockholder shall reasonably 3 request in writing; provided that the Company shall not be required in -------- connection with this Section 1.8 to qualify as a foreign corporation or execute a general consent to service of process in any jurisdiction. 1.9 Stockholder shall not have any right to obtain or seek an injunction restraining or otherwise delaying any registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. 2. Indemnification. --------------- 2.1 To the extent permitted by law, the Company will indemnify and hold harmless Stockholder against any losses, claims, damages, or liabilities to which he may become subject under the Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or other federal or ------------ state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation") by the --------- Company: (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law in connection with the offering covered by such registration statement; and the Company will reimburse Stockholder for any legal or other expenses reasonably incurred by him in connection with investigating or defending any such loss, claim, damage, liability or action; provided, that the indemnity agreement contained in this -------- Section 2.1 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by Stockholder. 2.2 To the extent permitted by law, Stockholder will, if Shares held by Stockholder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify and hold harmless the Company, each of its directors and officers, its legal counsel, each Person, if any, who controls the Company within the meaning of the Securities Act, each underwriter and each other shareholder selling securities under such registration statement against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, counsel, controlling Person, underwriter or other shareholders may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by Stockholder; and Stockholder will reimburse any legal or other 4 expenses reasonably incurred by the Company or any such director, officer, counsel, controlling Person, underwriter or other shareholders in connection with investigating or defending any such loss, claim, damage, liability or action if it is judicially determined that there was such a Violation; provided that the indemnity agreement contained in this Section 2.2 shall not - -------- apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of Stockholder, which consent shall not be unreasonably withheld. 3. Miscellaneous. ------------- 3.1 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument. 3.2 Successors and Assigns. This Agreement shall be enforceable by ---------------------- and shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns, provided that Stockholder's right to -------- register the Registrable Securities pursuant to Section 1 may be assigned (but only with all related obligations) by Stockholder to a permitted transferee or assignee of such securities who, after such assignment or transfer, holds at least a majority of the shares of Registrable Securities initially held by Stockholder pursuant to the Acquisition Agreements (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations); and provided, further, that: (a) Company is, within a -------- ------- reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; (b) such transferee or assignee agrees in writing to be bound by and subject to the terms and conditions of this Agreement; and (c) such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Securities Act. As used herein, the terms "successors and assigns" shall mean, where the context so permits, heirs, executors, administrators, trustees and successor trustees, and personal and other representatives. 3.3 Governing Law. This Agreement shall be governed by and construed, ------------- interpreted and enforced in accordance with the laws of the State of California, without regard to the principles of conflicts of laws. Each of the parties irrevocably waives the right to a jury trial in connection with any legal proceeding relating to this Agreement and the other Transaction Agreements or the enforcement of any provision of this Agreement or the other Transaction Agreements. 3.4 Notices. Any notice or other communication required or permitted ------- to be delivered to any party under this Agreement shall be in writing and shall be deemed properly delivered, given and received when delivered (by hand, by registered mail, by courier or express delivery service or by telecopier during business hours) to the address or telecopier number set forth beneath the name of such party on the signature page of this Agreement (or to such other address or telecopier number as such party shall have specified in a written notice given to the other party hereto). 5 3.5 Severability. If any provision of this Agreement is held to be ------------ unenforceable for any reason, such provision and all other related provisions shall be modified rather than voided, if possible, in order to achieve the intent of the parties to this Agreement to the extent possible. In any event, all other unrelated provisions of this Agreement shall be deemed valid and enforceable to the full extent. 3.6 Gender and Number. Whenever the context of this Agreement ----------------- requires, the gender of all words herein shall include the masculine, feminine and neuter, and the number of all words herein shall include the singular and plural. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 6 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first above written. MORE.COM, INC. By: _________________________________________ Name: Title: 520 Third St., Suite 245 San Francisco, CA 94107 Attention: Chief Executive Officer Telecopier: (415) 979-9598 STOCKHOLDER: ______________________________________________ Name: Address: _____________________________________ ______________________________________________ ______________________________________________ Facsimile: ___________________________________ ______________________________________________ (Print Taxpayer Identification Number) [THIS SIGNATURE PAGE TO BE DUPLICATED FOR EACH STOCKHOLDER] 7 EX-10.1 5 FORM OF INDEMNIFICATION AGREEMENT Exhibit 10.1 MORE.COM, INC. INDEMNIFICATION AGREEMENT THIS AGREEMENT is entered into, effective as of ____________, 2000 by and between more.com, Inc., a Delaware corporation (the "Company"), and ___________________ ("Indemnitee"). WHEREAS, it is essential to the Company to retain and attract as directors and officers the most capable persons available; WHEREAS, Indemnitee is a director and/or officer of the Company; and WHEREAS, in recognition of Indemnitee's need for substantial protection against personal liability in order to enhance Indemnitee's continued and effective service to the Company, and in order to induce Indemnitee to provide services to the Company as a director and/or officer, the Company wishes to provide in this Agreement for the indemnification of and the advancing of expenses to Indemnitee to the fullest extent (whether partial or complete) permitted by Delaware law and as set forth in this Agreement, and, to the extent insurance is maintained, for the coverage of Indemnitee under the Company's directors' and officers' liability insurance policies. NOW, THEREFORE, in consideration of the above premises and of Indemnitee's continuing to serve the Company directly or, at its request, with another enterprise, and intending to be legally bound hereby, the parties agree as follows: 1. Certain Definitions. ------------------- (a) Board: the Board of Directors of the Company. (b) Change In Control: shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Act")), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company (collectively "excluded persons"), is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 30% or more of the total voting power represented by the Company's then outstanding Voting Securities, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board and any new director whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to 1 represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 50% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company (in one transaction or a series of transactions) of all or substantially all of the Company's assets. (c) Expenses: any expense, liability, or loss, including attorneys' fees, judgments, fines, ERISA excise taxes and penalties, amounts paid or to be paid in settlement, any interest, assessments, or other charges imposed thereon, and any federal, state, local, or foreign taxes imposes as a result of the actual or deemed receipt of any payments under this Agreement, paid or incurred in connection with investigating, defending, being a witness in, or participating in (including on appeal), or preparing for any of the foregoing in, any Proceeding relating to any Indemnifiable Event. (d) Indemnifiable Event: any event or occurrence that takes place either prior to or after the effective date of this Agreement, related to the fact that Indemnitee is or was a director or an officer of the Company, or while a director or officer is or was serving at the request of the Company as a director, officer, employee, trustee, agent, or fiduciary of another foreign or domestic corporation, partnership, joint venture, employee benefit plan, trust, or other enterprise, or was a director, officer, employee, or agent of a foreign or domestic corporation that was a predecessor corporation of the Company or of another enterprise at the request of such predecessor corporation, or related to anything done or not done by Indemnitee in any such capacity. (e) Independent Counsel: the person or body appointed in connection with Section 3. (f) Potential Change In Control: shall be deemed to have occurred if (i) the Company enters into an agreement or arrangement, the consummation of which would result in the occurrence of a Change in Control, (ii) any person (including the Company) publicly announces an intention to take or to consider taking actions that, if consummated, would constitute a Change in Control, (iii) any person (other than an Excluded Person) who is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding Voting Securities, increases his beneficial ownership of such securities by 5% or more over the percentage so owned by such person on the date hereof, or (iv) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (g) Proceeding: (i) any threatened, pending, or complete action, suit, or proceeding, whether civil, criminal, administrative, investigative, or other, or (ii) any inquiry, hearing, or investigation, whether conducted by the Company or any other party, that Indemnitee in good faith believes might lead to the institution of any such action, or proceeding. 2 (h) Reviewing Party: the person or body appointed in accordance with Section 3. (i) Voting Securities: any securities of the Company that vote generally in the election of directors. 2. Agreement To Indemnify. ---------------------- (a) General Agreement. In the event Indemnitee was, is, or become a ----------------- party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a Proceeding by reason of (or arising in part out of) an Indemnifiable Event, the Company shall indemnify Indemnitee from and against any and all Expenses to the fullest extent permitted by law, as the same exists or may hereafter be amended or interpreted (but in the case of any such amendment or interpretation, only to the extent that such amendment or interpretation permits the Company to provide broader indemnification rights than were permitted prior thereto). The parties hereto intend that this Agreement shall provide for indemnification in excess of that expressly permitted by statute, including, without limitation, any indemnification provided by the Company's Amended and Restated Certificate of Incorporation, its bylaws, vote of its stockholders or disinterested directors, or applicable law. (b) Initiation Of Proceeding. Notwithstanding anything in this ------------------------ Agreement to the contrary, Indemnitee shall not be entitled to indemnification pursuant to this Agreement in connection with any Proceeding initiated by Indemnitee against the Company or any director or officer of the Company unless (i) the Company has joined in or the Board has consented to the initiation of such Proceeding, (ii) the Proceeding is one to enforce indemnification rights under Section 5, or (iii) the Proceeding is instituted after a Change in Control and Independent Counsel has approved its initiation. (c) Expense Advances. If so requested by Indemnitee, the Company ---------------- shall advance (within ten business days of such request) any and all Expenses to Indemnitee (an "Expense Advance"); provided that such request shall be accompanied by reasonable evidence of the expenses incurred by Indemnitee and that, if and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid. If Indemnitee has commenced legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, as provided in Section 4, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or have lapsed). (d) Mandatory Indemnification. Notwithstanding any other provision of ------------------------- this Agreement (other than Section 2(f) below), to the extent that Indemnitee has been successful on the merits in defense of any Proceeding relating in whole or in part to an Indemnifiable Event or in defense of any issue or matter therein, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 3 EX-10.2 6 1998 STOCK OPTION PLAN Exhibit 10.2 MORE.COM, INC. 1998 STOCK OPTION PLAN Amended and Restated January __, 2000 1. Adoption and Purpose of the Plan. This stock option plan, to be -------------------------------- known as the "More.com 1998 Stock Option Plan" (the "Plan") has been adopted by the board of directors (the "Board") of More.com, Inc. (the "Company"), and is subject to the approval of its shareholders pursuant to section 7 below. The purpose of this Plan is to advance the interests of the Company and its shareholders by enabling the Company to attract and retain qualified directors, officers, employees, independent contractors, consultants and advisers by providing them with an opportunity for investment in the Company. The options that may be granted hereunder ("Options") represent the right by the grantee thereof ("Optionee") to acquire shares of the Company's common stock ("Shares" which if acquired pursuant to the exercise of an Option will be referred to as "Option Shares") subject to the terms and conditions of this Plan and a written agreement between the Company and the Optionee to evidence each such Option (an "Option Agreement"). 2. Certain Definitions. The defined terms set forth in Exhibit A ------------------- --------- attached hereto and incorporated herein (together with other capitalized terms defined elsewhere in this Plan) will govern the interpretation of this Plan. 3. Eligibility. The Company may grant Options under this Plan only to ----------- (i) persons who, at the time of such grant, are directors, officers and/or employees of the Company and/or any of its Subsidiaries, and (ii) persons who, and entities which, at the time of such grant, are independent contractors, consultants or advisers of the Company and/or any of its Subsidiaries ("Eligible Participants"). Subject to the provisions of section 4 of this Plan, there is no limitation on the number of Options that may be granted to an Eligible Participant. 4. Option Pool; Shares Reserved for Options. In no event will the ---------------------------------------- Company issue, in the aggregate, more than 12,117,500 Shares (the "Option Pool") pursuant to the exercise of all Options granted under this Plan, exclusive of those Option Shares that may be reacquired by the Company by repurchase or otherwise; provided that in order to comply with the requirements of Section 260.140.45 of Title 10 of the California Code of Regulations (the "30% Rule"), at no time will the total number of Shares that either (x) may be acquired pursuant to the exercise of all outstanding Options granted hereunder or under any other outstanding options or warrants issued by the Company (exclusive of certain excluded rights and warrants described in the 30% Rule), or (y) are provided for under any stock bonus or similar plan of the Company, in the aggregate exceed 30% of the total number of then issued and outstanding Shares of the Company (including shares of convertible preferred stock or convertible senior common stock on an as converted basis), unless a percentage higher than 30% has been approved by at least two-thirds of the outstanding Shares of the Company entitled to vote. At all times while Options granted under this Plan are outstanding, the Company will reserve for issuance for the purposes hereof a sufficient number of authorized and unissued Shares to fully satisfy the Company's obligations under all such outstanding Options. 5. Administration. This Plan will be administered and interpreted by -------------- the Board, or by a committee consisting of two or more members of the Board, appointed by the Board for such purpose (the Board, or such committee, referred to herein as the "Administrator"). Subject to the express terms and conditions hereof, the Administrator is authorized to prescribe, amend and rescind rules and regulations relating to this Plan, and to make all other determinations necessary or advisable for its administration and interpretation. Specifically, the Administrator will have full and final authority in its discretion, subject to the specific limitations on that discretion as are set forth herein and in the Articles of Incorporation or Bylaws of the Company at any time: (a) to select and approve the Eligible Participants to whom Options will be granted; provided that no Option may be granted to any person after he or she ceases, or to any entity after it ceases, for any reason, to be an Eligible Participant (a "Loss of Eligibility Status"); (b) to determine the Fair Market Value of the Shares as of the Grant Date for any Option; (c) with respect to each Option, to determine the terms and conditions of the Option, to be set forth in the Option Agreement evidencing the Option (the form of which also being subject to approval by the Administrator), which may vary from the "default" terms and conditions set forth in section 6 below, except to the extent otherwise provided, including, without limitation, as follows: (i) the total number of Option Shares that may be acquired by the Optionee pursuant to the Option; (ii) whether the Option granted to an employee of the Company or its Subsidiary will be designated an ISO; if an Option does not expressly so indicate, the Option will not be deemed designated an ISO; (iii) the per share purchase price to be paid to the Company by the Optionee to acquire the Option Shares issuable upon exercise of the Option (the "Option Price"); provided that the Option Price will not be less than 85% of the Fair Market Value of the Shares as of the Grant Date, unless the Optionee is a 10% shareholder, in which case the Option Price will not be less than 110% of such Fair Market Value; (iv) the maximum period or term during which the Option will be exercisable (the "Option Term"), provided that in no event may the Option Term be longer than 10 years from the Grant Date; (v) the maximum period following any Loss of Eligibility Status with respect to the Optionee, whether resulting from his or her death, disability or any other reason, during which period (the "Grace Period") the Option will be exercisable and to the expiration of the Option Term, provided that in no event may the Administrator designate a Grace Period that is shorter than six months after such Loss of Eligibility Status by reason of the Optionee's death or disability, or 30 days after such Loss of Eligibility Status for any other reason, 2 except in the event of a Just Cause Termination, in which case no Grace Period will be required (i.e., the Option will terminate immediately); (vi) whether to accept a promissory note or other form of payment as a form of legal consideration in addition to cash as payment of all or a portion of the Option Price and/or Tax Withholding Liability to be paid by the Optionee upon the exercise of an Option granted hereunder; (vii) the conditions (e.g., the passage of time or the occurrence of events), if any, that must be satisfied prior to the vesting of the right to exercise all or specified portions of an Option (such portions being described as a percentage of the total number of Option Shares that may be acquired by the Optionee pursuant to the Option; the vested portion being referred to as a "Vested Option" and the unvested portion being referred to as an "Unvested Option"); provided that no such conditions (except the Loss of Eligibility Status of the Optionee, after which no Unvested Option will become a Vested Option) may be imposed which prevents an Optionee who is an employee, but who is neither an officer or director, of the Company or any of its Subsidiaries, from purchasing at least 20% of the Option Shares initially subject to the Option as of the first anniversary of the Grant Date, and as of each anniversary thereafter, such that by the fifth anniversary of the Grant Date (assuming no such Loss of Eligibility Status) the entire Option would be deemed a Vested Option; and (viii) in addition, or as an alternative, to imposing conditions on the right to exercise an Option as provided in section 5(c)(vii) above, whether any portion of the Option Shares acquired by an Optionee upon exercise of an Option will be subject to repurchase by the Company or its assigns pursuant to section 6.8(c) below at the Option Price paid for such Shares (such Shares, if subject to repurchase at less than Fair Market Value, being referred to as "Unvested Shares") following a Termination of Eligibility Status or other designated event, and the conditions (e.g., the passage of time or the occurrence of events), if any, that must be satisfied for such Shares to be no longer subject to such right of repurchase at such Option Price (such Shares being referred to as "Vested Shares"); provided that no such conditions (except an Optionee's Termination of Eligibility Status, after which no Unvested Shares will become Vested Shares) may be imposed which prevent Unvested Shares held by an employee, who is neither an officer or director, of the Company and/or any of its Subsidiaries, from becoming Vested Shares at the rate of at least twenty percent (20%) per year following the Grant Date, such that by the fifth anniversary of the Grant Date (assuming no earlier Termination of Eligibility Status) all of the Shares would be deemed Vested Shares; (d) to delegate all or a portion of the Administrator's authority under sections 5(a), (b) and (c) above to one or more members of the Board who also are executive officers of the Company, and subject to such restrictions and limitations as the Administrator may decide to impose on such delegation. 6. Default Terms and Conditions of Option Agreements. Unless otherwise ------------------------------------------------- 3 expressly provided in an Option Agreement based on the Administrator's determination pursuant to section 5(c) above, the following terms and conditions will be deemed to apply to each Option as if expressly set forth in the Option Agreement, provided that in no event may an Option Agreement modify the provisions of section 6.7(a): 6.1 ISO. If an Option is granted to an Eligible Participant who, as of --- the Grant Date, is an employee of the Company or any Subsidiary (as determined under Section 3401(c) of the Code), and the Option is designated by the Administrator as an ISO and the Option Agreement so states, then the Option will be subject to the following additional terms and conditions: (a) To the extent that the Fair Market Value of Option Shares (determined as of the Grant Date) with respect to which all ISOs are exercisable for the first time by any individual during any calendar year (pursuant to this Plan and all other plans of the Company and/or its Subsidiaries) exceeds $100,000, the Option will not be treated as an ISO. (b) The Option Price will not be less than 100% of the Fair Market Value of the Shares as of the Grant Date, except that if the Optionee is a 10% shareholder the Option Price will not be less than 110% of the Fair Market Value of the Shares as of the Grant Date, and the Option Term may not be more than five (5) years. (c) Notwithstanding any Grace Period selected by the Administrator pursuant to section 5(c)(v) above, or the default provisions of section 6.3 below, the tax treatment available pursuant to Section 422 of the Code upon the exercise of the ISO will not be available to an Optionee who exercises the Option (if permitted to do so) more than (i) three months following the Optionee's Loss of Eligibility Status other than by reason of his or her death or disability, or (ii) 12 months following such Optionee's Loss of Eligibility Status by reason or his or her disability, whichever case may be applicable. 6.2 Option Term. The Option Term will be for a period of 10 years ----------- beginning on the Grant Date (subject to section 6.1(b) above in the case of an ISO granted to a 10% shareholder). 6.3 Grace Periods. Following a Loss of Eligibility Status: ------------- (a) the Grace Period will be sixty days, unless the Loss of Eligibility Status is a result of a Just Cause Termination or the death or disability of the Optionee; (b) the Grace Period will be six months if the Loss of Eligibility Status is a result of the death or disability of the Optionee; (c) the Option will terminate, and there will be no Grace Period, effective immediately as of the date and time of a Loss of Eligibility Status which results from a Just Cause Termination of the Optionee, regardless of whether the Option is Vested or Unvested; and (d) in all events following a Loss of Eligibility Status, no portion of an Option may be exercised as would result in the purchase of Unvested Shares. 4 6.4 Vesting. Section 5(c)(viii), and not section 5(c)(vii), will apply to ------- the Option. The shares into which the Option is exercisable initially will be deemed entirely Unvested Shares, but portions of the shares into which the Option is exercisable will become Vested Shares on the following schedule: (a) twenty-five percent (25%) will become Vested Shares as of the first anniversary of the "Vesting Start Date" specified in the Option Agreement (which may be earlier than the Grant Date specified therein); (b) the balance of the shares into which the Option is exercisable will become Vested Shares pro rata monthly over the three year period commencing with the first anniversary of such Vesting Start Date; and (c) upon a Change of Control Transaction, an additional twelve and one- half percent (12.5%) of the shares into which the Option is exercisable will become Vested Shares; provided however that such percentage will be increased to twenty-five percent (25%) if the Optionee is employed by the Company immediately prior to the Change of Control Transaction and is laid off, or is scheduled to be laid off, by the Successor Entity as of the time of the Change of Control Transaction. provided that the Optionee does not suffer a Loss of Eligibility Status prior to each such vesting date and provided further that additional vesting will be suspended during any period while the Optionee is on a leave of absence from the Company, as determined by the Administrator. 6.5 Exercise of the Option; Issuance of Share Certificate. ----------------------------------------------------- (a) Subject to section 6.5(d) below, the portion of the Option that is a Vested Option may be exercised by giving written notice thereof to the Company, on such form as may be specified by the Administrator, but in any event stating: the Optionee's intention to exercise the Option; the date of exercise; the number of full Option Shares to be purchased (which number will be no less than 100 Shares, without regard to adjustments to the number of Shares subject to the Option pursuant to section 8 below, or, if less, all of the remaining Shares subject to the Option); the amount and form of payment of the Option Price; and such assurances of the Optionee's investment intent as the Company may require to ensure that the transaction complies in all respects with the requirements of the 1933 Act and other applicable securities laws. The notice of exercise will be signed by the person or persons exercising the Option. In the event that the Option is being exercised by the representative of the Optionee, the notice will be accompanied by proof satisfactory to the Company of the representative's right to exercise the Option. The notice of exercise will be accompanied by full payment of the Option Price for the number of Option Shares to be purchased, in United States dollars, in cash, by check made payable to the Company, or by delivery of such other form of payment (if any) as approved by the Administrator in the particular case. (b) To the extent required by applicable federal, state, local or foreign law, and as a condition to the Company's obligation to issue any Shares upon the exercise of the Option in full or in part, the Optionee will make arrangements satisfactory to the Company for the payment of any applicable Tax Withholding Liability that may arise by reason of or in 5 connection with such exercise. Such arrangements may include, in the Company's sole discretion, that the Optionee tender to the Company the amount of such Tax Withholding Liability, in cash, by check made payable to the Company, or in the form of such other payment as may be approved by the Administrator, in its discretion pursuant to section 5(c)(vi) above. (c) After receiving a proper notice of exercise and payment of the applicable Option Price and Tax Withholding Liability, the Company will cause to be issued a certificate or certificates for the Option Shares as to which the Option has been exercised, registered in the name of the person rightfully exercising the Option and the Company will cause such certificate or certificates to be delivered to such person. 6.6 Compliance with Law. Notwithstanding any other provision of this ------------------- Plan, Options may be granted pursuant to this Plan, and Option Shares may be issued pursuant to the exercise thereof by an Optionee, only after and on the condition that there has been compliance with all applicable federal and state securities laws. The Company will not be required to list, register or qualify any Option Shares upon any securities exchange, under any applicable state, federal or foreign law or regulation, or with the Securities and Exchange Commission or any state agency, or secure the consent or approval of any governmental regulatory authority, except that if at any time the Board determines, in its discretion, that such listing, registration or qualification of the Option Shares, or any such consent or approval, is necessary or desirable as a condition of or in connection with the exercise of an Option and the purchase of Option Shares thereunder, that Option may not be exercised, in whole or in part, unless and until such listing, registration, qualification, consent or approval is effected or obtained free of any conditions that are not acceptable to the Board, in its discretion. However, the Company will seek to register or qualify with, or as may be provided by applicable local law, file for and secure an exemption from such registration or qualification requirements from, the applicable securities administrator and other officials of each jurisdiction in which an Eligible Participant would be granted an Option hereunder prior to such grant. 6.7 Restrictions on Transfer. ------------------------ (a) Options Nontransferable. No Option will be transferable by an ----------------------- Optionee otherwise than by will or the laws of descent and distribution. During the lifetime of a natural person who is granted an Option under this Plan, the Option will be exercisable only by him or her. (b) Prohibited Transfers. Prior to the Initial Public Offering, no -------------------- Holder of any Option Shares may Transfer such Shares, or any interest therein: (i) except as expressly provided in this Plan; and (ii) in full compliance with all applicable securities laws. All Transfers of Option Shares not complying with the specific limitations and conditions set forth in this section 6.7 and section 6.8 below are expressly prohibited. Any prohibited Transfer is void and of no effect, and no purported transferee in connection therewith will be recognized as a Holder of Option Shares for any purpose whatsoever. Should such a Transfer purport to occur, the Company may refuse to carry out the Transfer on its books, attempt to set aside the Transfer, enforce any undertakings or rights under this Plan, or exercise any other legal or equitable remedy. 6 (c) Conditions to Transfer. It will be a condition to any Transfer of ---------------------- any Option Shares that: (i) the transferee of the Shares will execute such documents as the Company may reasonably require to ensure that the Company's rights under this Plan, and any applicable Option Agreement, are adequately protected with respect to such Shares, including, without limitation, the transferee's agreement to be bound by all of the terms and conditions of this Plan and such Agreement, as if he or she were the original Holder of such Shares; and (ii) the Company is satisfied that such Transfer complies in all respects with the requirements imposed by applicable state and federal securities laws and regulations. (d) Market Standoff. If in connection with any public offering of --------------- securities of the Company (or any Successor Entity), the underwriter or underwriters managing such offering so requests, then each Optionee and each Holder of Option Shares will agree to not sell or otherwise Transfer any such Shares (other than Shares included in such underwriting) without the prior written consent of such underwriter, for such period of time as may be requested by the underwriter (not to exceed 210 days) commencing on the effective date of the registration statement filed with the Securities and Exchange Commission in connection with such offering. 6.8 Rights of Purchase and First Refusal. The Company will have the ------------------------------------ following rights of purchase and first refusal with respect to Option Shares, provided that the rights set forth in sections (a) and (b) will terminate upon the closing of the Initial Public Offering: (a) Right of First Refusal. If any Holder proposes to Transfer any ---------------------- Option Shares, other than in the case of an Involuntary or Donative Transfer subject to section 6.8(b) below, the Company will have an assignable right of first refusal to purchase such Shares on the terms and conditions set out in this section 6.8(a). If the Company (or its assignee) elects to exercise such right, it will do so on an all-or-nothing basis with respect to any particular Transfer of Shares in the following manner: (i) Before any such Transfer, the Holder proposing to Transfer such Shares will deliver a notice of proposed Transfer (a "Proposed Transfer Notice") to the Company stating: the number of Option Shares that the Holder proposes to Transfer and the Holder's bona fide intention to Transfer such Shares; the names and addresses of the Holder, the proposed transferee and subsequently such other information regarding such transferee as the Company reasonably requests; the manner and date of such proposed Transfer; and the bona fide cash price and/or other consideration (and the fair market value thereof) per share, if any, that such Transferee has offered to pay Holder for such Shares (the "Offered Price") as well as such other terms, including payment terms, and conditions, if any, as were included in such offer (the "Offered Terms"). (ii) The Company (or its assignee) may exercise its right of first refusal under this section 6.8(a) at any time not more than thirty (30) days after the Company has received the Proposed Transfer Notice with respect to such Shares. If the Company (or its assignee) elects to exercise such purchase rights it will do so by delivering to the Holder of such Shares a notice of such election and a closing date that is no more than 7 sixty (60) days after receipt of the Proposed Transfer Notice (or such later date as the transferee may have offered or on which the Transfer is otherwise scheduled to occur). (iii) At the closing of the sale of the Shares to the Company (or its assignee), to be held at its principal executive offices, the Company (or its assignee) will pay the Holder of the Shares, in cash, the purchase price equal to the Offered Price, subject to an appropriate adjustment to take into account any deferred payment terms that were included in the Offered Terms, except in the case of a Transfer of Option Shares without consideration; provided that if the Offered Price includes any non-cash consideration, the value thereof for purposes of this section 6.8(a) will be determined in good faith by the Board. (iv) If the Company (including its assignees) fails or refuses to exercise its rights under this section 6.8(a) with respect to any Shares that are the subject of any Proposed Transfer Notice, then the Holder will have the right to Transfer such Shares to the transferee named in such Notice at the Offered Price and upon such Offered Terms as were set forth in such Notice; provided that such Transfer must be completed within ninety (90) days after the Company has received the Proposed Transfer Notice with respect to such Shares. (b) Following an Involuntary or Donative Transfer. Following any --------------------------------------------- Involuntary Transfer or Donative Transfer of Option Shares (the "Transferred Shares"), the Company will have the assignable right to purchase from the transferee of the Transferred Shares ("Transferee") all or a portion of such Shares for a purchase price that is equal to the Fair Market Value of those Shares as of the date of such Transfer. If the Company (or its assignee) elects to exercise such right, it will do so in the following manner: (i) Promptly after such Transfer, the transferor of the Transferred Shares will deliver, or will cause the Transferee to deliver, a notice (a "Completed Transfer Notice") to the Company stating: the number of Transferred Shares; the names and addresses of the transferor and the Transferee, and subsequently such other information regarding the Transferee as the Company reasonably requests; and the manner, circumstances and date of such Transfer. (ii) The Company (or its assignee) may exercise its purchase rights under this section 6.8(b) at any time not more than ninety (90) days after the Company has received the Completed Transfer Notice with respect to the Transferred Shares. If the Company (or its assignee) elects to exercise such purchase rights it will do so by delivering to the Transferee a notice of such election, specifying the number of Transferred Shares to be purchased and a closing date that is no more than sixty (60) days after the giving of such notice. (iii) At such closing, to be held at the Company's principal executive offices, the Company (or its assignee) will pay the Transferee the purchase price specified in this section 6.8(b). (c) Following a Loss of Eligibility Status. Following any Loss of -------------------------------------- Eligibility Status by the Original Holder of an Option, the Company will have the assignable right (but not the obligation) to purchase from the Holder of Shares acquired pursuant to the exercise of 8 the Option (except to the extent that such Shares previously were transferred in a transaction as to which section 6.8(a) or (b) applied), all or a portion of such Shares that are Unvested Shares as of the date of Loss of Eligibility Status for a purchase price that is equal to the Option Price per Share paid upon the exercise of the Option. Such right will be exercisable in the following manner: (i) The Company (or its assignee) may exercise its right of repurchase under this section 6.8(c) at any time not more than ninety (90) days after the effective date of the Loss of Eligibility Status of the Original Holder of the Option (or in the case of Shares issued upon the exercise of Options after such Loss of Eligibility Status, a period of ninety (90) days after the date of the exercise). If the Company (or its assignee) elects to exercise such purchase rights it will do so by delivering to the Holder of such Shares a notice of such election, specifying the number of Shares to be purchased and a closing date that is within such ninety (90) day period. (ii) At such closing, to be held at the Company's principal executive offices, the Company (or its assignee) will pay the Holder of the Shares, the purchase price, as specified in this section 6.8(c), in cash, or by cancellation of indebtedness to the Company, if any, incurred by the original purchaser of the Option Shares to purchase the same, or both, at a closing to be held at the Company's principal executive offices on the date specified in such notice. (d) Escrow. For purposes of facilitating the enforcement of the ------ restrictions on Transfer set forth in this Plan or in any Option Agreement, the Administrator may, at its discretion, require the Holder of Option Shares to deliver the certificate(s) for such Shares with a stock power executed by him or her and by his or her spouse (if required for Transfer), in blank, to the Secretary of the Company or his or her designee, to hold said certificate(s) and stock power(s) in escrow and to take all such actions and to effectuate all such Transfers and/or releases as are in accordance with the terms of this Plan. The certificates may be held in escrow so long as the Option Shares whose ownership they evidence are subject to any right of repurchase or first refusal under this Plan or under an Option Agreement, and shall be released by the escrow holder to an Optionee (or to any permitted transferee of the Optionee) when they are no longer subject to any right of repurchase or first refusal under this Plan or under the Option Agreement. Each Optionee, by exercising an Option, thereby acknowledges that the Secretary of the Company (or his or her designee) is so appointed as the escrow holder with the foregoing authorities as a material inducement to the grant of an Option under this Plan, that the appointment is coupled with an interest, and that it accordingly will be irrevocable. The escrow holder will not be liable to any party to an Option Agreement (or to any other party) for any actions or omissions unless the escrow holder is grossly negligent relative thereto. The escrow holder may rely upon any letter, notice or other document executed by any signature purported to be genuine. 6.9 Change of Control Transactions. Notwithstanding any other ------------------------------ provision of this Plan, in the event of a Change of Control Transaction (as defined herein): (a) with respect to all Options that have been granted hereunder and that are outstanding as of the consummation of such Change of Control Transaction, the Board, in its sole discretion, may determine that it is in the best interests of the Company, and if so may take all appropriate action either to: 9 (i) cancel all such Options effective as of the consummation of the Change of Control Transaction and, in connection with each Option, any portion of which is a Vested Option, notify the Optionee of the proposed Change of Control Transaction reasonably prior to its consummation so that the Optionee will have an opportunity to exercise the Vested Option immediately prior to such consummation; or (ii) require the Successor Entity in such Change of Control Transaction to assume the outstanding Options or substitute therefor comparable options of such Successor Entity (or of its parent or its Subsidiary); and (b) with respect to all Option Shares that have been issued and that are outstanding as of the consummation of such Change of Control Transaction, the Company will have the right (but not the obligation) to repurchase all (but not less than all) of such Shares by paying each Holder thereof cash, or cancelling any indebtedness of such Holder to the Company, or both, at a closing to be held contemporaneously with the consummation of the Change of Control Transaction, provided that the repurchase price for such Shares will be an amount per Share that is equal to the Fair Market Value of the relevant Class of Shares based on the Board's good faith estimate of the valuation of the Company implied by the estimated fair market value of the total consideration to be paid in connection with the Change of Control Transaction. For purposes of this section 6.9, the term "Change of Control Transaction" means a Business Combination in which less than 50% of the outstanding voting securities of the Successor Entity immediately following the Closing of the Business Combination transaction are beneficially held by those persons and entities in the same proportion as such persons and entities beneficially held the voting securities of the Company immediately prior to such transaction; the term "Business Combination" means a transaction or series of transactions consummated within any period of 90 days resulting in (A) the sale of all or substantially all of the assets of the Company, (B) a merger or consolidation or other reorganization of which the Company or a Subsidiary is a merging party, or (C) the sale or other change of beneficial ownership of at least 33-1/3% of the outstanding voting securities of the Company. 6.10 Additional Restrictions on Transfer; Investment Intent. By accepting ------------------------------------------------------ an Option and/or Option Shares under this Plan, the Optionee will be deemed to represent, warrant and agree that, unless a registration statement is in effect with respect to the offer and sale of Option Shares: (i) neither the Option nor any such Shares will be freely tradeable and must be held indefinitely unless such Option and such Shares are either registered under the 1933 Act or an exemption from such registration is available; (ii) the Company is under no obligation to register the Option or any such Shares; (iii) upon exercise of the Option, the Optionee will purchase the Option Shares for his or her own account and not with a view to distribution within the meaning of the 1933 Act, other than as may be effected in compliance with the 1933 Act and the rules and regulations promulgated thereunder; (iv) no one else will have any beneficial interest in the Option Shares; (v) the Optionee has no present intention of disposing of the Option Shares at any particular time; and (vi) neither the Option nor the Shares have been qualified under the securities laws of any state and may only be offered and sold pursuant to an exception from qualification under applicable state securities laws. 6.11 Stock Certificates; Legends. Certificates representing Option Shares --------------------------- will bear all legends required by law and necessary or appropriate in the Administrator's discretion to 10 effectuate the provisions of this Plan and of the applicable Option Agreement. The Company may place a "stop transfer" order against Option Shares until full compliance with all restrictions and conditions set forth in this Plan, in any applicable Option Agreement and in the legends referred to in this section 6.11. 6.12 Notices. Any notice to be given to the Company under the terms of an ------- Option Agreement will be addressed to the Company at its principal executive office, Attention: President, or at such other address as the Company may designate in writing. Any notice to be given to an Optionee will be addressed to him or her at the address provided to the Company by the Optionee. Any such notice will be deemed to have been duly given if and when enclosed in a properly sealed envelope, addressed as aforesaid, deposited, postage prepaid, in a post office or branch post office regularly maintained by the local postal authority. 7. Term of the Plan. This Plan will become effective on the date of ---------------- its adoption by the Board, provided this Plan is approved by the shareholders of the Company (excluding Option Shares issued by the Company pursuant to the exercise of Options granted under this Plan) within 12 months before or after that date. If this Plan is not so approved by the shareholders of the Company within that 12-month period of time, any Options granted under this Plan will be rescinded and will be void. This Plan will expire on the tenth (10th) anniversary of the date of its adoption by the Board or its approval by the shareholders of the Company, whichever is earlier, unless it is terminated earlier pursuant to section 11 of this Plan, after which no more Options may be granted under this Plan, although all outstanding Options granted prior to such expiration or termination will remain subject to the provisions of this Plan, and no such expiration or termination of this Plan will result in the expiration or termination of any such Option prior to the expiration or early termination of the applicable Option Term. 8. Adjustments Upon Changes in Stock; Rights Offering. In the event -------------------------------------------------- of any change in the outstanding Shares of the Company as a result of a stock split, reverse stock split, stock bonus or distribution, recapitalization, combination or reclassification, appropriate proportionate adjustments will be made in: (i) the aggregate number of Shares that are reserved for issuance in the Option Pool pursuant to section 4 above, under outstanding Options or future Options granted hereunder; (ii) the Option Price and the number of Option Shares that may be acquired under each outstanding Option granted hereunder; and (iii) other rights and matters determined on a per share basis under this Plan or any Option Agreement evidencing an outstanding Option granted hereunder. Any such adjustments will be made only by the Board, and when so made will be effective, conclusive and binding for all purposes with respect to this Plan and all Options then outstanding. No such adjustments will be required by reason of the issuance or sale by the Company for cash or other consideration of additional Shares or securities convertible into or exchangeable for Shares. In the event that the Company participates in any transaction incident to which the business of the Company is transferred to a corporation or other entity, whether by merger, transfer of assets or otherwise, and incident to which not less than sixty-six and two-thirds percent (66.67%) of the outstanding voting securities of the Successor Entity are beneficially held by those persons and entities who held a majority of the voting securities of the Company immediately prior to such transaction and whose ownership in the Successor Entity is in the same relative proportion as their ownership in the Company, then the Company will require the Successor Entity to substitute for Options hereunder comparable options in such Successor Entity, in which event this Plan and all Option Agreements hereunder shall terminate. 11 9. Modification, Extension and Renewal of Options; Governing Law. ------------------------------------------------------------- Subject to the terms and conditions and within the limitations of this Plan, the Administrator may modify, extend or renew outstanding Options granted under this Plan, or accept the surrender of outstanding Options (to the extent not theretofore exercised) and authorize the granting of new Options in substitution therefor (to the extent not theretofore exercised). Notwithstanding the foregoing, however, no modification of any Option will, without the consent of the Optionee, alter or impair any rights or obligations under any outstanding Option. This Plan will be governed by, and construed in accordance with, the substantive laws of the State of California. 10. Amendment and Discontinuance. The Board may amend, suspend or ---------------------------- discontinue this Plan at any time or from time to time; provided that no action of the Board will cause ISOs granted under this Plan not to comply with Section 422 of the Code unless the Board specifically declares such action to be made for that purpose and provided further that no such action may, without the approval of the shareholders of the Company, materially increase (other than by reason of an adjustment pursuant to section 8 hereof) the maximum aggregate number of Option Shares in the Option Pool, materially increase the benefits accruing to Eligible Participants, or materially modify the category of, or eligibility requirements for persons who are Eligible Participants. However, no such action may alter or impair any Option previously granted under this Plan without the consent of the Optionee, nor may the number of Option Shares in the Option Pool be reduced to a number that is less than the aggregate number of Option Shares (i) that may be issued pursuant to the exercise of all outstanding and unexpired Options granted hereunder, and (ii) that have been issued and are outstanding pursuant to the exercise of Options granted hereunder. 11. Information Provided by Company. Prior to the date on which the ------------------------------- Company is required to file its annual financial statements with the Securities and Exchange Commission under the Securities Exchange Act of 1934, the Company annually will make available to each Optionee the Company's financial statements (which statements need not be audited), and each Optionee will, by virtue of entering into an Option Agreement, be deemed to have agreed (and to cause any investment advisers to whom the Optionee proposes to make such information available to agree) to keep such information confidential and not to use, disclose or copy such information for any purpose whatsoever other than determining whether to exercise an Option. The Company deems such financial statements to be the valuable trade secrets of the Company, and in the event of any wrongful use, disclosure or other breach of the obligation to maintain the confidentiality of such financial information, the Company may seek to enforce all of its available legal and equitable rights and remedies, and may notify local law enforcement officials that a criminal misappropriation of the Company's trade secrets has taken place. 12. No Shareholder Rights. No rights or privileges of a shareholder --------------------- in the Company are conferred by reason of the granting of an Option. No Optionee will become a shareholder in the Company with respect to any Option Shares unless and until the Option has been properly exercised and the Option Price fully paid as to the portion of the Option exercised. 13. Copies of Plan. A copy of this Plan will be delivered to each -------------- Optionee at or before the time he or she executes an Option Agreement. 12 More.com, Inc. 1998 Stock Option Plan Exhibit A Definitions ----------- 1. "10% shareholder" means a person who owns, either directly or indirectly by virtue of the ownership attribution provisions set forth in Section 424(d) of the Code at the time he or she is granted an Option, stock possessing more than 10% of the total combined voting power or value of all classes of stock of the Company and/or of its Subsidiaries. 2. "1933 Act" means the Securities Act of 1933, as amended. 3. "Administrator" has the meaning set forth in section 5 of the Plan. 4. "Board" has the meaning set forth in section 1 of the Plan. 5. "Business Combination" has the meaning set forth in section 6.9 of the Plan. 6. "Change of Control Transaction" has the meaning set forth in section 6.9 of the Plan . 7. "Closing" has the meaning set forth in section 6.9 of the Plan. 8. "Code" means the Internal Revenue Code of 1986, as amended (references herein to Sections of the Code are intended to refer to Sections of the Code as enacted at the time of the Plan's adoption by the Board and as subsequently amended, or to any substantially similar successor provisions of the Code resulting from recodification, renumbering or otherwise). 9. "Company" has the meaning set forth in section 1 of the Plan. 10. "Completed Transfer Notice" has the meaning set forth in section 6.8(b) of the Plan. 11. "disability" means permanent and total disability within the meaning of Section 22(e)(3) of the Code. 12. "Donative Transfer" with respect to Option Shares means any voluntary Transfer by a transferor other than for value or the payment of consideration to the transferor. A Donative Transfer will include, without limitation: (i) a Transfer by will or under the laws of descent and distribution; or (ii) a Transfer by a Holder of Option Shares to his or her ancestors, descendants or spouse (other than pursuant to a decree of divorce, dissolution or separate maintenance, a property settlement, or a separation agreement or any similar agreement or arrangement with a spouse, except for bona fide estate planning 13 purposes), or to a trust, partnership, limited liability company, custodianship or other fiduciary account for the benefit of the Holder and/or such ancestors, descendants or spouse, including any Transfer in the form of a distribution from any such trust, partnership, limited liability company, custodianship or other fiduciary account to any of the foregoing permitted beneficial owners or beneficiaries thereof. 13. "Eligible Participants" has the meaning set forth in section 3 of the Plan. 14. "Fair Market Value" means, with respect to the Shares and as of the date that is relevant to such a determination (e.g., on the Grant Date), the market price per share of such Shares determined by the Administrator, consistent with the requirements of Section 422 of the Code and to the extent consistent therewith, as follows: (a) if the Shares are traded on a stock exchange on the date in question, then the Fair Market Value will be equal to the closing price reported by the applicable composite-transactions report for such date; (b) if the Shares are traded over-the-counter on the date in question and are classified as a national market issue, then the Fair Market Value will be equal to the last-transaction price quoted by the NASDAQ system for such date; (c) if the Shares are traded over-the-counter on the date in question but are not classified as a national market issue, then the Fair Market Value will be equal to the mean between the last reported representative bid and asked prices quoted by the NASDAQ system for such date; and (d) if none of the foregoing provisions is applicable, then the Fair Market Value will be determined by the Administrator in good faith on such basis as it deems appropriate, taking into consideration the provisions of Section 260.140.50 of Title 10 of the California Code of Regulations. 15. "Grace Period" has the meaning set forth in section 5(c)(v) of the Plan. 16. "Grant Date" means, with respect to an Option, the date on which the Option Agreement evidencing that Option is entered into between the Company and the Optionee, or such other date as may be set forth in that Option Agreement as the "Grant Date" which will be the effective date of that Option Agreement. 17. "Holder" means the holder of any Option Shares. 18. "Initial Public Offering" means the closing of the first sale of securities of the Company, or of any Successor Entity, to the public, through a firm commitment underwriting, for an aggregate price (exclusive of underwriters' discounts and commissions and expenses of the offering) of at least fifteen million dollars ($15,000,000), pursuant to an effective registration statement filed with the Securities and Exchange Commission under the 1933 Act. 19. "Involuntary Transfer" with respect to Option Shares includes, without limitation, any of the following: (A) an assignment of the Shares for the benefit of creditors of the transferor; (B) a Transfer by operation of law; (C) an execution of judgment against the Shares or the acquisition of record or beneficial ownership of Shares by a lender or creditor; (D) a Transfer pursuant to any decree of divorce, dissolution or separate maintenance, any property settlement, any separation agreement or any other agreement with a spouse (except for bona fide estate planning purposes) under which any 14 Shares are Transferred or awarded to the spouse of the transferor or are required to be sold; or (E) a Transfer resulting from the filing by the transferor of a petition for relief, or the filing of an involuntary petition against the transferor, under the bankruptcy laws of the United States or of any other nation. 20. "ISO" means an "incentive stock option" as defined in Section 422 of the Code. 21. "Just Cause Termination" means a termination by the Company and/or any of its Subsidiaries of the Optionee's employment or services (or if the Optionee is a director, removal of him or her from the Board by action of the shareholders or, if permitted by applicable law and the Bylaws of the Company, the other directors), in connection with the good faith determination of the Board (or of the Company's shareholders if the Optionee is a director and the removal of him or her from the Board is by action of the shareholders, but in either case excluding the vote of the subject individual if he or she is a director or a shareholder) that the Optionee has engaged in any acts involving dishonesty or moral turpitude or in any acts that materially and adversely affect the business, affairs or reputation of the Company or any of its Subsidiaries. 22. "Loss of Eligibility Status" has the meaning set forth in section 5(a) of the Plan. 23. "Offered Price" has the meaning set forth in section 6.8(a) of the Plan. 24. "Offered Terms" has the meaning set forth in section 6.8(a) of the Plan. 25. "Option Agreement" has the meaning set forth in section 1 of the Plan. 26. "Option Pool" has the meaning set forth in section 4 of the Plan. 27. "Option Price" has the meaning set forth in section 5(c)(iii) of the Plan. 28. "Option Shares" has the meaning set forth in section 1 of the Plan, provided that for purposes of section 6.7 and section 6.8 of the Plan, the term "Option Shares" includes all Shares issued by the Company to a Holder (or his, her or its predecessor) by reason of such holdings, including any securities which may be acquired as a result of a stock split, stock dividend, and other distributions of Shares in the Company made upon, or in exchange for, other securities of the Company. 29. "Option Term" has the meaning set forth in section 5(c)(iv) of the Plan. 30. "Optionee" has the meaning set forth in section 1 of the Plan. 31. "Options" has the meaning set forth in section 1 of the Plan. 32. "Original Holder" means the original Eligible Participant to whom an Option is granted under the Plan, even if such Option is transferred pursuant to section 6.7(a) of the Plan. 15 33. "Plan" has the meaning set forth in section 1 of the Plan. 34. "Proposed Transfer Notice" has the meaning set forth in section 6.8(a) of the Plan. 35. "Shares" has the meaning set forth in section 1 of the Plan. 36. "Subsidiary" has the same meaning as "subsidiary corporation" as defined in Section 424(f) of the Code. 37. "Successor Entity" means a corporation or other entity that acquires all or substantially all of the assets of the Company, or which is the surviving or parent entity resulting from a Business Combination, as that term is defined in section 6.9(b) of the Plan. 38. "Tax Withholding Liability" in connection with the exercise of any Option means all federal and state income taxes, social security tax, and any other taxes applicable to the compensation income arising from the transaction required by applicable law to be withheld by the Company. 39. "Transfer" with respect to Option Shares, includes, without limitation, a voluntary or involuntary sale, assignment, transfer, conveyance, pledge, hypothecation, encumbrance, disposal, loan, gift, attachment or levy of those Shares, including, without limitation, any Involuntary Transfer or any Donative Transfer. 40. "Transferee" has the meaning set forth in section 6.8(b) of the Plan. 41. "Transferred Shares" has the meaning set forth in section 6.8(b) of the Plan. 42. "Unvested Option" has the meaning set forth in section 5(c)(vii) of the Plan. 43. "Vested Option" has the meaning set forth in section 5(c)(vii) of the Plan. 16 Option Agreement Under the More.com, Inc. 1998 Option Plan This Agreement is made effective as of ________ ___, 199__ (the "Grant Date"), between More.com, Inc., a Delaware corporation (the "Company"), and the undersigned Optionee. The Parties Agree as Follows: 1. Option Grant. Subject to all of the terms and conditions of this ------------ Agreement and of the Company's 1998 Option Plan (the "Option Plan"), a copy of which is attached hereto and incorporated by reference, the Company hereby grants to Optionee an option (the "Option") to purchase the number of shares of Common Stock of (the "Shares"), for an exercise price per Share (the "Option Price"), and based upon a Grant Date set forth above and an Expiration Date (subject to earlier termination as provided in the Option Plan), all as set forth below: Number of Shares subject to the Option: _____________________________ Option Price per Share: $________________________________ Vesting Start Date: _____________________________________ Expiration Date: ________________________________________ 2. Vesting. The Shares purchasable upon exercise of the Option will ------- become Vested Shares on the schedule set forth in Section 6.4 of the Option Plan; provided that in each case the Original Holder of the Option does not suffer a Loss of Eligibility Status prior to each such vesting date. 3. Representations and Warranties of Optionee. Optionee represents ------------------------------------------ and warrants that he or she is acquiring the Option, and will acquire any Shares obtained upon exercise of the Option, for investment purposes only, for Optionee's own account, and with no view to the distribution thereof. 4. No Employment Rights. This Agreement gives Optionee no right to -------------------- retained as an employee of the Company and/or its Subsidiaries. 5. Terms of the Option Plan. Optionee understands that the Option ------------------------ Plan includes important terms and conditions that apply to the Option. Those terms include: important conditions to the right of Optionee to exercise the Option; important restrictions on the ability of Optionee to transfer the Option or to Transfer any of the Shares received upon exercise of the Option; Company rights of repurchase related to Option Shares; and early termination of the Option following the occurrence of certain events. Optionee has read the Option Plan, agrees to be bound by its terms, and makes each of the representations required to be made by Optionee under it. Optionee further acknowledges that the Company has given no tax advice concerning the Option and has advised Optionee to consult with his or her own tax or financial advisor 17 about the tax treatment of the Option and its exercise. 6. Miscellaneous. Capitalized terms not otherwise defined herein ------------- will have the meaning set forth in the Option Plan. Neither this Agreement nor the Option is assignable by either party, except as expressly provided herein. All of the covenants and provisions of this Agreement by or for the benefit of the Company or Optionee shall bind and inure to the benefit of their respective successors. This Agreement (including the Option Plan) constitutes the final and complete expression of all of the terms of the understanding and agreement between the parties hereto concerning the subject matter hereof. This Agreement may not be modified, amended, altered or supplemented except by means of the execution and delivery of a written instrument mutually executed by the Company and Optionee. This Agreement shall be construed and governed by the substantive laws of the State of California. The parties hereby have entered into this Agreement as of the Grant Date. More.com, Inc. By:_______________________________ Title:____________________________ "Optionee" __________________________________ Address: __________________________________ __________________________________ Social Security No.: ________ Attachments: (1) Spousal Consent (2) 1998 Option Plan 18 CONSENT OF SPOUSE ----------------- I am the spouse of _________________, who together with More.com, Inc. (the "Company"), has entered into the Option Agreement, to which this Consent is attached. Capitalized terms not defined herein will have the meaning set forth in such agreement. I have read and understand the Option Agreement, and the Company's 1998 Option Plan (the "Option Plan"). I acknowledge that, by execution hereof, I am bound by the Option Agreement, and the Option Plan, as to any and all interests I may have in the Option and Option Shares. In particular, I understand and agree that the Option Shares (including any interest that I may have therein) are subject to certain repurchase rights in the Company and certain restrictions on transfer. I also agree with my spouse and the Company that if my spouse and I ever get divorced or enter into any marital property settlement agreement, or if my spouse or I ever seek a decree of separate maintenance, to the extent my spouse has or can obtain assets other than the Option Shares in amounts and of value sufficient to settle or satisfy any marital property claims I may have in the value of the Option Shares, I will accept such other assets in settlement of those claims. I agree that I will not do anything to try to prevent the operation of any part of the Option Agreement or the Option Plan. I acknowledge that I have had an opportunity to obtain independent counsel to advise me concerning the matters contained herein. Signature --------- Name:________________________________ Date:________________________________ 19 EX-10.3 7 2000 STOCK INCENTIVE PLAN Exhibit 10.3 MORE.COM, INC. 2000 STOCK INCENTIVE PLAN 1. Purposes of the Plan. The purposes of this Stock Incentive Plan are -------------------- to attract and retain the best available personnel, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company's business. 2. Definitions. As used herein, the following definitions shall apply: ----------- (a) "Administrator" means the Board or any of the Committees ------------- appointed to administer the Plan. (b) "Affiliate" and "Associate" shall have the respective meanings --------- --------- ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act. (c) "Applicable Laws" means the legal requirements relating to the --------------- administration of stock incentive plans, if any, under applicable provisions of federal securities laws, state corporate and securities laws, the Code, the rules of any applicable stock exchange or national market system, and the rules of any foreign jurisdiction applicable to Awards granted to residents therein. (d) "Award" means the grant of an Option, SAR, Dividend Equivalent ----- Right, Restricted Stock, Performance Unit, Performance Share, or other right or benefit under the Plan. (e) "Award Agreement" means the written agreement evidencing the --------------- grant of an Award executed by the Company and the Grantee, including any amendments thereto. (f) "Board" means the Board of Directors of the Company. ----- (g) "Cause" means, with respect to the termination by the Company or a ----- Related Entity of the Grantee's Continuous Service, that such termination is for "Cause" as such term is expressly defined in a then-effective written agreement between the Grantee and the Company or such Related Entity, or in the absence of such then-effective written agreement and definition, is based on, in the determination of the Administrator, the Grantee's: (i) refusal or failure to act in accordance with any specific, lawful direction or order of the Company or a Related Entity; (ii) unfitness or unavailability for service or unsatisfactory performance (other than as a result of Disability); (iii) performance of any act or failure to perform any act in bad faith and to the detriment of the Company or a Related Entity; (iv) dishonesty, intentional misconduct or material breach of any agreement with the Company or a Related Entity; or (v) commission of a crime involving dishonesty, breach of trust, or physical or emotional harm to any person. At least 30 days prior to the termination of the Grantee's Continuous Service pursuant to (i) or (ii) above, the Administrator shall provide the Grantee with notice of the Company's or such Related Entity's intent to terminate, the reason therefor, and an opportunity for the Grantee to cure such defects in his or her service to the Company's or such Related 1 Entity's satisfaction. During this 30 day (or longer) period, no Award issued to the Grantee under the Plan may be exercised or purchased. (h) "Change in Control" means a change in ownership or control of the ----------------- Company effected through either of the following transactions: (i) the direct or indirect acquisition by any person or related group of persons (other than an acquisition from or by the Company or by a Company-sponsored employee benefit plan or by a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities pursuant to a tender or exchange offer made directly to the Company's stockholders which a majority of the Continuing Directors who are not Affiliates or Associates of the offeror do not recommend such stockholders accept, or (ii) a change in the composition of the Board over a period of thirty-six (36) months or less such that a majority of the Board members (rounded up to the next whole number) ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who are Continuing Directors. (i) "Code" means the Internal Revenue Code of 1986, as amended. ---- (j) "Committee" means any committee appointed by the Board to --------- administer the Plan. (k) "Common Stock" means the common stock of the Company. ------------ (l) "Company" means more.com, Inc., a Delaware corporation. ------- (m) "Consultant" means any person (other than an Employee or a ---------- Director, solely with respect to rendering services in such person's capacity as a Director) who is engaged by the Company or any Related Entity to render consulting or advisory services to the Company or such Related Entity. (n) "Continuing Directors" means members of the Board who either (i) -------------------- have been Board members continuously for a period of at least thirty-six (36) months or (ii) have been Board members for less than thirty-six (36) months and were elected or nominated for election as Board members by at least a majority of the Board members described in clause (i) who were still in office at the time such election or nomination was approved by the Board. (o) "Continuous Service" means that the provision of services to the ------------------ Company or a Related Entity in any capacity of Employee, Director or Consultant, is not interrupted or terminated. Continuous Service shall not be considered interrupted in the case of (i) any approved leave of absence, (ii) transfers among the Company, any Related Entity, or any successor, in any capacity of Employee, Director or Consultant, or (iii) any change in status as 2 long as the individual remains in the service of the Company or a Related Entity in any capacity of Employee, Director or Consultant (except as otherwise provided in the Award Agreement). An approved leave of absence shall include sick leave, military leave, or any other authorized personal leave. For purposes of Incentive Stock Options, no such leave may exceed ninety (90) days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. (p) "Corporate Transaction" means any of the following transactions: --------------------- (i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated; (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company (including the capital stock of the Company's subsidiary corporations) in connection with the complete liquidation or dissolution of the Company; (iii) any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger; or (iv) acquisition by any person or related group of persons (other than the Company or by a Company-sponsored employee benefit plan) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities (whether or not in a transaction also constituting a Change in Control), but excluding any such transaction that the Administrator determines shall not be a Corporate Transaction. (q) "Director" means a member of the Board or the board of directors -------- of any Related Entity. (r) "Disability" means a Grantee would qualify for benefit payments ---------- under the long-term disability policy of the Company or the Related Entity to which the Grantee provides services regardless of whether the Grantee is covered by such policy. If the Company or the Related Entity to which the Grantee provides service does not have a long-term disability plan in place, "Disability" means that a Grantee is permanently unable to carry out the responsibilities and functions of the position held by the Grantee by reason of any medically determinable physical or mental impairment. A Grantee will not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Administrator in its discretion. (s) "Dividend Equivalent Right" means a right entitling the Grantee ------------------------- to compensation measured by dividends paid with respect to Common Stock. 3 (t) "Employee" means any person, including an Officer or Director, -------- who is an employee of the Company or any Related Entity. The payment of a director's fee by the Company or a Related Entity shall not be sufficient to constitute "employment" by the Company. (u) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (v) "Fair Market Value" means, as of any date, the value of Common ----------------- Stock determined as follows: (i) Where there exists a public market for the Common Stock, the Fair Market Value shall be (A) the closing price for a Share for the last market trading day prior to the time of the determination (or, if no closing price was reported on that date, on the last trading date on which a closing price was reported) on the stock exchange determined by the Administrator to be the primary market for the Common Stock or the Nasdaq National Market, whichever is applicable or (B) if the Common Stock is not traded on any such exchange or national market system, the average of the closing bid and asked prices of a Share on the Nasdaq Small Cap Market for the day prior to the time of the determination (or, if no such prices were reported on that date, on the last date on which such prices were reported), in each case, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (ii) In the absence of an established market for the Common Stock of the type described in (i), above, the Fair Market Value thereof shall be determined by the Administrator in good faith. (w) "Good Reason" means the occurrence after a Corporate Transaction, ----------- Change in Control or a Related Entity Disposition of any of the following events or conditions unless consented to by the Grantee: (i) (A) a change in the Grantee's status, title, position or responsibilities which represents an adverse change from the Grantee's status, title, position or responsibilities as in effect at any time within ninety (90) days preceding the date of a Corporate Transaction, Change in Control or Related Entity Disposition or at any time thereafter or (B) the assignment to the Grantee of any duties or responsibilities which are inconsistent with the Optionee's status, title, position or responsibilities as in effect at any time within ninety (90) days preceding the date of a Corporate Transaction, Change in Control or Related Entity Disposition or at any time thereafter; (ii) reduction in the Grantee's base salary to a level below that in effect at any time within ninety (90) days preceding the date of a Corporate Transaction, Change in Control or Related Entity Disposition or at any time thereafter (except to the extent such reduction is part of a comprehensive reduction in salary applicable to Grantees generally); (iii) requiring the Grantee to be based at any place outside a 25-mile radius from the Grantee's job location or residence prior to the Corporate Transaction, Change in Control or Related Entity Disposition, except for reasonably required travel on business which is 4 not materially greater than such travel requirements prior to the Corporate Transaction, Change in Control or Related Entity Disposition; or (iv) the failure to (A) continue in effect (without reduction in benefit level and/or reward opportunities) any material compensation or employee benefit plan (which shall include vacation policies) in which the Grantee was participating at any time within ninety (90) days preceding the date of a Corporate Transaction, Change in Control or Related Entity Disposition or at any time thereafter, unless such plan is replaced with a plan that provides substantially equivalent compensation or benefits to the Grantee, or (B) provide the Grantee with compensation and benefits, in the aggregate, at least equal (in terms of benefit levels and/or reward opportunities) to those provided for under each other employee benefit plan, program and practice in which the Grantee was participating at any time within ninety (90) days preceding the date of a Corporate Transaction, Change in Control or Related Entity Disposition or at any time thereafter or which are provided to other similarly situated Grantees. (x) "Grantee" means an Employee, Director or Consultant who receives ------- an Award pursuant to an Award Agreement under the Plan. (y) "Immediate Family" means any child, stepchild, grandchild, ---------------- parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the Grantee's household (other than a tenant or employee), a trust in which these persons have more than fifty percent (50%) of the beneficial interest, a foundation in which these persons (or the Grantee) control the management of assets, and any other entity in which these persons (or the Grantee) own more than fifty percent (50%) of the voting interests. (z) "Incentive Stock Option" means an Option intended to qualify as ---------------------- an incentive stock option within the meaning of Section 422 of the Code. (aa) "Non-Qualified Stock Option" means an Option not intended to -------------------------- qualify as an Incentive Stock Option. (bb) "Officer" means a person who is an officer of the Company or a ------- Related Entity within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (cc) "Option" means an option to purchase Shares pursuant to an Award ------ Agreement granted under the Plan. (dd) "Parent" means a "parent corporation," whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (ee) "Performance Shares" means Shares or an Award denominated in ------------------ Shares which may be earned in whole or in part upon attainment of performance criteria established by the Administrator. 5 (ff) "Performance Units" means an Award which may be earned in whole ----------------- or in part upon attainment of performance criteria established by the Administrator and which may be settled for cash, Shares or other securities or a combination of cash, Shares or other securities as established by the Administrator. (gg) "Plan" means this 2000 Stock Incentive Plan. ---- (hh) "Registration Date" means the first to occur of (i) the closing ----------------- of the first sale to the general public of (A) the Common Stock or (B) the same class of securities of a successor corporation (or its Parent) issued pursuant to a Corporate Transaction in exchange for or in substitution of the Common Stock, pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended; and (ii) in the event of a Corporate Transaction, the date of the consummation of the Corporate Transaction if the same class of securities of the successor corporation (or its Parent) issuable in such Corporate Transaction shall have been sold to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended on or prior to the date of consummation of such Corporate Transaction. (ii) "Related Entity" means any Parent, Subsidiary and any business, -------------- corporation, partnership, limited liability company or other entity in which the Company, a Parent or a Subsidiary holds a substantial ownership interest, directly or indirectly. (jj) "Related Entity Disposition" means the sale, distribution or -------------------------- other disposition by the Company, a Parent or a Subsidiary of all or substantially all of the interests of the Company, a Parent or a Subsidiary in any Related Entity effected by a sale, merger or consolidation or other transaction involving that Related Entity or the sale of all or substantially all of the assets of that Related Entity, other than any Related Entity Disposition to the Company, a Parent or a Subsidiary. (kk) "Restricted Stock" means Shares issued under the Plan to the ---------------- Grantee for such consideration, if any, and subject to such restrictions on transfer, rights of first refusal, repurchase provisions, forfeiture provisions, and other terms and conditions as established by the Administrator. (ll) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act ---------- or any successor thereto. (mm) "SAR" means a stock appreciation right entitling the Grantee to --- Shares or cash compensation, as established by the Administrator, measured by appreciation in the value of Common Stock. (nn) "Share" means a share of the Common Stock. ----- (oo) "Subsidiary" means a "subsidiary corporation," whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code. 6 3. Stock Subject to the Plan. ------------------------- (a) Subject to the provisions of Section 10, below, the maximum aggregate number of Shares which may be issued pursuant to Awards initially shall be four million (4,000,000) Shares, increased by (i) any Shares available for future Awards under the Company's 1998 Stock Option Plan as of the Registration Date, (ii) any Shares that are represented by Awards under the Company's 1998 Stock Option Plan which are forfeited, expire or are cancelled without delivery of Shares or which result in the forfeiture of Shares back to the Company on or after the Registration Date, and (iii) an annual increase to be added on the first day of the Company's fiscal year beginning in 2001 equal to five percent (5%) of the number of Shares outstanding as of such date or a lesser number of Shares determined by the Administrator. Notwithstanding the foregoing, subject to the provisions of Section 10, below, of the number of Shares specified above, the maximum aggregate number of Shares available for grant of Incentive Stock Options shall be four million (4,000,000) Shares, and such number shall not be subject to annual adjustment as described above. The Shares to be issued pursuant to Awards may be authorized, but unissued, or reacquired Common Stock. (b) Any Shares covered by an Award (or portion of an Award) which is forfeited or canceled, expires or is settled in cash, shall be deemed not to have been issued for purposes of determining the maximum aggregate number of Shares which may be issued under the Plan. Shares that actually have been issued under the Plan pursuant to an Award shall not be returned to the Plan and shall not become available for future issuance under the Plan, except that if unvested Shares are forfeited, or repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. Administration of the Plan. -------------------------- (a) Plan Administrator. ------------------ (i) Administration with Respect to Directors and Officers. ----------------------------------------------------- With respect to grants of Awards to Directors or Employees who are also Officers or Directors of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws and to permit such grants and related transactions under the Plan to be exempt from Section 16(b) of the Exchange Act in accordance with Rule 16b-3. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. (ii) Administration With Respect to Consultants and Other ---------------------------------------------------- Employees. With respect to grants of Awards to Employees or Consultants who are - --------- neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. The Board may authorize one or more Officers to grant such Awards and may limit such authority as the Board determines from time to time. 7 (iii) Administration Errors. In the event an Award is granted in --------------------- a manner inconsistent with the provisions of this subsection (a), such Award shall be presumptively valid as of its grant date to the extent permitted by the Applicable Laws. (b) Powers of the Administrator. Subject to Applicable Laws and the --------------------------- provisions of the Plan (including any other powers given to the Administrator hereunder), and except as otherwise provided by the Board, the Administrator shall have the authority, in its discretion: (i) to select the Employees, Directors and Consultants to whom Awards may be granted from time to time hereunder; (ii) to determine whether and to what extent Awards are granted hereunder; (iii) to determine the number of Shares or the amount of other consideration to be covered by each Award granted hereunder; (iv) to approve forms of Award Agreements for use under the Plan; (v) to determine the terms and conditions of any Award granted hereunder; (vi) to amend the terms of any outstanding Award granted under the Plan, provided that any amendment that would adversely affect the Grantee's rights under an outstanding Award shall not be made without the Grantee's written consent; (vii) to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan, including without limitation, any notice of Award or Award Agreement, granted pursuant to the Plan; (viii) to establish additional terms, conditions, rules or procedures to accommodate the rules or laws of applicable foreign jurisdictions and to afford Grantees favorable treatment under such laws; provided, however, that no Award shall be granted under any such additional terms, conditions, rules or procedures with terms or conditions which are inconsistent with the provisions of the Plan; and (ix) to take such other action, not inconsistent with the terms of the Plan, as the Administrator deems appropriate. 5. Eligibility. Awards other than Incentive Stock Options may be granted ----------- to Employees, Directors and Consultants. Incentive Stock Options may be granted only to Employees of the Company, a Parent or a Subsidiary. An Employee, Director or Consultant who has been granted an Award may, if otherwise eligible, be granted additional Awards. Awards may be granted to such Employees, Directors or Consultants who are residing in foreign jurisdictions as the Administrator may determine from time to time. 8 6. Terms and Conditions of Awards. ------------------------------ (a) Type of Awards. The Administrator is authorized under the Plan -------------- to award any type of arrangement to an Employee, Director or Consultant that is not inconsistent with the provisions of the Plan and that by its terms involves or might involve the issuance of (i) Shares, (ii) an Option, a SAR or similar right with a fixed or variable price related to the Fair Market Value of the Shares and with an exercise or conversion privilege related to the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions, or (iii) any other security with the value derived from the value of the Shares. Such awards include, without limitation, Options, SARs, sales or bonuses of Restricted Stock, Dividend Equivalent Rights, Performance Units or Performance Shares, and an Award may consist of one such security or benefit, or two (2) or more of them in any combination or alternative. (b) Designation of Award. Each Award shall be designated in the -------------------- Award Agreement. In the case of an Option, the Option shall be designated as either an Incentive Stock Option or a Non-Qualified Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of Shares subject to Options designated as Incentive Stock Options which become exercisable for the first time by a Grantee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options, to the extent of the Shares covered thereby in excess of the foregoing limitation, shall be treated as Non-Qualified Stock Options. For this purpose, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the date the Option with respect to such Shares is granted. (c) Conditions of Award. Subject to the terms of the Plan, the ------------------- Administrator shall determine the provisions, terms, and conditions of each Award including, but not limited to, the Award vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form of payment (cash, Shares, or other consideration) upon settlement of the Award, payment contingencies, and satisfaction of any performance criteria. The performance criteria established by the Administrator may be based on any one of, or combination of, increase in share price, earnings per share, total stockholder return, return on equity, return on assets, return on investment, net operating income, cash flow, revenue, economic value added, personal management objectives, or other measure of performance selected by the Administrator. Partial achievement of the specified criteria may result in a payment or vesting corresponding to the degree of achievement as specified in the Award Agreement. (d) Acquisitions and Other Transactions. The Administrator may issue ----------------------------------- Awards under the Plan in settlement, assumption or substitution for, outstanding awards or obligations to grant future awards in connection with the Company or a Related Entity acquiring another entity, an interest in another entity or an additional interest in a Related Entity whether by merger, stock purchase, asset purchase or other form of transaction. (e) Deferral of Award Payment. The Administrator may establish one ------------------------- or more programs under the Plan to permit selected Grantees the opportunity to elect to defer 9 receipt of consideration upon exercise of an Award, satisfaction of performance criteria, or other event that absent the election would entitle the Grantee to payment or receipt of Shares or other consideration under an Award. The Administrator may establish the election procedures, the timing of such elections, the mechanisms for payments of, and accrual of interest or other earnings, if any, on amounts, Shares or other consideration so deferred, and such other terms, conditions, rules and procedures that the Administrator deems advisable for the administration of any such deferral program. (f) Award Exchange Programs. The Administrator may establish one ----------------------- or more programs under the Plan to permit selected Grantees to exchange an Award under the Plan for one or more other types of Awards under the Plan on such terms and conditions as determined by the Administrator from time to time. (g) Separate Programs. The Administrator may establish one or more ----------------- separate programs under the Plan for the purpose of issuing particular forms of Awards to one or more classes of Grantees on such terms and conditions as determined by the Administrator from time to time. (h) Early Exercise. The Award Agreement may, but need not, include a -------------- provision whereby the Grantee may elect at any time while an Employee, Director or Consultant to exercise any part or all of the Award prior to full vesting of the Award. Any unvested Shares received pursuant to such exercise may be subject to a repurchase right in favor of the Company or a Related Entity or to any other restriction the Administrator determines to be appropriate. (i) Term of Award. The term of each Award shall be the term stated ------------- in the Award Agreement, provided, however, that the term of an Incentive Stock Option shall be no more than ten (10) years from the date of grant thereof. However, in the case of an Incentive Stock Option granted to a Grantee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Award Agreement. (j) Transferability of Awards. Incentive Stock Options 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 Grantee, only by the Grantee; provided, however, that the Grantee may designate a beneficiary of the Grantee's Incentive Stock Option in the event of the Grantee's death on a beneficiary designation form provided by the Administrator. Other Awards may be transferred by gift or through a domestic relations order to members of the Grantee's Immediate Family to the extent provided in the Award Agreement or in the manner and to the extent determined by the Administrator. (k) Time of Granting Awards. The date of grant of an Award shall ----------------------- for all purposes be the date on which the Administrator makes the determination to grant such Award, or such other date as is determined by the Administrator. Notice of the grant determination shall 10 be given to each Employee, Director or Consultant to whom an Award is so granted within a reasonable time after the date of such grant. 7. Award Exercise or Purchase Price, Consideration and Taxes. --------------------------------------------------------- (a) Exercise or Purchase Price. The exercise or purchase price, if -------------------------- any, for an Award shall be as follows: (i) In the case of an Incentive Stock Option: (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be not less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of grant; or (B) granted to any Employee other than an Employee described in the preceding paragraph, the per Share exercise price shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant. (ii) In the case of a Non-Qualified Stock Option, the per Share exercise price shall be not less than eighty-five percent (85%) of the Fair Market Value per Share on the date of grant unless otherwise determined by the Administrator. (iii) In the case of other Awards, such price as is determined by the Administrator. (iv) Notwithstanding the foregoing provisions of this Section 7(a), in the case of an Award issued pursuant to Section 6(d), above, the exercise or purchase price for the Award shall be determined in accordance with the principles of Section 424(a) of the Code. (b) Consideration. Subject to Applicable Laws, the consideration ------------- to be paid for the Shares to be issued upon exercise or purchase of an Award including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant). In addition to any other types of consideration the Administrator may determine, the Administrator is authorized to accept as consideration for Shares issued under the Plan the following, provided that the portion of the consideration equal to the par value of the Shares must be paid in cash or other legal consideration permitted by the Delaware General Corporation Law: (i) cash; (ii) check; (iii) delivery of Grantee's promissory note with such recourse, interest, security, and redemption provisions as the Administrator determines as appropriate; 11 (iv) if the exercise or purchase occurs on or after the Registration Date, surrender of Shares or delivery of a properly executed form of attestation of ownership of Shares as the Administrator may require (including withholding of Shares otherwise deliverable upon exercise of the Award) which have a Fair Market Value on the date of surrender or attestation equal to the aggregate exercise price of the Shares as to which said Award shall be exercised (but only to the extent that such exercise of the Award would not result in an accounting compensation charge with respect to the Shares used to pay the exercise price unless otherwise determined by the Administrator); (v) with respect to Options, if the exercise occurs on or after the Registration Date, payment through a broker-dealer sale and remittance procedure pursuant to which the Grantee (A) shall provide written instructions to a Company designated brokerage firm to effect the immediate sale of some or all of the purchased Shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased Shares and (B) shall provide written directives to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction; or (vi) any combination of the foregoing methods of payment. (c) Taxes. No Shares shall be delivered under the Plan to any ----- Grantee or other person until such Grantee or other person has made arrangements acceptable to the Administrator for the satisfaction of any foreign, federal, state, or local income and employment tax withholding obligations, including, without limitation, obligations incident to the receipt of Shares or the disqualifying disposition of Shares received on exercise of an Incentive Stock Option. Upon exercise of an Award, the Company shall withhold or collect from Grantee an amount sufficient to satisfy such tax obligations. 8. Exercise of Award. ----------------- (a) Procedure for Exercise; Rights as a Stockholder. ----------------------------------------------- (i) Any Award granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator under the terms of the Plan and specified in the Award Agreement. (ii) An Award shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Award by the person entitled to exercise the Award and full payment for the Shares with respect to which the Award is exercised, including, to the extent selected, use of the broker-dealer sale and remittance procedure to pay the purchase price as provided in Section 7(b)(v). Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to Shares subject to an Award, notwithstanding the exercise of an Option or other Award. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Award. No adjustment 12 will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in the Award Agreement or Section 10, below. (b) Exercise of Award Following Termination of Continuous Service. ------------------------------------------------------------- (i) An Award may not be exercised after the termination date of such Award set forth in the Award Agreement and may be exercised following the termination of a Grantee's Continuous Service only to the extent provided in the Award Agreement. (ii) Where the Award Agreement permits a Grantee to exercise an Award following the termination of the Grantee's Continuous Service for a specified period, the Award shall terminate to the extent not exercised on the last day of the specified period or the last day of the original term of the Award, whichever occurs first. (iii) Any Award designated as an Incentive Stock Option to the extent not exercised within the time permitted by law for the exercise of Incentive Stock Options following the termination of a Grantee's Continuous Service shall convert automatically to a Non-Qualified Stock Option and thereafter shall be exercisable as such to the extent exercisable by its terms for the period specified in the Award Agreement. 9. Conditions Upon Issuance of Shares. ---------------------------------- (a) Shares shall not be issued pursuant to the exercise of an Award unless the exercise of such Award and the issuance and delivery of such Shares pursuant thereto shall comply with all Applicable Laws, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) As a condition to the exercise of an Award, the Company may require the person exercising such Award 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 by any Applicable Laws. 10. Adjustments Upon Changes in Capitalization. Subject to any required ------------------------------------------ action by the stockholders of the Company, the number of Shares covered by each outstanding Award, and the number of Shares which have been authorized for issuance under the Plan but as to which no Awards have yet been granted or which have been returned to the Plan, the exercise or purchase price of each such outstanding Award, the maximum number of Shares with respect to which Options and SARs may be granted to any Employee in any fiscal year of the Company, as well as any other terms that the Administrator determines require adjustment shall be proportionately adjusted for (i) any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Shares, or similar event affecting the Shares, (ii) any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company, or (iii) as the Administrator may determine in its discretion, any other transaction with respect to Common Stock to which Section 424(a) of the Code applies or any similar transaction; provided, however that conversion of any 13 convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Administrator and its determination shall be final, binding and conclusive. Except as the Administrator determines, 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 hereof shall be made with respect to, the number or price of Shares subject to an Award. 11. Corporate Transactions/Changes in Control/Related Entity Dispositions. --------------------------------------------------------------------- Except as may be provided in an Award Agreement: (a) In the event of any Corporate Transaction, each Award which is at the time outstanding under the Plan automatically shall become fully vested and exercisable and be released from any restrictions on transfer (other than transfer restrictions applicable to Options) and repurchase or forfeiture rights, immediately prior to the specified effective date of such Corporate Transaction, for all of the Shares at the time represented by such Award. Effective upon the consummation of the Corporate Transaction, all outstanding Awards under the Plan shall terminate. However, all such Awards shall not terminate if the Awards are, in connection with the Corporate Transaction, assumed by the successor corporation or Parent thereof. In addition, an outstanding Award under the Plan shall not so fully vest and be exercisable and released from such limitations if and to the extent: (i) such Award is, in connection with the Corporate Transaction, either assumed by the successor corporation or Parent thereof or replaced with a comparable Award with respect to shares of the capital stock of the successor corporation or Parent thereof or (ii) such Award is to be replaced with a cash incentive program of the successor corporation which preserves the compensation element of such Award existing at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to such Award; provided, however, that such Award (if assumed), the replacement Award (if replaced), or the cash incentive program automatically shall become fully vested, exercisable and payable and be released from any restrictions on transfer (other than transfer restrictions applicable to Options) and repurchase or forfeiture rights immediately upon termination of the Grantee's Continuous Service (substituting the successor employer corporation for "Company or Related Entity" for the definition of "Continuous Service") if such Continuous Service is terminated by the successor company without Cause or voluntarily by the Grantee with Good Reason within six (6) months of the Corporate Transaction. The determination of Award comparability above shall be made by the Administrator. Notwithstanding the foregoing in the event of any Corporate Transaction, the number of Shares subject to each Award which is at the time outstanding under the Plan which would vest within six (6) months measured from the consummation of the Corporate Transaction automatically shall become fully vested and exercisable and be released from any restrictions on transfer (other than transfer restrictions applicable to Options) and repurchase or forfeiture rights immediately prior to the specified effective date of such Corporate Transaction regardless of whether the Award is assumed or replaced under subpart (i) or (ii) of this Section 11(a). (b) Following a Change in Control (other than a Change in Control which also is a Corporate Transaction) and upon the termination of the Continuous Service of a Grantee if such Continuous Service is terminated by the Company or Related Entity without Cause or 14 voluntarily by the Grantee with Good Reason within six (6) months of a Change in Control, each Award of such Grantee which is at the time outstanding under the Plan automatically shall become fully vested and exercisable and be released from any restrictions on transfer (other than transfer restrictions applicable to Options) and repurchase or forfeiture rights, immediately upon the termination of such Continuous Service. Notwithstanding the foregoing in the event of any Change in Control, the number of Shares subject to each Award which is at the time outstanding under the Plan which would vest within six (6) months measured from the consummation of the Change in Control automatically shall become fully vested and exercisable and be released from any restrictions on transfer (other than transfer restrictions applicable to Options) and repurchase or forfeiture rights immediately prior to the specified effective date of such Change in Control. (c) Effective upon the consummation of a Related Entity Disposition, for purposes of the Plan and all Awards, the Continuous Service of each Grantee who is at the time engaged primarily in service to the Related Entity involved in such Related Entity Disposition shall be deemed to terminate and each Award of such Grantee which is at the time outstanding under the Plan automatically shall become fully vested and exercisable and be released from any restrictions on transfer (other than transfer restrictions applicable to Options) and repurchase or forfeiture rights for all of the Shares at the time represented by such Award and be exercisable in accordance with the terms of the Award Agreement evidencing such Award. However, such Continuous Service shall be not be deemed to terminate if such Award is, in connection with the Related Entity Disposition, assumed by the successor entity or its Parent. In addition, such Continuous Service shall not be deemed to terminate and an outstanding Award under the Plan shall not so fully vest and be exercisable and released from such limitations if and to the extent: (i) such Award is, in connection with the Related Entity Disposition, either to be assumed by the successor entity or its parent or to be replaced with a comparable Award with respect to interests in the successor entity or its parent or (ii) such Award is to be replaced with a cash incentive program of the successor entity which preserves the compensation element of such Award existing at the time of the Related Entity Disposition and provides for subsequent payout in accordance with the same vesting schedule applicable to such Award; provided, however, that such Award (if assumed), the replacement Award (if replaced), or the cash incentive program automatically shall become fully vested, exercisable and payable and be released from any restrictions on transfer (other than transfer restrictions applicable to Options) and repurchase or forfeiture rights immediately upon termination of the Grantee's Continuous Service (substituting the successor employer entity for "Company or Related Entity" for the definition of "Continuous Service") if such Continuous Service is terminated by the successor entity without Cause or voluntarily by the Grantee with Good Reason within six (6) months of the Related Entity Disposition. The determination of Award comparability above shall be made by the Administrator. Notwithstanding the foregoing, effective upon the consummation of a Related Entity Disposition, the number of Shares subject to each Award which is at the time outstanding under the Plan and held by a Grantee who is at the time engaged primarily in service to the Related Entity involved in such Related Entity Disposition which would vest within six (6) months measured from the consummation of the Related Entity Disposition automatically shall become fully vested and exercisable and be released from any restrictions on transfer (other than transfer restrictions applicable to Options) and repurchase or forfeiture rights regardless of whether the Award is assumed or replaced under subpart (i) or (ii) of this Section 11(c). 15 12. Effective Date and Term of Plan. The Plan shall become effective upon ------------------------------- the earlier to occur of its adoption by the Board or its approval by the stockholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated. Subject to Section 17, below, and Applicable Laws, Awards may be granted under the Plan upon its becoming effective. 13. Amendment, Suspension or Termination of the Plan. ------------------------------------------------ (a) The Board may at any time amend, suspend or terminate the Plan. To the extent necessary to comply with Applicable Laws, the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required. (b) No Award may be granted during any suspension of the Plan or after termination of the Plan. (c) Any amendment, suspension or termination of the Plan (including termination of the Plan under Section 12, above) shall not affect Awards already granted, and such Awards shall remain in full force and effect as if the Plan had not been amended, suspended or terminated, unless mutually agreed otherwise between the Grantee and the Administrator, which agreement must be in writing and signed by the Grantee and the Company. 14. Reservation of Shares. --------------------- (a) The Company, during the term of the Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. (b) 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. 15. No Effect on Terms of Employment/Consulting Relationship. The Plan -------------------------------------------------------- shall not confer upon any Grantee any right with respect to the Grantee's Continuous Service, nor shall it interfere in any way with his or her right or the Company's right to terminate the Grantee's Continuous Service at any time, with or without cause. 16. No Effect on Retirement and Other Benefit Plans. Except as ----------------------------------------------- specifically provided in a retirement or other benefit plan of the Company or a Related Entity, Awards shall not be deemed compensation for purposes of computing benefits or contributions under any retirement plan of the Company or a Related Entity, and shall not affect any benefits under any other benefit plan of any kind or any benefit plan subsequently instituted under which the availability or amount of benefits is related to level of compensation. The Plan is not a "Retirement Plan" or "Welfare Plan" under the Employee Retirement Income Security Act of 1974, as amended. 16 17. Stockholder Approval. The grant of Incentive Stock Options under the -------------------- Plan shall be subject to approval by the stockholders of the Company within twelve (12) months before or after the date the Plan is adopted excluding Incentive Stock Options issued in substitution for outstanding Incentive Stock Options pursuant to Section 424(a) of the Code. Such stockholder approval shall be obtained in the degree and manner required under Applicable Laws. The Administrator may grant Incentive Stock Options under the Plan prior to approval by the stockholders, but until such approval is obtained, no such Incentive Stock Option shall be exercisable. In the event that stockholder approval is not obtained within the twelve (12) month period provided above, all Incentive Stock Options previously granted under the Plan shall be exercisable as Non-Qualified Stock Options. 17 MORE.COM, INC. 2000 STOCK INCENTIVE PLAN NOTICE OF STOCK OPTION AWARD ---------------------------- Grantee's Name and Address: ____________________________ ____________________________ ____________________________ You have been granted an option to purchase shares of Common Stock, subject to the terms and conditions of this Notice of Stock Option Award (the "Notice"), the More.com, Inc. 2000 Stock Incentive Plan, as amended from time to time (the "Plan") and the Stock Option Award Agreement (the "Option Agreement") attached hereto, as follows. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Notice. Award Number ______________________________________ Date of Award ______________________________________ Vesting Commencement Date ______________________________________ Exercise Price per Share $ ______________________________________ Total Number of Shares subject to the Option ______________________________________ Total Exercise Price $ ______________________________________ Type of Option: _______ Incentive Stock Option _______ Non-Qualified Stock Option Expiration Date: ________________________________________ Post-Termination Exercise Period: Three (3) Months Vesting Schedule: - ---------------- Subject to Grantee's Continuous Service and other limitations set forth in this Notice, the Plan and the Option Agreement, the Option may be exercised, in whole or in part, in accordance with the following schedule: 25% of the Shares subject to the Option shall vest twelve months after the Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall vest on each monthly anniversary of the Vesting Commencement Date thereafter. During any authorized leave of absence, the vesting of the Option as provided in this schedule shall cease after the leave of absence exceeds a period of ninety (90) days. Vesting of the Option shall resume upon the Grantee's termination of the leave of absence and return to service to the Company or a Related Entity. In the event of the Grantee's change in status from Employee to Consultant or from an Employee whose customary employment is 20 hours or more per week to an Employee whose customary employment is fewer than 20 hours per week, vesting of the Option shall continue only to the extent determined by the Administrator as of such change in status. IN WITNESS WHEREOF, the Company and the Grantee have executed this Notice and agree that the Option is to be governed by the terms and conditions of this Notice, the Plan, and the Option Agreement. More.com, Inc., a Delaware corporation By: __________________________________ Title:________________________________ THE GRANTEE ACKNOWLEDGES AND AGREES THAT THE SHARES SUBJECT TO THE OPTION SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THE GRANTEE'S CONTINUOUS SERVICE (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THE OPTION OR ACQUIRING SHARES HEREUNDER). THE GRANTEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS NOTICE, THE OPTION AGREEMENT, OR THE PLAN SHALL CONFER UPON THE GRANTEE ANY RIGHT WITH RESPECT TO FUTURE AWARDS OR CONTINUATION OF GRANTEE'S CONTINUOUS SERVICE, NOR SHALL IT INTERFERE IN ANY WAY WITH THE GRANTEE'S RIGHT OR THE RIGHT OF THE GRANTEE'S EMPLOYER TO TERMINATE GRANTEE'S CONTINUOUS SERVICE, WITH OR WITHOUT CAUSE, AND WITH OR WITHOUT NOTICE. THE GRANTEE ACKNOWLEDGES THAT UNLESS THE GRANTEE HAS A WRITTEN EMPLOYMENT AGREEMENT WITH THE COMPANY TO THE CONTRARY, GRANTEE'S STATUS IS AT WILL. The Grantee acknowledges receipt of a copy of the Plan and the Option Agreement, and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts the Option subject to all of the terms and provisions hereof and thereof. The Grantee has reviewed this Notice, the Plan, and the Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Notice, and fully understands all provisions of this Notice, the Plan and the Option Agreement. The Grantee hereby agrees that all disputes arising out of or relating to this Notice, the Plan and the Option Agreement shall be resolved in accordance with Section 13 of the Option Agreement. The Grantee further agrees to notify the Company upon any change in the residence address indicated in this Notice. Dated: ______________________ Signed:_____________________________ Grantee 2 Award Number: ___________ MORE.COM, INC. 2000 STOCK INCENTIVE PLAN STOCK OPTION AWARD AGREEMENT ---------------------------- 1. Grant of Option. More.com, Inc., a Delaware corporation (the --------------- "Company"), hereby grants to the Grantee (the "Grantee") named in the Notice of Stock Option Award (the "Notice"), an option (the "Option") to purchase the Total Number of Shares of Common Stock subject to the Option (the "Shares") set forth in the Notice, at the Exercise Price per Share set forth in the Notice (the "Exercise Price") subject to the terms and provisions of the Notice, this Stock Option Award Agreement (the "Option Agreement") and the Company's 2000 Stock Incentive Plan, as amended from time to time (the "Plan"), which are incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. If designated in the Notice as an Incentive Stock Option, the Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of Shares subject to Options designated as Incentive Stock Options which become exercisable for the first time by the Grantee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options, to the extent of the Shares covered thereby in excess of the foregoing limitation, shall be treated as Non-Qualified Stock Options. For this purpose, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the date the Option with respect to such Shares is awarded. 2. Exercise of Option. ------------------ (a) Right to Exercise. The Option shall be exercisable during its term ----------------- in accordance with the Vesting Schedule set out in the Notice and with the applicable provisions of the Plan and this Option Agreement. The Option shall be subject to the provisions of Section 11 of the Plan relating to the exercisability or termination of the Option in the event of a Corporate Transaction, Change in Control or Related Entity Disposition. No partial exercise of the Option may be for less than the lesser of five percent (5%) of the total number of Shares subject to the Option or the remaining number of Shares subject to the Option. In no event shall the Company issue fractional Shares. (b) Method of Exercise. The Option shall be exercisable only by ------------------ delivery of an Exercise Notice (attached as Exhibit A) which shall state the election to exercise the Option, the whole number of Shares in respect of which the Option is being exercised, such other representations and agreements as to the holder's investment intent with respect to such Shares and such other provisions as may be required by the Administrator. The Exercise Notice shall be signed by the Grantee and shall be delivered in person, by certified mail, or by such other method as determined from time to time by the Administrator to the Company accompanied by payment 1 of the Exercise Price. The Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price, which, to the extent selected, shall be deemed to be satisfied by use of the broker- dealer sale and remittance procedure to pay the Exercise Price provided in Section 3(d), below. (c) Taxes. No Shares will be delivered to the Grantee or other ----- person pursuant to the exercise of the Option until the Grantee or other person has made arrangements acceptable to the Administrator for the satisfaction of applicable income tax, employment tax, and social security tax withholding obligations, including, without limitation, obligations incident to the receipt of Shares or the disqualifying disposition of Shares received on exercise of an Incentive Stock Option. Upon exercise of the Option, the Company or the Grantee's employer may offset or withhold (from any amount owed by the Company or the Grantee's employer to the Grantee) or collect from the Grantee or other person an amount sufficient to satisfy such tax obligations and/or the employer's withholding obligations. 3. Method of Payment. Payment of the Exercise Price shall be by any of ----------------- the following, or a combination thereof, at the election of the Grantee; provided, however, that such exercise method does not then violate any Applicable Law and, provided further, that the portion of the Exercise Price equal to the par value of the Shares must be paid in cash or other legal consideration permitted by the Delaware General Corporation Law: (a) cash; (b) check; (c) surrender of Shares or delivery of a properly executed form of attestation of ownership of Shares as the Administrator may require (including withholding of Shares otherwise deliverable upon exercise of the Option) which have a Fair Market Value on the date of surrender or attestation equal to the aggregate Exercise Price of the Shares as to which the Option is being exercised (but only to the extent that such exercise of the Option would not result in an accounting compensation charge with respect to the Shares used to pay the exercise price); or (d) payment through a broker-dealer sale and remittance procedure pursuant to which the Grantee (i) shall provide written instructions to a Company designated brokerage firm to effect the immediate sale of some or all of the purchased Shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased Shares and (ii) shall provide written directives to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction. 4. Restrictions on Exercise. The Option may not be exercised if the ------------------------ issuance of the Shares subject to the Option upon such exercise would constitute a violation of any Applicable Laws. In addition, the Option, if an Incentive Stock Option, may not be exercised until such time as the Plan has been approved by the stockholders of the Company. 2 5. Termination or Change of Continuous Service. In the event the Grantee's ------------------------------------------- Continuous Service terminates, the Grantee may, to the extent otherwise so entitled at the date of such termination (the "Termination Date"), exercise the Option during the Post-Termination Exercise Period. In no event shall the Option be exercised later than the Expiration Date set forth in the Notice. In the event of the Grantee's change in status from Employee, Director or Consultant to any other status of Employee, Director or Consultant, the Option shall remain in effect and, except to the extent otherwise determined by the Administrator, continue to vest; provided, however, that with respect to any Incentive Stock Option that shall remain in effect after a change in status from Employee to Director or Consultant, such Incentive Stock Option shall cease to be treated as an Incentive Stock Option and shall be treated as a Non-Qualified Stock Option on the day three (3) months and one (1) day following such change in status. Except as provided in Sections 6 and 7 below, to the extent that the Grantee is not entitled to exercise the Option on the Termination Date, or if the Grantee does not exercise the Option within the Post-Termination Exercise Period, the Option shall terminate. 6. Disability of Grantee. In the event the Grantee's Continuous Service --------------------- terminates as a result of his or her Disability, the Grantee may, but only within twelve (12) months from the Termination Date (and in no event later than the Expiration Date), exercise the Option to the extent he or she was otherwise entitled to exercise it on the Termination Date; provided, however, that if such Disability is not a "disability" as such term is defined in Section 22(e)(3) of the Code and the Option is an Incentive Stock Option, such Incentive Stock Option shall cease to be treated as an Incentive Stock Option and shall be treated as a Non-Qualified Stock Option on the day three (3) months and one (1) day following the Termination Date. To the extent that the Grantee is not entitled to exercise the Option on the Termination Date, or if the Grantee does not exercise the Option to the extent so entitled within the time specified herein, the Option shall terminate. 7. Death of Grantee. In the event of the termination of the Grantee's ---------------- Continuous Service as a result of his or her death, or in the event of the Grantee's death during the Post-Termination Exercise Period or during the twelve (12) month period following the Grantee's termination of Continuous Service as a result of his or her Disability, the Grantee's estate, or a person who acquired the right to exercise the Option by bequest or inheritance, may exercise the Option, but only to the extent the Grantee could exercise the Option at the date of termination, within twelve (12) months from the date of death (but in no event later than the Expiration Date). To the extent that the Grantee is not entitled to exercise the Option on the date of death, or if the Option is not exercised to the extent so entitled within the time specified herein, the Option shall terminate. 8. Transferability of Option. The Option, if an Incentive Stock Option, ------------------------- may not be transferred in any manner other than by will or by the laws of descent and distribution and may be exercised during the lifetime of the Grantee only by the Grantee; provided, however, that the Grantee may designate a beneficiary of the Grantee's Incentive Stock Option in the event of the Grantee's death on a beneficiary designation form provided by the Administrator. The Option, if a Non-Qualified Stock Option may be transferred to any person by will and by the laws of descent and distribution. Non-Qualified Stock Options also may be transferred during the lifetime of the Grantee by gift and pursuant to a domestic relations order to members of the 3 Grantee's Immediate Family to the extent and in the manner determined by the Administrator. The terms of the Option shall be binding upon the executors, administrators, heirs, successors and transferees of the Grantee. 9. Term of Option. The Option may be exercised no later than the -------------- Expiration Date set forth in the Notice or such earlier date as otherwise provided herein. 10. Tax Consequences. Set forth below is a brief summary as of the date ---------------- of this Option Agreement of some of the federal tax consequences of exercise of the Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE GRANTEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION OR DISPOSING OF THE SHARES. (a) Exercise of Incentive Stock Option. If the Option qualifies as an ---------------------------------- Incentive Stock Option, there will be no regular federal income tax liability upon the exercise of the Option, although the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price will be treated as income for purposes of the alternative minimum tax for federal tax purposes and may subject the Grantee to the alternative minimum tax in the year of exercise. (b) Exercise of Incentive Stock Option Following Disability. If the ------------------------------------------------------- Grantee's Continuous Service terminates as a result of Disability that is not total and permanent disability as defined in Section 22(e)(3) of the Code, to the extent permitted on the date of termination, the Grantee must exercise an Incentive Stock Option within three (3) months of such termination for the Incentive Stock Option to be qualified as an Incentive Stock Option. (c) Exercise of Non-Qualified Stock Option. On exercise of a Non- -------------------------------------- Qualified Stock Option, the Grantee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price. If the Grantee is an Employee or a former Employee, the Company will be required to withhold from the Grantee's compensation or collect from the Grantee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (d) Disposition of Shares. In the case of a Non-Qualified Stock --------------------- Option, if Shares are held for more than one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes and subject to tax at a maximum rate of 20%. In the case of an Incentive Stock Option, if Shares transferred pursuant to the Option are held for more than one year after receipt of the Shares and are disposed more than two years after the Date of Award, any gain realized on disposition of the Shares also will be treated as capital gain for federal income tax purposes and subject to the same tax rates and holding periods that apply to Shares acquired upon exercise of a Non-Qualified Stock Option. If Shares purchased under an Incentive Stock Option are disposed of prior to the expiration of such 4 one-year or two-year periods, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price and the lesser of (i) the Fair Market Value of the Shares on the date of exercise, or (ii) the sale price of the Shares. 11. Entire Agreement: Governing Law. The Notice, the Plan and this Option ------------------------------- Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Grantee with respect to the subject matter hereof, and may not be modified adversely to the Grantee's interest except by means of a writing signed by the Company and the Grantee. Nothing in the Notice, the Plan and this Option Agreement (except as expressly provided therein) is intended to confer any rights or remedies on any persons other than the parties. The Notice, the Plan and this Option Agreement are to be construed in accordance with and governed by the internal laws of the State of California (as permitted by Section 1646.5 of the California Civil Code, or any similar successor provision) without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. Should any provision of the Notice, the Plan or this Option Agreement be determined by a court of law to be illegal or unenforceable, such provision shall be enforced to the fullest extent allowed by law and the other provisions shall nevertheless remain effective and shall remain enforceable. 12. Headings. The captions used in the Notice and this Option Agreement -------- are inserted for convenience and shall not be deemed a part of the Option for construction or interpretation. 13. Dispute Resolution. The provisions of this Section 13 shall be the ------------------ exclusive means of resolving disputes arising out of or relating to the Notice, the Plan and this Option Agreement. The Company, the Grantee, and the Grantee's assignees pursuant to Section 8 (the "parties") shall attempt in good faith to resolve any disputes arising out of or relating to the Notice, the Plan and this Option Agreement by negotiation between individuals who have authority to settle the controversy. Negotiations shall be commenced by either party by notice of a written statement of the party's position and the name and title of the individual who will represent the party. Within thirty (30) days of the written notification, the parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to resolve the dispute. If the dispute has not been resolved by negotiation, the parties agree that any suit, action, or proceeding arising out of or relating to the Notice, the Plan or this Option Agreement shall be brought in the United States District Court for the Northern District of California (or should such court lack jurisdiction to hear such action, suit or proceeding, in a California state court in the County of San Francisco) and that the parties shall submit to the jurisdiction of such court. The parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action or proceeding brought in such court. THE PARTIES ALSO EXPRESSLY WAIVE ANY RIGHT THEY HAVE OR MAY HAVE TO A JURY TRIAL OF ANY SUCH SUIT, ACTION OR PROCEEDING. If any one or more provisions of this Section 13 shall for any reason be held 5 invalid or unenforceable, it is the specific intent of the parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable. 14. Notices. Any notice required or permitted hereunder shall be given in ------- writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail (if the parties are within the United States) or upon deposit for delivery by an internationally recognized express mail courier service (for international delivery of notice), with postage and fees prepaid, addressed to the other party at its address as shown beneath its signature in the Notice, or to such other address as such party may designate in writing from time to time to the other party. 6 EXHIBIT A --------- MORE.COM, INC. 2000 STOCK INCENTIVE PLAN EXERCISE NOTICE --------------- More.com, Inc. 520 Third Street, Suite 245 San Francisco, CA 94107 Attention: Secretary 1. Exercise of Option. Effective as of today, ______________, ___ the ------------------ undersigned (the "Grantee") hereby elects to exercise the Grantee's option to purchase ___________ shares of the Common Stock (the "Shares") of More.com, Inc. (the "Company") under and pursuant to the Company's 2000 Stock Incentive Plan, as amended from time to time (the "Plan") and the [ ] Incentive [ ] Non- Qualified Stock Option Award Agreement (the "Option Agreement") and Notice of Stock Option Award (the "Notice") dated ______________, ________. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Exercise Notice. 2. Representations of the Grantee. The Grantee acknowledges that the ------------------------------ Grantee has received, read and understood the Notice, the Plan, and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 3. Rights as Stockholder. Until the stock certificate evidencing such --------------------- Shares is 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 stockholder shall exist with respect to the Shares, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate 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 stock certificate is issued, except as provided in Section 10 of the Plan. 4. Delivery of Payment. The Grantee herewith delivers to the Company the ------------------- full Exercise Price for the Shares, which, to the extent selected, shall be deemed to be satisfied by use of the broker-dealer sale and remittance procedure to pay the Exercise Price provided in Section 3(d) of the Option Agreement. 5. Tax Consultation. The Grantee understands that the Grantee may suffer ---------------- adverse tax consequences as a result of the Grantee's purchase or disposition of the Shares. The Grantee represents that the Grantee has consulted with any tax consultants the Grantee deems advisable in connection with the purchase or disposition of the Shares and that the Grantee is not relying on the Company for any tax advice 1 6. Taxes. The Grantee agrees to satisfy all applicable federal, state and ----- local income and employment tax withholding obligations and herewith delivers to the Company the full amount of such obligations or has made arrangements acceptable to the Company to satisfy such obligations. In the case of an Incentive Stock Option, the Grantee also agrees, as partial consideration for the designation of the Option as an Incentive Stock Option, to notify the Company in writing within thirty (30) days of any disposition of any shares acquired by exercise of the Option if such disposition occurs within two (2) years from the Date of Award or within one (1) year from the date the Shares were transferred to the Grantee. If the Company is required to satisfy any federal, state or local income or employment tax withholding obligations as a result of such an early disposition, the Grantee agrees to satisfy the amount of such withholding in a manner that the Administrator prescribes. 7. Successors and Assigns. The Company may assign any of its rights under ---------------------- this Exercise Notice to single or multiple assignees, and this agreement shall inure to the benefit of the successors and assigns of the Company. This Exercise Notice shall be binding upon the Grantee and his or her heirs, executors, administrators, successors and assigns. 8. Headings. The captions used in this Exercise Notice are inserted for -------- convenience and shall not be deemed a part of this agreement for construction or interpretation. 9. Dispute Resolution. The provisions of Section 13 of the Option ------------------ Agreement shall be the exclusive means of resolving disputes arising out of or relating to this Exercise Notice. 10. Governing Law; Severability. This Exercise Notice is to be construed --------------------------- in accordance with and governed by the internal laws of the State of California (as permitted by Section 1646.5 of the California Civil Code, or any similar successor provision) without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. Should any provision of this Exercise Notice be determined by a court of law to be illegal or unenforceable, such provision shall be enforced to the fullest extent allowed by law and the other provisions shall nevertheless remain effective and shall remain enforceable. 11. Notices. Any notice required or permitted hereunder shall be given in ------- writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail, (if the parties are within the United States) or upon deposit for delivery by an internationally recognized express mail courier service (for international delivery of notice) with postage and fees prepaid, addressed to the other party at its address as shown below beneath its signature, or to such other address as such party may designate in writing from time to time to the other party. 12. Further Instruments. The parties agree to execute such further ------------------- instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this agreement. 13. Entire Agreement. The Notice, the Plan, and the Option Agreement are ---------------- incorporated herein by reference, and together with this Exercise Notice constitute the entire 2 agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Grantee with respect to the subject matter hereof, and may not be modified adversely to the Grantee's interest except by means of a writing signed by the Company and the Grantee. Nothing in the Notice, the Plan, the Option Agreement and this Exercise Notice (except as expressly provided therein) is intended to confer any rights or remedies on any persons other than the parties. Submitted by: Accepted by: GRANTEE: MORE.COM, INC. By:___________________________________ _____________________________ Title:________________________________ (Signature) Address: Address: - ------- ------- ____________________________ 520 Third Street, Suite 245 ____________________________ San Francisco, CA 94107 3 EX-10.5 8 2000 EMPLOYEE STOCK PURCHASE PLAN Exhibit 10.5 MORE.COM, INC. 2000 EMPLOYEE STOCK PURCHASE PLAN --------------------------------- The following constitute the provisions of the 2000 Employee Stock Purchase Plan of more.com, Inc. 1. Purpose. The purpose of the Plan is to provide employees of the ------- Company and its Designated Parents or Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. As used herein, the following definitions shall ----------- apply: (a) "Administrator" means either the Board or a committee of the ------------- Board that is responsible for the administration of the Plan as is designated from time to time by resolution of the Board. (b) "Applicable Laws" means the legal requirements relating to the --------------- administration of employee stock purchase plans, if any, under applicable provisions of federal securities laws, state corporate and securities laws, the Code, the rules of any applicable stock exchange or national market system, and the rules of any foreign jurisdiction applicable to participation in the Plan by residents therein. (c) "Board" means the Board of Directors of the Company. ----- (d) "Change in Control" means a change in ownership or control of the ----------------- Company effected through the direct or indirect acquisition by any person or related group of persons (other than an acquisition from or by the Company or by a Company-sponsored employee benefit plan or by a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities. (e) "Code" means the Internal Revenue Code of 1986, as amended. ---- (f) "Common Stock" means the common stock of the Company. ------------ (g) "Company" means more.com, Inc., a Delaware corporation. ------- (h) "Compensation" means an Employee's base salary from the Company ------------ or one or more Designated Parents or Subsidiaries, including such amounts of base salary as are deferred by the Employee (i) under a qualified cash or deferred arrangement described in Section 1 401(k) of the Code, or (ii) to a plan qualified under Section 125 of the Code. Compensation does not include overtime, bonuses, annual awards, other incentive payments, reimbursements or other expense allowances, fringe benefits (cash or noncash), moving expenses, deferred compensation, contributions (other than contributions described in the first sentence) made on the Employee's behalf by the Company or one or more Designated Parents or Subsidiaries under any employee benefit or welfare plan now or hereafter established, and any other payments not specifically referenced in the first sentence. (i) "Corporate Transaction" means any of the following transactions: --------------------- (1) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated; (2) the sale, transfer or other disposition of all or substantially all of the assets of the Company (including the capital stock of the Company's subsidiary corporations) in connection with complete liquidation or dissolution of the Company; (3) any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger; or (4) acquisition by any person or related group of persons (other than the Company or by a Company-sponsored employee benefit plan) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities (whether or not in a transaction also constituting a Change in Control), but excluding any such transaction that the Administrator determines shall not be a Corporate Transaction (j) "Designated Parents or Subsidiaries" means the Parents or ---------------------------------- Subsidiaries which have been designated by the Administrator from time to time as eligible to participate in the Plan. (k) "Effective Date" means the effective date of the Registration -------------- Statement relating to the Company's initial public offering of its Common Stock. However, should any Designated Parent or Subsidiary become a participating company in the Plan after such date, then such entity shall designate a separate Effective Date with respect to its employee-participants. (l) "Employee" means any individual, including an officer or -------- director, who is an employee of the Company or a Designated Parent or Subsidiary for purposes of Section 423 of the Code. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the 2 individual's employer. Where the period of leave exceeds ninety (90) days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship will be deemed to have terminated on the ninety-first (91st) day of such leave, for purposes of determining eligibility to participate in the Plan. (m) "Enrollment Date" means the first day of each Offer Period. --------------- (n) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (o) "Exercise Date" means the last day of each Purchase Period. ------------- (p) "Fair Market Value" means, as of any date, the value of Common ----------------- Stock determined as follows: (1) Where there exists a public market for the Common Stock, the Fair Market Value shall be (A) the closing price for a share of Common Stock for the last market trading day prior to the time of the determination (or, if no closing price was reported on that date, on the last trading date on which a closing price was reported) on the stock exchange determined by the Administrator to be the primary market for the Common Stock or the Nasdaq National Market, whichever is applicable or (B) if the Common Stock is not traded on any such exchange or national market system, the average of the closing bid and asked prices of a share of Common Stock on the Nasdaq Small Cap Market for the day prior to the time of the determination (or, if no such prices were reported on that date, on the last date on which such prices were reported), in each case, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (2) In the absence of an established market of the type described in (1), above, for the Common Stock, and subject to (3), below, the Fair Market Value thereof shall be determined by the Administrator in good faith; or (3) On the initial Effective Date of the Plan, the Fair Market Value shall be the price at which the Board, or if applicable, the Pricing Committee of the Board, and the underwriters agree to offer the Common Stock to the public in the initial public offering of the Common Stock. (q) "Offer Period" means an Offer Period established pursuant to ------------ Section 4 hereof. (r) "Parent" means a "parent corporation," whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (s) "Participant" means an Employee of the Company or Designated ----------- Parent or Subsidiary who is actively participating in the Plan. (t) "Plan" means this Employee Stock Purchase Plan. ---- 3 (u) "Purchase Period" means a period of approximately six months, --------------- commencing on February 15 and August 15 of each year and terminating on the next following February 14 or August 14, respectively; provided, however, that the first Purchase Period shall commence on the Effective Date and shall end on August 14, 2000. (v) "Purchase Price" shall mean an amount equal to 85% of the Fair -------------- Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower. (w) "Reserves" means the sum of the number of shares of Common Stock -------- covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. (x) "Subsidiary" means a "subsidiary corporation," whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code. 3. Eligibility. ----------- (a) General. Any individual who is an Employee on a given Enrollment ------- Date shall be eligible to participate in the Plan for the Offer Period commencing with such Enrollment Date. (b) Limitations on Grant and Accrual. Any provisions of the Plan to -------------------------------- the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) if, immediately after the grant, such Employee (taking into account stock owned by any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own stock and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Parent or Subsidiary, or (ii) which permits the Employee's rights to purchase stock under all employee stock purchase plans of the Company and its Parents or Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the Fair Market Value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. The determination of the accrual of the right to purchase stock shall be made in accordance with Section 423(b)(8) of the Code and the regulations thereunder. (c) Other Limits on Eligibility. Notwithstanding Subsection (a), --------------------------- above, the following Employees shall not be eligible to participate in the Plan for any relevant Offer Period: (i) Employees whose customary employment is 20 hours or less per week; (ii) Employees whose customary employment is for not more than 5 months in any calendar year; (iii) Employees who have been employed for 10 business days or less; and (iv) Employees who are subject to rules or laws of a foreign jurisdiction that prohibit or make impractical the participation of such Employees in the Plan. 4 4. Offer Periods. ------------- (a) The Plan shall be implemented through overlapping or consecutive Offer Periods until such time as (i) the maximum number of shares of Common Stock available for issuance under the Plan shall have been purchased or (ii) the Plan shall have been sooner terminated in accordance with Section 19 hereof. The maximum duration of an Offer Period shall be twenty-seven (27) months. Initially, the Plan shall be implemented through overlapping Offer Periods of twenty-four (24) months' duration commencing each February 15 and August 15 following the Effective Date (except that the initial Offer Period shall commence on the Effective Date and shall end on February 14, 2002). (b) A Participant shall be granted a separate option for each Offer Period in which he or she participates. The option shall be granted on the Enrollment Date and shall be automatically exercised in successive installments on the Exercise Dates ending within the Offer Period. (c) If on the first day of any Purchase Period in an Offer Period in which a Participant is participating, the Fair Market Value of the Common Stock is less than the Fair Market Value of the Common Stock on the Enrollment Date of the Offer Period (after taking into account any adjustment during the Offer Period pursuant to Section 18(a)), the Offer Period shall be terminated automatically and the Participant shall be enrolled automatically in the new Offer Period which has its first Purchase Period commencing on that date, provided the Participant is eligible to participate in the Plan on that date and has not elected to terminate participation in the Plan. (d) Except as specifically provided herein, the acquisition of Common Stock through participation in the Plan for any Offer Period shall neither limit nor require the acquisition of Common Stock by a Participant in any subsequent Offer Period. 5. Participation. ------------- (a) An eligible Employee may become a Participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the designated payroll office of the Company at least ten (10) business days prior to the Enrollment Date for the Offer Period in which such participation will commence, unless a later time for filing the subscription agreement is set by the Administrator for all eligible Employees with respect to a given Offer Period. (b) Payroll deductions for a Participant shall commence with the first partial or full payroll period beginning on the Enrollment Date and shall end on the last complete payroll period during the Offer Period, unless sooner terminated by the Participant as provided in Section 10. 5 6. Payroll Deductions. ------------------ (a) At the time a Participant files a subscription agreement, the Participant shall elect to have payroll deductions made during the Offer Period in amounts between one percent (1%) and not exceeding ten percent (10%) of the Compensation which the Participant receives during the Offer Period. (b) All payroll deductions made for a Participant shall be credited to the Participant's account under the Plan and will be withheld in whole percentages only. A Participant may not make any additional payments into such account. (c) A Participant may discontinue participation in the Plan as provided in Section 10, or may increase or decrease the rate of payroll deductions during the Offer Period by completing and filing with the Company a change of status notice in the form of Exhibit B to this Plan authorizing an increase or decrease in the payroll deduction rate. Any increase or decrease in the rate of a Participant's payroll deductions shall be effective with the first full payroll period commencing ten (10) business days after the Company's receipt of the change of status notice unless the Company elects to process a given change in participation more quickly. A Participant's subscription agreement (as modified by any change of status notice) shall remain in effect for successive Offer Periods unless terminated as provided in Section 10. The Administrator shall be authorized to limit the number of payroll deduction rate changes during any Offer Period. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) herein, a Participant's payroll deductions shall be decreased to 0%. Payroll deductions shall recommence at the rate provided in such Participant's subscription agreement, as amended, at the time when permitted under Section 423(b)(8) of the Code and Section 3(b) herein, unless such participation is sooner terminated by the Participant as provided in Section 10. 7. Grant of Option. On the Enrollment Date, each Participant shall --------------- be granted an option to purchase (at the applicable Purchase Price) two thousand (2,000) shares of the Common Stock, subject to adjustment as provided in Section 18 hereof; provided (i) that such option shall be subject to the limitations set forth in Sections 3(b), 6 and 12 hereof, and (ii) the maximum number of shares of Common Stock a Participant shall be permitted to purchase in any Purchase Period shall be five hundred (500) shares, subject to adjustment as provided in Section 18 hereof. Exercise of the option shall occur as provided in Section 8, unless the Participant has withdrawn pursuant to Section 10, and the option, to the extent not exercised, shall expire on the last day of the Offer Period. 8. Exercise of Option. Unless a Participant withdraws from the Plan ------------------ as provided in Section 10, below, the Participant's option for the purchase of shares will be exercised automatically on each Exercise Date, by applying the accumulated payroll deductions in the Participant's account to purchase the number of full shares subject to the option by dividing such Participant's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price. No 6 fractional shares will be purchased; any payroll deductions accumulated in a Participant's account which are not sufficient to purchase a full share shall be carried over to the next Purchase Period or Offer Period, whichever applies, or returned to the Participant, if the Participant withdraws from the Plan. Notwithstanding the foregoing, any amount remaining in a Participant's account following the purchase of shares on the Exercise Date due to the application of Section 423(b)(8) of the Code or Section 7, above, shall be returned to the Participant and shall not be carried over to the next Offer Period. During a Participant's lifetime, a Participant's option to purchase shares hereunder is exercisable only by the Participant. 9. Delivery. Upon receipt of a request from a Participant after -------- each Exercise Date on which a purchase of shares occurs, the Company shall arrange the delivery to such Participant, as promptly as practicable, of a certificate representing the shares purchased upon exercise of the Participant's option. 10. Withdrawal; Termination of Employment. ------------------------------------- (a) A Participant may either (i) withdraw all but not less than all the payroll deductions credited to the Participant's account and not yet used to exercise the Participant's option under the Plan or (ii) terminate future payroll deductions, but allow accumulated payroll deductions to be used to exercise the Participant's option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan. If the Participant elects withdrawal alternative (i) described above, all of the Participant's payroll deductions credited to the Participant's account will be paid to such Participant as promptly as practicable after receipt of notice of withdrawal, such Participant's option for the Offer Period will be automatically terminated, and no further payroll deductions for the purchase of shares will be made during the Offer Period. If the Participant elects withdrawal alternative (ii) described above, no further payroll deductions for the purchase of shares will be made during the Offer Period, all of the Participant's payroll deductions credited to the Participant's account will be applied to the exercise of the Participant's option on the next Exercise Date, and after such Exercise Date, such Participant's option for the Offer Period will be automatically terminated. If a Participant withdraws from an Offer Period, payroll deductions will not resume at the beginning of the succeeding Offer Period unless the Participant delivers to the Company a new subscription agreement. (b) Upon termination of a Participant's employment relationship (as described in Section 2(k)) at a time more than three (3) months from the next scheduled Exercise Date, the payroll deductions credited to such Participant's account during the Offer Period but not yet used to exercise the option will be returned to such Participant or, in the case of his/her death, to the person or persons entitled thereto under Section 14, and such Participant's option will be automatically terminated. Upon termination of a Participant's employment relationship (as described in Section 2(k)) within three (3) months of the next scheduled Exercise Date, the payroll deductions credited to such Participant's account during the Offer Period but not yet used to exercise the option will be applied to the purchase of Common Stock on the next Exercise Date, unless the Participant (or in the case of the Participant's death, the person or persons entitled to the Participant's account balance under Section 14) withdraws from the Plan by 7 submitting a change of status notice in accordance with subsection (a) of this Section 10. In such a case, no further payroll deductions will be credited to the Participant's account following the Participant's termination of employment and the Participant's option under the Plan will be automatically terminated after the purchase of Common Stock on the next scheduled Exercise Date. 11. Interest. No interest shall accrue on the payroll deductions -------- credited to a Participant's account under the Plan. 12. Stock. ----- (a) Subject to adjustment upon changes in capitalization of the Company as provided in Section 18, the maximum number of shares of Common Stock which shall be made available for sale under the Plan shall be two million (2,000,000) shares, plus an annual increase to be added on the first business day of the Company's fiscal year beginning in 2001 equal to the lesser of (i) two million (2,000,000) shares, (ii) one and three-quarters percent (1.75%) of the outstanding shares of Common Stock on such date, or (iii) a lesser number of shares determined by the Administrator. If the Administrator determines that on a given Exercise Date the number of shares with respect to which options are to be exercised may exceed (x) the number of shares then available for sale under the Plan or (y) the number of shares available for sale under the Plan on the Enrollment Date of the Offer Period in which such Exercise Date is to occur, the Administrator may make a pro rata allocation of the shares remaining available for purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine to be equitable, and shall either continue all Offer Periods then in effect or terminate any Offer Periods then in effect pursuant to Section 19, below. (b) A Participant will have no interest or voting right in shares covered by the Participant's option until such shares are actually purchased on the Participant's behalf in accordance with the applicable provisions of the Plan. No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date of such purchase. (c) Shares to be delivered to a Participant under the Plan will be registered in the name of the Participant or in the name of the Participant and his or her spouse. 13. Administration. The Plan shall be administered by the -------------- Administrator which shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Administrator shall, to the full extent permitted by Applicable Law, be final and binding upon all persons. 14. Designation of Beneficiary. -------------------------- (a) Each Participant will file a written designation of a beneficiary who is to receive any shares and cash, if any, from the Participant's account under the Plan in the event of 8 such Participant's death. If a Participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the Participant (and the Participant's spouse, if any) at any time by written notice. In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living (or in existence) at the time of such Participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Administrator), the Administrator shall deliver such shares and/or cash to the spouse (or domestic partner, as determined by the Administrator) of the Participant, or if no spouse (or domestic partner) is known to the Administrator, then to the issue of the Participant, such distribution to be made per stirpes (by right of representation), or if no issue are known to the Administrator, then to the heirs at law of the Participant determined in accordance with Section 27. 15. Transferability. Neither payroll deductions credited to a --------------- Participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 14 hereof) by the Participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Administrator may treat such act as an election to withdraw funds from an Offer Period in accordance with Section 10. 16. Use of Funds. All payroll deductions received or held by the ------------ Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 17. Reports. Individual accounts will be maintained for each ------- Participant in the Plan. Statements of account will be given to Participants at least annually, which statements will set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 18. Adjustments Upon Changes in Capitalization; Corporate ----------------------------------------------------- Transactions. ------------ (a) Adjustments Upon Changes in Capitalization. Subject to any ------------------------------------------ required action by the stockholders of the Company, the Reserves, the Purchase Price, the maximum number of shares that may be purchased in any Offer Period or Purchase Period, as well as any other terms that the Administrator determines require adjustment shall be proportionately adjusted for (i) 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, (ii) any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company, or (iii) as the Administrator may determine in its discretion, any other transaction with respect to Common Stock to which Section 424(a) of the Code applies; 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 Administrator and its determination 9 shall be final, binding and conclusive. Except as the Administrator determines, 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 hereof shall be made with respect to, the Reserves and the Purchase Price. (b) Corporate Transactions. In the event of a proposed Corporate ---------------------- Transaction, each option under the Plan shall be assumed by such successor corporation or a parent or subsidiary of such successor corporation, unless the Administrator determines, in the exercise of its sole discretion and in lieu of such assumption, to shorten the Offer Period then in progress by setting a new Exercise Date (the "New Exercise Date"). If the Administrator shortens the Offer Period then in progress in lieu of assumption in the event of a Corporate Transaction, the Administrator shall notify each Participant in writing, at least ten (10) days prior to the New Exercise Date, that the Exercise Date for the Participant's option has been changed to the New Exercise Date and that the Participant's option will be exercised automatically on the New Exercise Date, unless prior to such date the Participant has withdrawn from the Offer Period as provided in Section 10. For purposes of this Subsection, an option granted under the Plan shall be deemed to be assumed if, in connection with the Corporate Transaction, the option is replaced with a comparable option with respect to shares of capital stock of the successor corporation or Parent thereof. The determination of option comparability shall be made by the Administrator prior to the Corporate Transaction and its determination shall be final, binding and conclusive on all persons. 19. Amendment or Termination. ------------------------ (a) The Administrator may at any time and for any reason terminate or amend the Plan. Except as provided in Section 18, no such termination can affect options previously granted, provided that the Plan or an Offer Period may be terminated by the Administrator on any Exercise Date or by the Administrator establishing a new Exercise Date with respect to any Offer Period and/or any Purchase Period then in progress if the Administrator determines that the termination of the Plan or such Offer Period is in the best interests of the Company and its stockholders. Except as provided in Section 18 and this Section 19, no amendment may make any change in any option theretofore granted which adversely affects the rights of any Participant without the consent of affected Participants. To the extent necessary to comply with Section 423 of the Code (or any successor rule or provision or any other Applicable Law), the Company shall obtain stockholder approval in such a manner and to such a degree as required. (b) Without stockholder consent and without regard to whether any Participant rights may be considered to have been "adversely affected," the Administrator shall be entitled to limit the frequency and/or number of changes in the amount withheld during Offer Periods, change the length of Purchase Periods within any Offer Period, determine the length of any future Offer Period, whether future Offer Periods shall be consecutive or overlapping, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, establish additional terms, conditions, rules or procedures to accommodate the rules or laws of applicable foreign jurisdictions, permit payroll withholding in excess of the amount designated by a Participant in order to adjust for delays or mistakes in the Company's processing of properly 10 completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each Participant properly correspond with amounts withheld from the Participant's Compensation, and establish such other limitations or procedures as the Administrator determines in its sole discretion advisable and which are consistent with the Plan. 20. Notices. All notices or other communications by a Participant to ------- the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Administrator at the location, or by the person, designated by the Administrator for the receipt thereof. 21. Conditions Upon Issuance of Shares. Shares shall not be issued ---------------------------------- with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the Participant 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 by any of the aforementioned Applicable Laws. In addition, no options shall be exercised or shares issued hereunder before the Plan shall have been approved by stockholders of the Company as provided in Section 23. 22. Term of Plan. The Plan shall become effective upon the earlier ------------ to occur of its adoption by the Board or its approval by the stockholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 19. 23. Stockholder Approval. Continuance of the Plan shall be subject -------------------- to approval by the stockholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such stockholder approval shall be obtained in the degree and manner required under Applicable Laws. 24. No Employment Rights. The Plan does not, directly or indirectly, -------------------- create any right for the benefit of any employee or class of employees to purchase any shares under the Plan, or create in any employee or class of employees any right with respect to continuation of employment by the Company or a Designated Parent or Subsidiary, and it shall not be deemed to interfere in any way with such employer's right to terminate, or otherwise modify, an employee's employment at any time. 25. No Effect on Retirement and Other Benefit Plans. Except as ----------------------------------------------- specifically provided in a retirement or other benefit plan of the Company or a Designated Parent or Subsidiary, participation in the Plan shall not be deemed compensation for purposes of computing benefits or contributions under any retirement plan of the Company or a Designated Parent or Subsidiary, and shall not affect any benefits under any other benefit plan of any kind or any benefit plan subsequently instituted under which the availability or amount of benefits is related to level of compensation. The Plan is not a "Retirement Plan" or "Welfare Plan" under the Employee Retirement Income Security Act of 1974, as amended. 11 26. Effect of Plan. The provisions of the Plan shall, in accordance -------------- with its terms, be binding upon, and inure to the benefit of, all successors of each Participant, including, without limitation, such Participant's estate and the executors, administrators or trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy or representative of creditors of such Participant. 27. Governing Law. The Plan is to be construed in accordance with ------------- and governed by the internal laws of the State of California (as permitted by Section 1646.5 of the California Civil Code, or any similar successor provision) without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties, except to the extent the internal laws of the State of California are superseded by the laws of the United States. Should any provision of the Plan be determined by a court of law to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable. 28. Dispute Resolution. The provisions of this Section 28 (and as ------------------ restated in the Subscription Agreement) shall be the exclusive means of resolving disputes arising out of or relating to the Plan. The Company and the Participant, or their respective successors (the "parties"), shall attempt in good faith to resolve any disputes arising out of or relating to the Plan by negotiation between individuals who have authority to settle the controversy. Negotiations shall be commenced by either party by notice of a written statement of the party's position and the name and title of the individual who will represent the party. Within thirty (30) days of the written notification, the parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to resolve the dispute. If the dispute has not been resolved by negotiation, the parties agree that any suit, action, or proceeding arising out of or relating to the Plan shall be brought in the United States District Court for the Northern District of California (or should such court lack jurisdiction to hear such action, suit or proceeding, in a California state court in the County of San Francisco) and that the parties shall submit to the jurisdiction of such court. The parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action or proceeding brought in such court. THE PARTIES ALSO EXPRESSLY WAIVE ANY RIGHT THEY HAVE OR MAY HAVE TO A JURY TRIAL OF ANY SUCH SUIT, ACTION OR PROCEEDING. If any one or more provisions of this Section 28 shall for any reason be held invalid or unenforceable, it is the specific intent of the parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable. 12 Exhibit A more.com, Inc. 2000 Employee Stock Purchase Plan SUBSCRIPTION AGREEMENT Effective with the Offer Period beginning on: [_] ESPP Effective Date [_] August 15, 2000 or [_] February 15, 2001 1. Personal Information [modify data requested as appropriate] Legal Name (Please Print)__________________________ _________ ___________ (Last) (First) (MI) Location Department Street Address_____________________________________ ______________________ Daytime Telephone City, State/Country, Zip___________________________ ______________________ E-Mail Address Social Security No. __ __ __ - Employee I.D. No.___ ______________________ Manager Mgr. Location 2. Eligibility Any Employee whose customary employment is more than 20 hours per week and more than 5 months per calendar year, who has been an Employee for more than 10 business days and who does not hold (directly or indirectly) five percent (5%) or more of the combined voting power of the Company, a parent or a subsidiary, whether in stock or options to acquire stock is eligible to participate in the more.com, Inc. 2000 Employee Stock Purchase Plan (the "ESPP"); provided, however, that Employees who are subject to the rules or laws of a foreign jurisdiction that prohibit or make impractical the participation of such Employees in the ESPP are not eligible to participate. 3. Definitions Each capitalized term in this Subscription Agreement shall have the meaning set forth in the ESPP. 4. Subscription I hereby elect to participate in the ESPP and subscribe to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the ESPP. I have received a complete copy of the ESPP and a prospectus describing the ESPP and understand that my participation in the ESPP is in all respects subject to the terms of the ESPP. The effectiveness of this Subscription Agreement is dependent on my eligibility to participate in the ESPP. 5. Payroll Deduction Authorization I hereby authorize payroll deductions from my Compensation during the Offer Period in the percentage specified below (payroll reductions may not exceed 10% of Compensation nor $21,250 per calendar year): Percentage to be Deducted (circle one) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 6. ESPP Accounts and Purchase Price I understand that all payroll deductions will be credited to my account under the ESPP. No additional payments may be made to my account. No interest will be credited on funds held in the account at any time including any refund of the account caused by withdrawal from the ESPP. All payroll deductions shall be accumulated for the purchase of Company Common Stock at the applicable Purchase Price determined in accordance with the ESPP. 7. Withdrawal and Changes in Payroll Deduction I understand that I may discontinue my participation in the ESPP at any time prior to an Exercise Date as provided in Section 10 of the ESPP, but if I do not withdraw from the ESPP, any accumulated payroll deductions will be applied automatically to purchase Company Common Stock. I may increase or decrease the rate of my payroll deductions in whole percentage increments to not less than one percent (1%) during any Purchase Period by completing and timely filing a Change of Status Notice. Any increase or decrease will be effective for the full payroll period occurring after ten (10) business days from the Company's receipt of the Change of Status Notice. 8. Perpetual Subscription I understand that this Subscription Agreement shall remain in effect for successive Offer Periods until I withdraw from participation in the ESPP, or termination of the ESPP. 9. Taxes I have reviewed the ESPP prospectus discussion of the federal tax consequences of participation in the ESPP and consulted with tax consultants as I deemed advisable prior to my participation in the ESPP. I hereby agree to notify A-1 the Company in writing within thirty (30) days of any disposition (transfer or sale) of any shares purchased under the ESPP if such disposition occurs within two (2) years of the Enrollment Date (the first day of the Offer Period during which the shares were purchased) or within one (1) year of the Exercise Date (the date I purchased such shares), and I will make adequate provision to the Company for foreign, federal, state or other tax withholding obligations, if any, which arise upon the disposition of the shares. In addition, the Company may withhold from my Compensation any amount necessary to meet applicable tax withholding obligations incident to my participation in the ESPP, including any withholding necessary to make available to the Company any tax deductions or benefits contingent on such withholding. 10. Dispute Resolution The provisions of this Section 10 and Section 28 of the ESPP shall be the exclusive means of resolving disputes arising out of or relating to the Plan. The Company and I, or our respective successors (the "parties"), shall attempt in good faith to resolve any disputes arising out of or relating to the Plan by negotiation between individuals who have authority to settle the controversy. Negotiations shall be commenced by either party by notice of a written statement of the party's position and the name and title of the individual who will represent the party. Within thirty (30) days of the written notification, the parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to resolve the dispute. If the dispute has not been resolved by negotiation, the Company and I agree that any suit, action, or proceeding arising out of or relating to the Plan shall be brought in the United States District Court for the Northern District of California (or should such court lack jurisdiction to hear such action, suit or proceeding, in a California state court in the County of San Francisco) and that we shall submit to the jurisdiction of such court. The Company and I irrevocably waive, to the fullest extent permitted by law, any objection we may have to the laying of venue for any such suit, action or proceeding brought in such court. THE COMPANY AND I ALSO EXPRESSLY WAIVE ANY RIGHT WE HAVE OR MAY HAVE TO A JURY TRIAL OF ANY SUCH SUIT, ACTION OR PROCEEDING. If any one or more provisions of this Section 10 or Section 28 of the ESPP shall for any reason be held invalid or unenforceable, it is the specific intent of the Company and I that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable. 11. Designation of Beneficiary In the event of my death, I hereby designate the following person or trust as my beneficiary to receive all payments and shares due to me under the ESPP : [_] I am single [_] I am married Beneficiary_________________________________ Relationship to Beneficiary (please print) (Last) (First) (MI) (if any) Street Address______________________________ ____________________________ City, State/Country, Zip____________________ 12. Termination of ESPP I understand that the Company has the right, exercisable in its sole discretion, to amend or terminate the ESPP at any time, and a termination may be effective as early as an Exercise Date, including the establishment of an alternative date for an Exercise Date within each outstanding Offer Period. Date:___________ Employee Signature:_____________________________________ _____________________________________ spouse's signature (if beneficiary is other than spouse) A-2 Exhibit B more.com, Inc. 2000 Employee Stock Purchase Plan CHANGE OF STATUS NOTICE _______________________________________ Participant Name (Please Print) _______________________________________ Social Security Number ================================================================================ Withdrawal From ESPP I hereby withdraw from the more.com, Inc. 2000 Employee Stock Purchase Plan (the "ESPP") and agree that my option under the applicable Offer Period will be automatically terminated and all accumulated payroll deductions credited to my account will be refunded to me or applied to the purchase of Common Stock depending on the alternative indicated below. No further payroll deductions will be made for the purchase of shares in the applicable Offer Period and I shall be eligible to participate in a future Offer Period only by timely delivery to the Company of a new Subscription Agreement. [_] Withdrawal and Purchase of Common Stock Payroll deductions will terminate, but your account balance will be applied to purchase Common Stock on the next Exercise Date. Any remaining balance will be refunded. [_] Withdrawal Without Purchase of Common Stock Entire account balance will be refunded to me and no Common Stock will be purchased on the next Exercise Date provided this notice is submitted to the Company ten (10) business days prior to the next Exercise Date. ================================================================================ [_] Change in Payroll Deduction I hereby elect to change my rate of payroll deduction under the ESPP as follows (select one): Percentage to be Deducted (circle one) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% An increase or a decrease in payroll deduction will be effective for the first full payroll period commencing no fewer than ten (10) business days following the Company's receipt of this notice, unless this change is processed more quickly. ================================================================================ B-1 ================================================================================ [_] Change of Beneficiary [_] I am single [_] I am married This change of beneficiary shall terminate my previous beneficiary designation under the ESPP. In the event of my death, I hereby designate the following person or trust as my beneficiary to receive all payments and shares due to me under the ESPP: Beneficiary___________________________________ Relationship to Beneficiary (please print) (Last) (First) (MI) (if any) Street Address________________________________ ____________________________ City, State/Country, Zip______________________ =============================================================================== Date:_______________ Employee Signature:_____________________________________ _____________________________________ spouse's signature (if beneficiary is other than spouse) B-2 EX-10.6 9 COMPENSATION PROTECTION AGREEMENT EXHIBIT 10.6 COMPENSATION PROTECTION AGREEMENT --------------------------------- THIS COMPENSATION PROTECTION AGREEMENT (this "Agreement"), made as of the ___ day of ________, 2000, by and between more.com, Inc., a corporation incorporated under the laws of Delaware (the "Company"), and _________________ ("Protected Officer"). WHEREAS, the Board of Directors of the Company (the "Board") recognizes that the possibility of a Change in Control (as hereinafter defined) exists and that the threat or the occurrence of a Change in Control can result in significant distractions of its key management personnel because of the uncertainties inherent in such a situation; WHEREAS, the Board has determined that it is essential and in the best interest of the Company and its stockholders to retain the services of Protected Officer in the event of a threat or occurrence of a Change in Control and to ensure Protected Officer's continued dedication and efforts in such event without undue concern for Protected Officer's personal financial and employment security; and WHEREAS, in order to induce Protected Officer to remain in the employ of the Company, particularly in the event of a threat or the occurrence of a Change in Control, the Company desires to enter into this Agreement with Protected Officer to provide Protected Officer with certain benefits in the event Protected Officer's employment is terminated as a result of, or in connection with, a Change in Control; NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows: 1. Term of Agreement. This Agreement shall commence as of _______ ----------------- __, 2000 (the "Effective Date") and shall continue in effect until the third anniversary of the Effective Date; provided, that commencing on the third -------- anniversary of the Effective Date and on each subsequent anniversary thereof, the term of this Agreement shall automatically be extended for one (1) year unless either the Company or Protected Officer shall have given written notice to the other at least ninety (90) days prior thereto that the term of this Agreement shall not be so extended; and provided, further, that notwithstanding -------- ------- any such notice by the Company not to extend, the term of this Agreement shall not expire prior to the expiration of twelve (12) months after the occurrence of a Change in Control. 2. Definitions. ----------- 2.1. Accrued Compensation. "Accrued Compensation" shall mean an -------------------- amount which shall include all amounts earned or accrued through the Termination Date (as hereinafter defined) but not paid as of the Termination Date, including, without limitation, (i) base salary, (ii) reimbursement for reasonable and necessary expenses incurred by Protected Officer on behalf of the Company during the period ending on the Termination Date, and (iii) vacation pay. 1 2.2. Base Amount. "Base Amount" shall mean the amount of Protected ----------- Officer's annual base salary at the rate in effect immediately prior to the Change in Control, and shall include all amounts of Protected Officer's base salary that are deferred under the qualified and non-qualified employee benefit plans of the Company or any other agreement or arrangement. 2.3. Bonus Amount. "Bonus Amount" shall mean the greater of (i) 100% ------------ of the last annual incentive payment paid or payable to Protected Officer prior to the Termination Date under the Company's cash bonus incentive plan, and (ii) Protected Officer's incentive target for the fiscal year in which the Change in Control occurs. 2.4. Cause. A termination of employment is for "Cause" if Protected ----- Officer has been convicted of a felony involving fraud or dishonesty or the termination is evidenced by a resolution adopted in good faith by two-thirds of the Board to the effect that Protected Officer (i) intentionally and continually failed substantially to perform Protected Officer's reasonably assigned duties with the Company (other than a failure resulting from Protected Officer's incapacity due to physical or mental illness or from Protected Officer's assignment of duties that would constitute Good Reason (as hereinafter defined)), which failure continued for a period of at least thirty (30) days after a written notice of demand for substantial performance has been delivered to Protected Officer specifying the manner in which Protected Officer has failed substantially to perform, or (ii) intentionally engaged in conduct which is demonstrably and materially injurious to the Company; provided, that no -------- termination of Protected Officer's employment shall be for Cause as set forth in clause (ii) above until (a) there shall have been delivered to Protected Officer a copy of a written notice setting forth that Protected Officer was guilty of the conduct set forth in clause (ii) and specifying the particulars thereof in detail, and (b) Protected Officer shall have been provided an opportunity to be heard in person by the Board (with the assistance of Protected Officer's counsel if Protected Officer so desires). No act, nor failure to act, on Protected Officer's part shall be considered "intentional" unless Protected Officer has acted, or failed to act, with a lack of good faith and with a lack of reasonable belief that Protected Officer's action or failure to act was in the best interest of the Company. 2.5. Change in Control. "Change in Control" shall mean any of the ----------------- following: (a) An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any Person (as the term "person" is used for purposes of Section 13 or 14 of the Securities Exchange Act of 1934, as amended (the "1934 Act")) immediately after which such Person has Beneficial Ownership (as the term "beneficial ownership" is defined under Rule 13d-3 promulgated under the 1934 Act) of forty percent (40%) or more of the combined voting power of the Company's then outstanding Voting Securities; Provided, that in determining whether a Change in Control has -------- occurred, Voting Securities which are acquired in a Non-Control Acquisition (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (i) an 2 employee benefit plan (or a trust forming a part thereof) maintained by (1) the Company or (2) any corporation or other Person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by the Company (a "Subsidiary"), (ii) the Company or any Subsidiary, or (iii) any Person in connection with a Non-Control Transaction (as hereinafter defined); (b) The individuals who, as of date this Agreement is approved by the Board, are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least a majority of the Board; provided, that if the -------- appointment, election or nomination for election by the Company's stockholders of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered a member of the Incumbent Board; and provided, further, that no -------- ------- individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the 1934 Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; (c) Approval by stockholders of the Company of: (1) A merger, consolidation or reorganization involving the Company, unless such merger, consolidation or reorganization satisfies the conditions set forth in clauses (i) and (ii) below (any transaction(s) meeting the requirements of clauses (i) and (ii) below being referred to herein as "Non-Control Transactions"): (i) the stockholders of the Company immediately before such merger, consolidation or reorganization own, directly or indirectly, immediately following such merger, consolidation or reorganization, at least sixty percent (60%) of the combined voting power of the outstanding voting securities of the corporation resulting from such merger, consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization; and (ii) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least a majority of the members of the board of directors of the Surviving Corporation; (2) A complete liquidation or dissolution of the Company; or 3 (3) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary); and (d) Any other event that at least two-thirds of the Incumbent Board in its sole discretion shall determine constitutes a Change in Control. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person; provided, that if a -------- Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such share acquisition by the Company the Subject Person becomes the Beneficial Owner of any additional voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur. (e) Notwithstanding anything contained in this Agreement to the contrary, if Protected Officer's employment is terminated prior to a Change in Control and the Board determines that such termination (i) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control and who subsequently effectuates a Change in Control (a "Third Party") or (ii) otherwise occurred in connection with, or in anticipation of, a Change in Control which actually occurs, then, for all purposes of this Agreement, the date of a Change in Control with respect to Protected Officer shall mean the date immediately prior to the date of such termination of Protected Officer's employment. 2.6. Company. The "Company" shall mean more.com, Inc. and shall ------- include its "Successors and Assigns" (as hereinafter defined). 2.7. Disability. "Disability" shall mean a physical or mental ---------- infirmity which impairs Protected Officer's ability to substantially perform Protected Officer's duties with the Company for a period of one hundred eighty (180) consecutive days; provided, that Protected Officer has not returned to -------- Protected Officer's full-time employment prior to the Termination Date as stated in the Notice of Termination (as hereinafter defined). 2.8. Good Reason. ----------- (a) "Good Reason" shall mean the occurrence after a Change in Control of any of the events or conditions described in subsections (i) through (viii) hereof: (i) (A) a change in Protected Officer's status, title, position or responsibilities (including reporting responsibilities) which, in Protected Officer's reasonable judgment, represents an adverse change from 4 Protected Officer's status, title, position or responsibilities as in effect at any time within ninety (90) days preceding the date of a Change in Control or at any time thereafter; (B) the assignment to Protected Officer of any duties or responsibilities which, in Protected Officer's reasonable judgment, are inconsistent with Protected Officer's status, title, position or responsibilities as in effect at any time within ninety (90) days preceding the date of a Change in Control or at any time thereafter; or (C) any removal of Protected Officer from or failure to reappoint or reelect Protected Officer to any of such offices or positions, except in connection with the termination of Protected Officer's employment for Disability, Cause, as a result of Protected Officer's death or by Protected Officer other than for Good Reason; (ii) reduction in Protected Officer's base salary to a level below that in effect at any time within ninety (90) days preceding the date of a Change in Control or at any time thereafter (except to the extent such reduction is part of a comprehensive reduction in salary applicable to employees of the Company generally so long as the reduction applicable to Protected Officer is comparable to the reduction applied to other senior executives of the Company), or any failure to pay Protected Officer any compensation or benefits to which Protected Officer is entitled within five (5) days of the date due; (iii) the Company's requiring Protected Officer to be based at any place outside a 25-mile radius from Protected Officer's job location or residence prior to the Change in Control, except for reasonably required travel on the Company's business which is not materially greater than such travel requirements prior to the Change in Control; (iv) the failure by the Company to (A) continue in effect (without reduction in benefit level and/or reward opportunities) any material compensation or employee benefit plan in which Protected Officer was participating at any time within ninety (90) days preceding the date of the Change in Control or at any time thereafter, including, but not limited to, the plans listed on Appendix A (which shall include vacation policies), unless such plan is replaced with a plan that provides substantially equivalent compensation or benefits to Protected Officer, or (B) provide Protected Officer with compensation and benefits, in the aggregate, at least equal (in terms of benefit levels and/or reward opportunities) to those provided for under each other employee benefit plan, program and practice in which Protected Officer was participating at any time within ninety (90) days preceding the date of the Change in Control or at any time thereafter or which are provided to other similarly situated executives of the Company; (v) the insolvency or the filing (by any party, including the Company) of a petition for bankruptcy of the Company, which petition is not dismissed within sixty (60) days; 5 (vi) any material breach by the Company of any provision of this Agreement: (vii) any purported termination of Protected Officer's employment for Cause by the Company which does not comply with the terms of Section 2.4; or (viii) the failure of the Company to obtain an agreement, satisfactory to Protected Officer, from any Successors and Assigns (as hereinafter defined) to assume and agree to perform this Agreement, as contemplated in Section 6 hereof. (b) Any event or condition described in this Section 2.8 which occurs prior to a Change in Control, but which the Board determines (i) was at the request of a Third Party, or (ii) otherwise arose in connection with, or in anticipation of, a Change in Control which actually occurs, shall constitute Good Reason for purposes of this Agreement notwithstanding that it occurred prior to the Change in Control. (c) Protected Officer's right to terminate Protected Officer's employment pursuant to this Section 2.8 shall not be affected by Protected Officer's incapacity due to physical or mental illness. Protected Officer must determine whether to invoke the right to terminate employment pursuant to Section 2.8(a)(i) or 2.8(a)(iii) within ninety (90) days of the change in status or relocation referred to therein. 2.9. Notice of Termination. Following a Change in Control, "Notice --------------------- of Termination" shall mean a written notice from the Company of termination of Protected Officer's employment which indicates the specific termination provision in this Agreement relied upon and which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Protected Officer's employment under the provision so indicated. 2.10. Pro-Rata Bonus. "Pro-Rata Bonus" shall mean an amount equal to -------------- the Bonus Amount multiplied by a fraction the numerator of which is the number of days in the fiscal year through the Termination Date and the denominator of which is 365. 2.11. Successors and Assigns. "Successors and Assigns" shall mean a ---------------------- corporation or other entity acquiring all or substantially all the assets and business of the Company (including this Agreement), whether by operation of law or otherwise. 2.12. Termination Date. "Termination Date" shall mean (i) in the case ---------------- of Protected Officer's death, Protected Officer's date of death, (ii) in the case of Good Reason, the last day of Protected Officer's employment, and (iii) in all other cases, the date specified in the Notice of Termination; provided, -------- that if Protected Officer's employment is terminated by the Company for Cause or due to Disability, the date specified in the Notice of Termination shall be at least thirty (30) days from the date the Notice of Termination is given to Protected Officer; and provided, further, that in the case of Disability -------- ------- Protected Officer shall not have returned to the full-time performance of Protected Officer's duties during such period of at least thirty (30) days. 6 3. Protected Officer Obligations. During the term of this ----------------------------- Agreement, and excluding any periods of vacation and sick leave to which Protected Officer is entitled, Protected Officer agrees to devote his full time and attention spent on business matters to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to Protected Officer by the Company that do not constitute Good Reason, to use Protected Officer's reasonable best efforts to perform faithfully and efficiently such responsibilities; provided, that it shall not be a violation of -------- this Agreement for Protected Officer to, without limitation, (i) serve on corporate, civic or charitable boards or committees, (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions, (iii) manage personal investments and (iv) perform such other activities as the Board may approve, so long as such activities do not interfere materially with the performance of Protected Officer's responsibilities as an employee of the Company. It is expressly understood and agreed that to the extent that any such activities have been conducted by Protected Officer prior to the date of a Change of Control, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to such date shall not thereafter be deemed to interfere with the performance of Protected Officer's responsibilities to the Company. 4. Termination of Employment. ------------------------- 4.1. Termination Benefits. If, during the term of this Agreement, -------------------- Protected Officer's employment with the Company shall be terminated within twelve (12) months following a Change in Control, Protected Officer shall be entitled to the following compensation and benefits: - -------- (a) If Protected Officer's employment with the Company shall be terminated (i) by the Company for Cause or Disability, (ii) by reason of Protected Officer's death, (iii) due to Protected Officer's retirement pursuant to the Company's policies applying to executive officers generally, or (iv) by Protected Officer other than for Good Reason, the Company shall pay to Protected Officer the Accrued Compensation; (b) If Protected Officer's employment with the Company shall be terminated for any reason other than as specified in Section 4.1(a), Protected Officer shall be entitled to the following: (i) the Company shall pay Protected Officer all Accrued Compensation and a Pro-Rata Bonus; (ii) the Company shall pay Protected Officer as severance pay and in lieu of any further compensation for periods subsequent to the Termination Date, an amount in cash equal to two (2) times the sum of (A) the Base Amount and (B) the Bonus Amount; (iii) until the third anniversary of the Date of Termination, Protected Officer shall have such rights with respect to benefits provided by the Company, including without limitation life insurance, disability, 7 medical, dental and hospitalization benefits and pension and retirement benefits as were provided to Protected Officer as of the Effective Date or, if greater, at any time within ninety (90) days preceding the date of the Change in Control; and (iv) the restrictions on any outstanding incentive awards (including restricted stock and granted performance shares or units) granted to Protected Officer under the Company's stock option and other stock incentive plans or under any other incentive plan or arrangement shall lapse and such incentive award shall become 100% vested, all stock options and stock appreciation rights granted to Protected Officer shall become immediately exercisable and shall become 100% vested and all performance units granted to Protected Officer shall become 100% vested, except that such acceleration will not occur, if in the opinion of the Company's accountants, it would render unavailable "pooling of interest" accounting for a Change in Control that would otherwise qualify for such accounting treatment; provided however that such acceleration of any outstanding equity-based incentive awards under the provisions of any employment agreement, offer letter or stock option or other equity-based compensation award agreement entered into by Protected Officer prior to the Effective Date shall occur regardless of whether such acceleration would render unavailable "pooling of interest" accounting for a Change in Control that would otherwise qualify for such accounting treatment. In addition, the vesting and exercisability of any purchase rights granted under an employee stock purchase plan qualified under Section 423 of the Code shall not accelerate under this Section 4.1(b)(iv). (c) The amounts provided for in Sections 4.1(a) and 4.1(b)(i), and (ii) shall be paid in a single lump sum cash payment within thirty (30) days after the Termination Date (or earlier, if required by applicable law). (d) The Protected Officer shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to Protected Officer in any subsequent employment. 4.2. Other Benefit Policies. The severance pay and benefits provided ---------------------- for in this Section 4 shall be in lieu of any other severance or termination pay to which Protected Officer may be entitled under any Company severance or termination plan, program, practice or arrangement except as provided in Section 4.1(b)(iv). The Protected Officer's entitlement to any other compensation or benefits shall be determined in accordance with the Company's employee benefit plans (including the plans listed on Appendix A) and other applicable programs, policies and practices then in effect. The Company may condition the payment to Protected Officer of severance benefits pursuant to Section 4.1(b)(ii) upon Protected Officer's delivery of a reasonable form of release in favor of the Company containing customary terms and conditions for the release of employment related claims. Nothing in this Agreement shall alter Protected Officer's status as an "at will" employee of the Company. 8 5. Notice of Termination. Following a Change in Control, any purported --------------------- termination of Protected Officer's employment by the Company shall be communicated by Notice of Termination to Protected Officer. For purposes of this Agreement, no such purported termination shall be effective without such Notice of Termination. 6. Excise Tax Payments. ------------------- 6.1. Notwithstanding anything contained in this Agreement to the contrary, to the extent that any payment or benefit (within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")) to Protected Officer or for Protected Officer's benefit, paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, Protected Officer's employment with the Company or a Change in Control (a "Payment" or "Payments"), would be subject to the excise tax imposed under Code Section 4999, or any interest or penalties are incurred by Protected Officer with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), the Payments shall be reduced (but not below zero) if and to the extent that a reduction in the Payments would result in Protected Officer retaining a larger amount, on an after-tax basis (taking into account federal, state and local income taxes and the Excise Tax), than if Protected Officer received all of the Payments (any such reduced amount is hereinafter referred to as the "Limited Payment Amount"). Unless Protected Officer shall have given prior written notice specifying a different order to the Company to effectuate the Limited Payment Amount, the Company shall reduce or eliminate the Payments by (i) first reducing or eliminating those payments or benefits which are payable in cash and then (ii) by reducing or eliminating non-cash payments or benefits, in each case in reverse order beginning with payments or benefits which are to be paid the farthest in time from the Determination (as hereinafter defined). Any notice given by Protected Officer pursuant to the preceding sentence shall take precedence over the provisions of any other plan, arrangement or agreement governing Protected Officer's rights and entitlements to any benefits or compensation. 6.2. An initial determination as to whether the Payments shall be reduced to the Limited Payment Amount and the amount of such Limited Payment Amount shall be made, at the Company's expense, by the accounting firm that is the Company's independent accounting firm as of the date of the Change in Control (the "Accounting Firm"). The Accounting Firm shall provide its determination (the "Determination"), together with detailed supporting calculations and documentation, to the Company and Protected Officer within five (5) days of the Termination Date, if applicable, or such other time as requested by the Company or by Protected Officer (provided Protected Officer reasonably believes that any of the Payments may be subject to the Excise Tax) and, if the Accounting Firm determines that no Excise Tax is payable by Protected Officer with respect to a Payment or Payments, it shall furnish Protected Officer with an opinion reasonably acceptable to Protected Officer that no Excise Tax will be imposed with respect to any such Payment or Payments. Within ten (10) days of the delivery of the Determination to Protected Officer, Protected Officer shall have the right to dispute the Determination (the "Dispute"). If there is no Dispute, the Determination shall be 9 binding, final and conclusive upon the Company and Protected Officer, subject to the application of Section 6.3 below. 6.3. As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that the Payments to be made to, or provided for the benefit of, Protected Officer either will be greater (an "Excess Payment") or less (an "Underpayment") than the amounts provided for by the limitations contained in Section 5.1. (a) If it is established, pursuant to a final determination of a court or an Internal Revenue Service (the "IRS") proceeding which has been finally and conclusively resolved, that an Excess Payment has been made, such Excess Payment shall be deemed for all purposes to be a loan to Protected Officer made on the date Protected Officer received the Excess Payment, which loan Protected Officer must repay to the Company together with interest at the applicable federal rate under Code Section 7872(f)(2); provided, that no loan -------- shall be deemed to have been made and no amount will be payable by Protected Officer to the Company unless, and only to the extent that, the deemed loan and payment would either reduce the amount on which Protected Officer is subject to tax under Code Section 4999 or generate a refund of tax imposed under Code Section 4999. (b) In the event that it is determined, by (i) the Accounting Firm, the Company (which shall include the position taken by the Company, or together with its consolidated group, on its federal income tax return) or the IRS, (ii) pursuant to a determination by a court, or (iii) upon the resolution to Protected Officer's satisfaction of the Dispute, that an Underpayment has occurred, the Company shall pay an amount equal to the Underpayment to Protected Officer within ten (10) days of such determination or resolution, together with interest on such amount at the applicable federal rate under Code Section 7872(f)(2) from the date such amount would have been paid to Protected Officer until the date of payment. 7. Cooperation. Notwithstanding anything to the contrary contained herein, ----------- payment of the amounts specified in Section 4.1(b)(ii) hereof is conditional upon Protected Officer cooperating with the Company in connection with any Change of Control or proposed Change of Control and all matters relating to Protected Officer's employment with the Company and assisting the Company as reasonably requested in transitioning Protected Officer's responsibilities to Protected Officer's replacement as well as upon Protected Officer refraining from doing or saying anything derogatory about the Company or its businesses or personnel; provided, that Protected Officer shall not be required to perform any -------- duties or take any action that would constitute Good Reason. 8. Confidential Information. Protected Officer shall hold in confidence ------------------------ for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company and its businesses, which shall have been obtained by Protected Officer in the course of Protected Officer's employment by the Company and which shall not be public knowledge (other than by acts by Protected Officer in violation of this Agreement) ("Confidential Information"). --------- Whether before or after termination of the Protected 10 Officer's employment with the Company, Protected Officer shall not, without the prior written consent of the Company, communicate or divulge any Confidential Information, other than to the Company and to those persons or entities designated by the Company or as otherwise is reasonably necessary for Protected Officer to carry out his or her responsibilities as an executive of the Company. In no event shall an asserted violation of the provisions of this Section 8 constitute a basis for deferring or withholding any amounts otherwise payable to Protected Officer under this Agreement. 9. Exclusive Remedy. ---------------- 9.1. Protected Officer's right to salary continuation and other severance benefits pursuant to Section 4.1 shall be Protected Officer's sole and exclusive remedy for any termination of Protected Officer's employment by the Company other than for Death, Disability or Cause or by Protected Officer for Good Reason. The payments, severance benefits and severance protections provided to Protected Officer pursuant to this Agreement are provided in lieu of any severance payments, severance benefits and severance protections provided in any other plan or policy of the Company, except as may be expressly provided in writing under the terms of any plan or policy of the Company, or in a written agreement between the Company and Protected Officer entered into after the date of this Agreement. Notwithstanding the foregoing, nothing in this Agreement shall prevent or limit Protected Officer's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company (except for any severance or termination policies, plans, programs or practices) and for which Protected Officer may qualify, nor shall anything herein limit or reduce such rights as Protected Officer may have under any other agreements with the Company (except for any severance or termination agreement). Amounts which are vested benefits or which Protected Officer is otherwise entitled to receive under any plan or program of the Company shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement. 9.2. The Company agrees to pay, to the full extent permitted by law, all legal fees and expenses which Protected Officer may reasonably incur as a result of any contest by the Company or others of the validity or enforceability of, or liability under, any provision of this Agreement which is ultimately decided in favor of Protected Officer. 10. Successors; Binding Agreement. ----------------------------- 10.1. This Agreement shall be binding upon and shall inure to the benefit of the Company and its Successors and Assigns, and the Company shall require any Successors and Assigns to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. 10.2. Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by Protected Officer or Protected Officer's beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This 11 Agreement shall inure to the benefit of and be enforceable by Protected Officer's legal personal representative. 11. Fees and Expenses. The Company shall pay all reasonable legal fees and ----------------- related expenses (including the reasonable costs of experts, evidence and counsel) incurred by Protected Officer as they become due as a result of (a) Protected Officer's termination of employment (including all such fees and expenses, if any, incurred in contesting or disputing any such termination of employment), (b) Protected Officer's seeking to obtain or enforce any right or benefit provided by this Agreement (including, but not limited to, any such fees and expenses incurred in connection with any Dispute) or by any other plan or arrangement maintained by the Company under which Protected Officer is or may be entitled to receive benefits, and (c) Protected Officer's hearing before the Board as contemplated in Section 2.4; provided, that the circumstances set forth -------- in clauses (a) and (b) of this Section 11 (other than as a result of Protected Officer's termination of employment under circumstances described in Section 2.5(d)) occurred on or after a Change in Control. 12. Notice. Notices and all other communications provided for in this ------ Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses last given by each party to the other; provided, that all notices to -------- the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof or on the third business day after the mailing thereof, except that notice of change of address shall be effective only upon receipt. 13. Settlement of Claims. The Company's obligation to make the payments -------------------- provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against Protected Officer or others. 14. Miscellaneous. No provision of this Agreement may be modified, waived ------------- or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Protected Officer and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representation, oral or otherwise, express or implied, with respect to the subject matter hereof has been made by either party which is not expressly set forth in this Agreement. 12 15. Governing Law; Arbitration. -------------------------- (a) This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California without giving effect to the conflict of laws principles thereof. (b) Any controversy or claim arising out of, relating to or in connection with this Agreement, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association ("AAA") in accordance with its then existing Commercial Arbitration rules and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. (c) It is the express agreement of the parties that the provisions of this Section, including the rules of the AAA , as modified by the terms of this Section 15, shall govern the arbitration of any disputes arising pursuant to this Agreement. In the event of any conflict between the law of the State of California, the law of the arbitral location, and the U.S. Arbitration Act (Title 9, U.S. Code), with respect to any arbitration conducted pursuant to this Agreement, to the extent permissible, it is the express intent of the parties that the law of California, as modified herein, shall prevail. To the extent this Section 15 is deemed a separate agreement, independent from this Agreement, Sections 11, 12, 14, 16 and 17 are incorporated herein by reference. Either party (the "Initiating Party") may commence an arbitration by submitting ---------------- a Demand for Arbitration under the AAA Rules and by notice to the other Party (the "Respondent") in accordance with Section 12. Such notice shall set forth in ---------- reasonable detail the basic operative facts upon which the Initiating Party seeks relief and specific reference to the clauses of this Agreement, the amount claimed, if any, and any nonmonetary relief sought against the Respondent. After the initial list of issues to be resolved has been submitted, the arbitrators shall permit either party to propose additional issues for resolution in the pending proceedings. (d) The place of arbitration shall be Denver, California, or any other place selected by mutual agreement. (e) The parties shall attempt, by agreement, to nominate a sole arbitrator for confirmation by the AAA. If the parties fail so to nominate a sole arbitrator within 30 days from the date when the Initiating Party's Demand for Arbitration has been communicated to the other party, a board of three arbitrators shall be appointed by the parties jointly or, if the parties cannot agree as to three arbitrators within 30 days after the commencement of the arbitration proceeding, then one arbitrator shall be appointed by each of Protected Officer and the Company within 60 days after the commencement of the arbitration proceeding and the third arbitrator shall be appointed by mutual agreement of such two arbitrators. If such two arbitrators shall fail to agree within 75 days after commencement of the arbitration proceeding upon the appointment of the third arbitrator, the third arbitrator shall be appointed by the AAA in accordance with its then existing rules. Notwithstanding the foregoing, if any party shall fail to appoint an arbitrator within the specified time period, such arbitrator and the third arbitrator shall be appointed by the AAA in accordance with its then existing rules. For purposes of this Section 15, the "commencement of the arbitration proceeding" shall be deemed to be the date upon 13 which the Demand for Arbitration has been received by the AAA. Any award shall be rendered by a majority of the members of the board of arbitration. (f) An award rendered in connection with an arbitration pursuant to this Section 15 shall be final and binding upon the parties, and any judgment upon such an award may be entered and enforced in any court of competent jurisdiction. (g) The parties agree that the award of the arbitral tribunal will be the sole and exclusive remedy between them regarding any and all claims between them with respect to the subject matter of the arbitrated dispute. The parties hereby waive all jurisdictional defenses in connection with any arbitration hereunder or the enforcement of any order or award rendered pursuant thereto (assuming that the terms and conditions of this arbitration clause have been complied with). (h) With respect to any award issued by the arbitrators pursuant to this Agreement, the parties expressly agree (i) that such order shall be conclusive proof of the validity of the determination(s) of the arbitrators underlying such order; and (ii) any federal court sitting in Denver, California, or any other court having jurisdiction, may enter judgment upon and enforce such order, whether pursuant to the U.S. Arbitration Act, or otherwise. (i) The arbitrators shall issue a written explanation of the reasons for the award and a full statement of the facts as found and the rules of law applied in reaching their decision to both parties. The arbitrators shall apportion to each party all costs (other than attorneys' fees) incurred in conducting the arbitration in accordance with what the arbitrators deem just and equitable under the circumstances. The prevailing party shall be entitled to recover its attorneys' fees from the other party. Any provisional remedy which would be available to a court of law shall be available from the arbitrators pending arbitration of the dispute. Either party may make an application to the arbitrators seeking injunctive or other interim relief, and the arbitrators may take whatever interim measures they deem necessary in respect of the subject matter of the dispute, including measures to maintain the status quo until such time as the arbitration award is rendered or the controversy is otherwise resolved. The arbitrator shall have the authority to award any remedy or relief that a court of the State of California could order or grant, including, without limitation, specific performance of any obligation created under this Agreement, the issuance of an injunction, or the imposition of sanctions for abuse or frustration of the arbitration process, but specifically excluding punitive damages (the parties specifically agree that punitive damages shall not be available in the event of any dispute). (j) The parties may file an application in any proper court for a provisional remedy in connection with an arbitrable controversy, but only upon the ground that the award to which the application may be entitled may be rendered ineffectual without provisional relief. 14 16. Severability. The provisions of this Agreement shall be deemed ------------ severable, and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 17. Entire Agreement. This Agreement constitutes the entire agreement ---------------- between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or otherwise, between the parties hereto with respect to the subject matter hereof except that the provisions regarding the acceleration of vesting and exercisability of any outstanding equity-based incentive awards under any employment agreement, offer letter or stock option or other equity-based compensation award agreement entered into by Protected Officer prior to the Effective Date shall remain in full force and effect. 15 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and Protected Officer has executed this Agreement as of the day and year first above written. MORE.COM, INC. ATTEST: By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- - ----------------------------- Secretary PROTECTED OFFICER --------------------------------------- Signature --------------------------------------- Print Name 16 EX-10.7 10 LEASE - 500 THIRD STREET Exhibit 10.7 LEASE 500 THIRD STREET INTEREAL CORPORATION, AGENTS (415) 778-3900 THIS LEASE ("Lease"), dated as of August 1, 1999, for reference purposes only is made and entered into by and between 500 THIRD STREET ASSOCIATES, a California General Partnership herein called Lessor and MORE.COM a DELAWARE corporation herein called Lessee. THIS LEASE is subject to the terms, covenants and conditions herein set forth, and the Tenant covenants as a material part of the consideration for this Lease to keep and perform each and all of said terms, covenants and conditions by it to be kept and performed and that this Lease is made upon the condition of said performance. WITNESSETH: ARTICLE 1 Premises Lessor hereby leases to Lessee and Lessee leases from Lessor for the term, at the rental, and upon all of the conditions set forth herein a portion of that certain real property situated in the City and County of San Francisco, State of California, commonly known as the 500 Third Street Building, located at the Southwest corner of Third and Bryant Streets. Said portion is more particularly described as: (See Addendum) a suite of approximately (See Addendum), as diagrammed on Exhibit "B" attached to and made a part of this lease. Said real property, including the land and the improvements therein or so much as Lessee is entitled to occupy or use under terms of this Lease, is herein called the "Premises". ARTICLE 2 Term Except as otherwise provided in this Lease, the term of this Lease shall be One (1) year commencing on August 1, 1999. and expiring on July 31, 2000 unless sooner terminated pursuant to any provisions hereof. ARTICLE 3 Possession Notwithstanding said commencement date, if for any reason Lessor cannot deliver possession of the Premises to Lessee on said date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this 1 Lease or the obligations of Lessee hereunder or extend the term hereof, but in such case, Lessee shall not be obligated to pay rent until possession of the Premises is tendered to Lessee; provided, however, that if Lessor shall not have delivered possession of the Premises within sixty (60) days from said commencement date, Lessee may, at Lessee's option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided further, however, that if such written notice of Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. If Lessee occupies the Premises prior to said commencement date, such occupancy shall be subject to all provisions hereof, such occupancy shall not advance t he termination date, and Lessee shall pay rent for such period at the initial monthly rates set forth below. ARTICLE 4 Base Rent Lessee shall pay to Lessor as base rent for the Premises the sum of TWENTY FOUR THOUSAND, FIVE HUNDRED SIXTY ONE Dollars and 50/100 ($24,561.50), commencing August 1, 1999 in advance on or before the first day of each calendar month of the term of this Lease without deduction, offset, prior notice or demand, in lawful money of the United States. Base Rent for any period during the term hereof which is for less than one month shall be a pro rata portion of the monthly installment calculated on a 30-day month basis and payable in advance. ARTICLE 5 Security Deposit Lessee has deposited with Lessor the sum of TWENTY FOUR THOUSAND, FIVE HUNDRED SIXTY ONE Dollars and 50/100 ($24,561.50). Said sum shall be held by Lessor as security for the faithful performance by Lessee of all the terms, covenants, and conditions of this Lease to be kept and performed by Lessee during the term hereof. If Lessee defaults with respect to any provision of this Lease, including, but not limited to the provisions relating to the payment of rent, Lessor may (but shall not be required to) use, apply or retain all or any part of this security deposit for the payment of any rent or any other sum in default, or for the payment of any amount which Lessor may spend or become obligated to spend by reason of Lessee's default, or to compensate Lessor for any other loss or damage which Lessor may suffer by reason of Lessee's default. If any portion of said deposit is so used or applied, Lessee shall within five (5) days after written demand therefor, deposit cash with Lessor in an amount sufficient to restore the security deposit to its original amount and Lessee's failure to do so shall be a material breach of this Lease. Lessor shall not be required to keep this security deposit separate from its general funds, and Lessee shall not be entitled to interest on such deposit. If Lessee shall fully and faithfully perform every provision of this Lease to be performed by it, the security deposit or any balance thereof shall be returned to Lessee (or, at Lessor's option, to the last assignee of Lessee's interest hereunder) at the expiration 2 of the Lease Term. In the event of termination of Lessor's interest in this Lease, Lessor shall transfer said deposit to Lessor's successor in interest. ARTICLE 6 Rent Adjustments Notwithstanding anything contained in this Article, the rental payable by Lessee shall in no event be less than the base rent specified in Article four (4) herein above. For the purposes of this Article, the following terms are defined as follows: Base Year: The calendar year in which this Lease term commences, (1998). Comparison Year: Each calendar year of the term after the Base Year. (A) Direct Expenses: In addition to Base Rent, Lessee shall pay to Lessor its Pro Rata share of expenses as herein defined. All direct costs of operation and maintenance, as determined by standard accounting practices, shall include the following costs by way of illustration, but not be limited to: real property taxes and assessments; rent taxes, gross receipt taxes, (whether assessed against the Lessor or assessed against the Lessee and collected by the Lessor, or both), water and sewer charges, insurance premiums, utilities, janitorial services, labor, costs incurred in the management of the Building, if any, air conditioning & heating, elevator maintenance, supplies, material, equipment, and tools, including maintenance, costs, and upkeep of all parking and common areas. ("Direct Expenses" shall not include depreciation on the Building of which the Premises are a part or equipment therein, loan payments, executive salaries or real estate brokers' commissions, or costs paid directly by Lessee). If the Direct Expenses paid or incurred by the Lessor for the Comparison Year on account of the operation or maintenance of the Building of which the Premises area part are in excess of the Direct Expenses paid or incurred for the Base Year, then the Lessee shall pay 9.06% of the increase. This percentage is that portion of the total rentable area of the Building occupied by the Lessee hereunder. Lessor shall endeavor to give to Lessee on or before the first day of March of each year following the respective Comparison Year a statement of the increase in rent payable by Lessee hereunder, but failure by Lessor to give such statement by said date shall not constitute a waiver by Lessor of its right to require an increase in rent. Upon receipt of the statement for the first Comparison Year, Lessee shall pay in full the total amount of increase due for the first Comparison Year, and in addition for the then current year, the amount of any such increase shall be used as an estimate for said current year and this amount shall be divided into twelve (12) equal monthly installments and Lessee shall pay to Lessor, concurrently with the regular monthly rent payment next due following the receipt of such statement, an amount equal to one (1) monthly installment multiplied by the number of months from January in the calendar year in which said statement is submitted to the month of 3 such payment, both months inclusive. Subsequent installments shall be payable concurrently with the regular monthly rent payments for the balance of that calendar year and shall continue until the next Comparison Year's statement is rendered. If the next or any succeeding Comparison Year results in a greater increase in Direct Expenses, then upon receipt of a statement from Lessor, Lessee shall pay a lump sum equal to such total increase in Direct Expenses over the Base Year, less the total of the monthly installments of estimated increases paid in the previous calendar year for which comparison is then being made to the Base Year; and the estimated monthly installments to be paid for the next year, following said Comparison Year, shall be adjusted to reflect such increase. If in any Comparison Year the Lessee's share of Direct Expenses be less than the preceding year, then upon receipt of Lessor's statement, any overpayment made by Lessee on the monthly installment basis provided above shall be credited towards the next monthly rent falling due and the estimated monthly installments of Direct Expenses to be paid shall be adjusted to reflect such lower Direct Expenses for the most recent Comparison Year. Even though the term has expired and Lessee has vacated the Premises, when the final determination is made of Lessee's share of Direct Expenses for the year in which this Lease terminates, Lessee shall immediately pay any increase due over the estimated expenses paid and conversely any overpayment made d expenses decree shall be immediately rebated by Lessor to Lessee. (B) UTILITIES. Lessee shall pay prior to delinquency for all water, gas, hear, light, power, telephone, sewage, air conditioning and ventilating, scavenger, janitorial, landscaping and all other materials and utilities supplied to the Premises. If any such services are not separately metered to Lessee, Lessee shall pay a pro rata share of all charges which are jointly metered, the determination to be made by Lessor, and payment to be made by Lessee together with rent as estimated by Lessor. Pro rata share for purposes hereof shall be 9.06% and may be adjusted reasonably to reflect actual usage and cost. ARTICLE 7 Property Taxes Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause said trade fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 4 ARTICLE 8 Use The Premises shall be used and occupied by Lessee for only the following purposes and for no other purposes whatsoever without obtaining the prior written consent of Lessor: Offices & warehouse space. (A) Lessee shall not do or permit anything to be done in or about the Premises which will increase the existing rate of insurance upon the Premises (unless Lessee shall pay any increased premium as a result of such use or acts) or cause the cancellation of any insurance policy covering said Premises or any building of which the Premises may be a part, nor shall Lessee sell or permit to be kept, used or sold in or about said Premises any articles which may be prohibited by a standard form policy of fire insurance. (B) Lessee shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of any building of which the Premises may be a part or injure or annoy them or use or allow the Premises to be used for any unlawful or objectionable purpose, nor shall Lessee cause, maintain or permit any nuisance in, an or about the Premises. Lessee shall not commit or suffer to be committed any waste in or upon the Premises. (C) Lessee shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with any law, statute, zoning restriction, ordinance or governmental rule or regulation or requirements or duly constituted public authorities now in force or which may hereafter be enacted or promulgated. Lessee shall at its sole cost and expense promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force and with the requirements of any board of fire underwriters or other similar body now or hereafter constituted relating to or affecting the condition, use or occupancy of the Premises. The judgment of any court of competent jurisdiction or the admission of Lessee in any action against Lessee, whether Lessor be a party thereto or not, that Lessee has violated any law, statute, ordinance or governmental rule, regulation or covenant, shall be conclusive of that fact as between Lessor and Lessee. (D) Lessee understands and acknowledges that using the Premises as permanent lodging or residence is prohibited by this lease and by local zoning ordinances. Lessee further understands and acknowledges that Lessee may not "build out" or construct any tenant improvements in the Premises incident to use of the Premises as a residence, including, but not limited to, a kitchen or a bedroom. Lessee certifies that the premises shall not be used as a residence. Further, Lessee expressly agrees to indemnify the Lessor and to hold the Lessor harmless in the event Lessor is subject to any liability, either civil or criminal, including, but not limited to, any expense, fines, levies, 5 liens or other assessments, expenses or liabilities incurred as a result of any proceeding by any person or governmental entity, as a result of Lessee's violation of these terms. ARTICLE 9 Condition of Premises If the Premises are completed as of the date of execution hereof, then Lessee, by execution of this Lease, shall be deemed to have accepted the Premises in the condition existing as of the date of execution and in any event this Lease shall be subject to all applicable zoning ordinances and to any municipal, county and state laws and regulations governing and regulating the use of the Premises. Lessee acknowledges that neither Lessor nor Lessor's agent has made any representation or warranty as to the suitability of the Premises for the conduct of Lessee's business. ARTICLE 10 Maintenance, Repair and Alterations Lessee shall keep in good order, condition and repair the Premises and every part thereof, structural and non structural, (whether or not such portion of the Premises requiring repair, or the means of repairing the same are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, including, without limiting the generality of the foregoing, all plumbing, heating, air conditioning, (Lessee shall procure and maintain, at Lessee's expense, an air conditioning system maintenance contract, if applicable) ventilating, electrical, lighting facilities and equipment within the Premises, fixtures, walls, (interior and exterior), ceilings, floors, windows, doors, plate glass and skylights located within the Premises. (A) Lessor's Rights. If Lessee fails to perform Lessee's obligations under this Article 10, or under any other paragraph of the Lease, Lessor may at its option (but shall not be required to) enter upon the Premises after ten (10) days' prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee's behalf and put the same in good order, condition and repair, and the cost thereof together with interest thereon at the maximum rate then allowable by law shall become due and payable as additional rental to Lessor together with Lessee's next rental installment. (B) Lessor's Obligations. Except for the obligations of Lessor under Article 9 (relating to Lessor's warranty), Article 14 (relating to destruction of the Premises) and under Article 15 (relating to condemnation of the Premises), it is intended by the parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises nor the building located thereon nor the equipment therein, whether structural or non structural, all of which obligations are intended to be that of the Lessee tinder Article 10 hereof. Lessee expressly waives the benefit of any statute 6 now or hereinafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises in good order, condition and repair. (C) Lessee shall not, without Lessor's prior written consent make any alterations, improvements, additions or Utility Installations in, on or about the Premises, except for nonstructural alterations not exceeding $10,00, -in cumulative costs during the term of this Lease. In any event, whether or not in excess of $2,500 in cumulative cost, Lessee shall make no change or alteration to the exterior of the Premises nor the exterior of the building(s) on the Premises without Lessor's prior written consent, less those alterations approved in Exhibit "C." (1) As used in this Article 10 (C) the term "Utility Installation" shall mean carpeting, window coverings, air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, plumbing, and fencing. Lessor may require that Lessee remove any or all of said alterations, improvements, additions or Utility Installations at the expiration of the term, and restore the Premises to their prior condition. Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Lessee make any alterations or improvements, additions or Utility Installations without the prior approval of Lessor, Lessor may require that Lessee remove any or all of the same, less those alterations approved in Exhibit "C." (2) Any alterations, improvements, additions or Utility Installations in, or about the Premises that Lessee shall desire to make and which requires the consent of the Lessor shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent, the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from appropriate governmental agencies, the furnishing of a copy thereof to Lessor prior to the commencement of the work and the compliance by Lessee of a I conditions of said permit in a prompt and expeditious manner. (3) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanics' lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of 7 any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability for the same and holding the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorneys fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. (4) Unless Lessor requires their removal, as set forth in Article 10 (C), all alterations, improvement, additions and Utility Installations (whether or not such Utility Installations constitute trade fixtures of Lessee), which may be made on the Premises, shall become the property of the Lessor and remain upon and be surrendered with the Premises at the expiration of the term. Notwithstanding the provisions of this Article 10 (C), Lessee's machinery and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises, shall remain the property of Lessee and may be removed by Lessee subject to the provisions of Article 11. ARTICLE 11 Surrender of Premises On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as when received, ordinary wear and tear excepted, clean and free of debris. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, furnishings and equipment. Notwithstanding anything to the contrary otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distributions systems, lighting fixtures, space heaters, air conditioning, plumbing and fencing on the Premises in good operating condition. ARTICLE 12 Liability Insurance Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of comprehensive public liability insurance insuring Lessor and Lessee against any liability arising out of the ownership, use, occupancy or maintenance of the Premises and all area appurtenant thereto. The limit of said insurance shall not, however, limit the liability of the Lessee hereunder. Lessee may carry said insurance under a blanket policy, providing, however, said insurance by Lessee shall have a Lessor's protective liability endorsement attached thereto. If Lessee shall fail to procure and maintain said insurance, Lessor may, but shall not be required to, procure and maintain same, but at the expense of the Lessee. Insurance required hereunder, shall be in companies rated A+ or better in "Best's 8 Insurance Guide". Lessee shall deliver to Lessor prior to occupancy of the Premises copies of policies of liability insurance required herein or certificates evidencing the existence and amounts of such insurance with loss payable clauses satisfactory to Lessor. No policy shall be cancelable or subject to reduction of coverage except after ten (10) days' prior written notice to Lessor. ARTICLE 13 Subrogation As long as their respective insurers so permit, Lessor and Lessee hereby mutually waive their respective rights of recovery against each other for any loss insured by fire, extended coverage and other property insurance policies existing for the benefit of the respective parties. Each party shall obtain any special endorsements, if required by their insurer to evidence compliance with the aforementioned waiver. ARTICLE 14 Damage or Destruction (A) Partial Damage -- Insured. In the event improvements on the Premises are damaged by any casualty which is covered under an insurance policy required to be maintained pursuant to Article 13, then Lessor shall repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. (B) Partial Damage -- Uninsured. In the event the improvements on the Premises are damaged, except by a negligent or willful act or omission of Lessee, by any casualty not covered under an insurance policy required to be maintained pursuant to Article 12, then Lessor may, at Lessor's option, either: (1) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (2) give written notice to Lessee within thirty (30) days after the date of occurrence of such damage of Lessor's intention to cancel and terminate this Lease as of the date of the occurrence of the damage. In the event Lessor elects to terminate this Lease pursuant to this Article 14 (B), Lessee shall have the right within ten (10) days after receipt of the required notice to notify Lessor in writing of Lessee's intention to repair such damage at Lessee's expense, without reimbursement from Lessor, in which event this Lease shall continue in full force and effect, and Lessee shall proceed to make such repairs as soon as reasonably possible. If Lessee does not give such notice within the ten (10) day period, this Lease shall be canceled and terminated as of the date of the occurrence of such damage. 9 (C) Total Destruction. If the Premises are totally destroyed during the term of this Lease from any cause whether or not covered by the insurance required under Article 13 (including any destruction required by any authorized public authority), this Lease shall automatically terminate as of the date of such total destruction. (D) Damage Near End of The Term. If the Premises are partially destroyed or damaged during the last six (6) months of the terms of this Lease, Lessor may at Lessor's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. (E) Lessor's Obligations. The Lessor shall not be required to repair any injury or damage by fire or other cause, or to make any restoration or replacement of any panelings, decorations, office fixtures, partitions, railings, ceilings, floor covering, equipment, machinery or fixtures or any other improvements or property installed in the Premises by Lessee or at the direct or indirect expense of Lessee. Lessee shall be required to restore or replace same in the event of damage. (F) Abatement of Rent; Lessee's Remedies. (1) If the premises are partially destroyed or damaged and Lessor or Lessee repairs them pursuant to this Lease, the rent payable hereunder for the period during which such damage and repair continues shall be abated in proportion to the extent to which Lessee's use of the Premises is impaired. Except for abatement of rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair or restoration. (2) If Lessor shall be obligated to repair or restore the Premises under this Section 14 and shall not commence such repair or restoration within ninety (90) days after such obligation shall accrue, Lessee at Lessee's option may cancel and terminate this Lease by written notice to Lessor at any time prior to the commencement of such repair or restoration. In such event this Lease shall terminate as of the date of such notice. (G) Termination -- Advance Payments. Upon termination of this Lease pursuant to Article 14, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's security deposit as has not theretofore been applied by Lessor. 10 ARTICLE 15 Condemnation (A) If the premises or any portion thereof are taken under the power of eminent domain, or sold by Lessor under the threat of the exercise of said power (all of which is herein referred to as "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever occurs first. If more than ten percent (10%) of the floor area of any buildings on the Premises, or more than twenty-five percent (25%) of the land area of the Premises not covered with buildings, is taken by condemnation, either Lessor or Lessee may terminate this Lease, as of the date the condemning authority takes possession, by notice in writing of such election within twenty (20) days after Lessor shall have notified Lessee of the taking, or in the absence of such notice then within twenty (20) days after the condemning authority shall have taken possession. (B) If this Lease is not terminated by either Lessor or Lessee then it shall remain in full force and effect as to the portion of the Premises remaining, provided the rent shall be reduced in the proportion that the floor area of the buildings taken within the Premises bears to the total floor area of all buildings located on the Premises. In the event this Lease is not so terminated then Lessor agrees, at Lessor's sole cost, to restore the Premises to a complete unit of like quality and character as existed prior to the condemnation as soon as reasonably possible. All awards for the taking of any part of the Premises or any payment made under the threat of the exercise of compensation for diminution of value of a leasehold or for the taking of the fee or as severance damages; provided, however, that Lessee shall be entitled to any award for loss of or damage to Lessee's trade fixtures and removable personal property. In the event that this Lease is not terminated by reason of such in connection with such condemnation, Lessor shall, to the extent of severance damages received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall pay any amount in excess of such severance damages required to complete such repair. ARTICLE 16 Liens Lessee shall keep the Premises and the property in which the Premises are situated free from any liens arising out of any work performed, materials furnished or obligations incurred by Lessee. Lessor may require, a t Lessor's sole option, that Lessee shall provide to Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times any and all estimated cost of any improvements, additions, or alterations in the Premises, to insure Lessor 11 against any liability for mechanics' and material men's liens and to insure completion of the work. ARTICLE 17 Assignment and Subletting Lessee shall not mortgage, pledge, hypothecate or encumber this Lease or any interest therein. Lessee shall not assign this Lease or sublet, or suffer any other person (the agents and servants of Lessee excepted) to occupy or use, the Premises, or any part thereof, or any right or privilege appurtenant thereto without the prior written consent of Lessor first had and obtained, which consent shall not be unreasonably withheld. Lessor's consent to one assignment or subletting shall not be deemed to be a consent to any subsequent assignment or subletting, nor shall Lessor's consent release Lessee from any of its obligations under this Lease unless such consent expressly so provides. Any assignment, subletting, occupation or use without the consent of Lessor shall be void and, at the option of Lessor, shall terminate this Lease. (A) In the event at any time or times during the Term of this Lease Lessee desires to sublet all or part of the Premises, Lessor reserves the prior right and option to: (1) sublet from Lessee any portion of the Premises proposed by Lessee to be sublet for the term for which such portion is proposed to be sublet but at the same rent (including escalation as provided for in Article 6 hereof) as Lessee is required to pay to Lessor under this Lease for the same space, computed on a pro rata of square footage basis or (2) terminate this Lease as it pertains to the portion of the Premises so proposed by Lessee to be sublet. Lessee shall notify Lessor in writing if Lessee proposes to sublet all or any part of the Premises, designating the space proposed to be sublet and the terms of the proposed subletting. Lessor shall be allowed fifteen (15) days after Lessor's foregoing option. If Lessor fails to exercise its said option, all the provisions of Article 17 subparagraph (1) above, respecting subletting, nevertheless shall be in full force and effect and nothing contained in this subparagraph (2) shall be construed as a waiver by Lessor of any of its rights under said subparagraph (1). (B) Lessor's foregoing right and option shall continue throughout the entire term of this Lease. (C) In no event shall Lessee assign this Lease or sublet the Premises or any portion thereof to any then-existing lessee of the building, unless affirmed in writing by the Lessor. 12 ARTICLE 18 Hold Harmless Lessee shall indemnify and hold harmless Lessor against and from any and all claims arising from Lessee's use of the Premises for the conduct of its business or from any activity, work, or other thing done, permitted or suffered by the Lessee in or about the Premises, and shall further indemnify and hold harmless Lessor against and from any and all claims arising from any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease, or arising from any act or negligence of the Lessee, or any officer, agent, employee, guest, or invitee of Lessee, and from all and against all cost, attorney's fees, expenses and liabilities incurred in or about any such claim or any action or proceeding brought thereon, and, in any case, action or proceeding be brought against Lessor by reason of any such claim, Lessee upon notice from Lessor shall defend the same a t Lessee's expense by counsel reasonably satisfactory to Lessor. Lessee as a material part of the consideration to Lessor hereby assumes all risk of damage to property or injury to persons, in, upon or about the Premises, from any cause other than Lessor's negligence, and Lessee hereby waives all claims in respect thereof against Lessor. Lessor or its agents shall not be liable for any damage to property entrusted to employees of the Building, nor for loss or its agents shall not be liable for any damage to property entrusted to employees of the Building, nor for loss or damage to any property by theft or otherwise, nor for any injury to or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak from any part of the Building or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface or from any other place resulting from dampness or any other cause whatsoever, unless caused by or due to the negligence of Lessor, its agents, servants or employees. Lessor or its agents shall not be liable for interference with the light or other incorporeal hereditaments, loss of business by Lessee, nor shall Lessor be liable for any latent defect in the Premises or in the Building. Lessee shall give prompt notice to Lessor in case of fire or accidents in the Premises or in the Building or of defects therein or in the fixtures or equipment. ARTICLE 19 Rules and Regulations Lessee shall faithfully observe and comply with the rules and regulations, indicated on Exhibit "A" attached hereto and hereby reference thereto made a part hereof, that Lessor shall from time to time promulgate. Lessor reserves the right from time to time to make all reasonable modifications to said rules. The additions and modifications to those rules shall be binding upon Lessee upon delivery of a copy of them to Lessee. Lessor shall not be responsible to Lessee for the nonperformance of any said rules by any other tenants or occupants. 13 ARTICLE 20 Holding Over If Lessee remains in possession of the Premises or any part thereof after the expiration of the term hereof, with the express written consent of Lessor, such occupancy shall be a tenancy from month to month and a rental in the amount equal to 125% of the last monthly rental, plus all other charges payable hereunder, and upon all the terms hereof applicable to a month to month tenancy. ARTICLE 21 Entry By Lessor Lessor reserves and shall at any and all times have the right to enter the Premises, inspect the same, supply janitorial service and any other service to be provided by Lessor to Lessee hereunder, to submit said Premises to prospective purchasers or tenants, to post notices of non-responsibility, and to alter, improve or repair the Premises and any portion of the Building of which the Premises are a part that Lessor may deem necessary or desirable, without abatement of rent and may for that purpose erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed, always providing that the entrance to the Premises shall not be blocked thereby, and further providing that the business of the Lessee shall not be interfered with unreasonably. Lessee hereby waives any claim for damages or for any injury or inconvenience to or interference with Lessee's business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby. For each of the aforesaid purposes, Lessor shall at all times have and retain a key with which to unlock all of the doors in, upon and about the Premises, excluding Lessee's vaults, safes and files, and Lessor shall have the right to use any and all means which Lessor may deem proper to open said doors in an emergency, in order to obtain entry to the Premises without liability to Lessee except for any failure to exercise due care for Lessee's property. Any entry to the Premises obtained by Lessor by any of said means, or otherwise shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction of Lessee from the Premises or any portion thereof. ARTICLE 22 Estoppel Lessee shall at any time and from time to time upon not less than ten (10) days' prior written notice from Lessor execute, acknowledge and deliver to Lessor a statement in writing, (A) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the mature of such modification and certifying that this Lease as so modified, is in full force and effect), and the date to which the rental and other charges are paid in advance, if any, and 14 (B) acknowledging that there are not, to Lessee's knowledge, any uncured defaults on the part of the Lessor hereunder, or specifying such defaults if any are claimed. Any such statement may be relied upon by any prospective purchaser or encumbrancer of all or any portion of the real property of which the Premises are a part. ARTICLE 23 Reconstruction In the event the Premises or the Building of which the Premises are a part are damaged by fire or other perils covered by extended coverage insurance, Lessor agrees to forthwith repair the same; and this Lease shall remain in full force and effect, except that Lessee shall be entitled to a proportionate reduction of the rent while such repairs are being made, such proportionate reduction to be based upon the extent to which the making of such repairs shall materially interfere with the business carried on by the Lessee in the Premises. If the damage is due to the fault or neglect of Lessee or its employees, there shall be no abatement of rent. (A) In the event the Premises or the Building of which the Premises are a part are damaged as a result of any cause other than the perils covered by fire and extended coverage insurance, then Lessor shall forthwith repair (1) to repair or restore such damage, this Lease continuing in full force and effect, but the rent to be proportionately reduced as herein above in this Article provided; or (2) give notice to Lessee at any time within sixty (60) days after such damage terminating this Lease as of the date specified in such notice, which date shall be no less than thirty (30) days and no more than sixty (60) days after the giving of such notice. In the event of giving such notice, this Lease shall expire and all interest of the Lessee in the Premises shall terminate on the date so specified in such notice and the rent, reduced by a proportionate amount, based upon the extent, if any, to which such damage materially interfered with the business carried on by the Lessee in the Premises, shall be paid up to date of said such termination. (B) Notwithstanding anything to the contrary contained in this Article, Lessor shall not have any obligation whatsoever to repair, reconstruct or restore the Premises when the damage resulting from any casualty covered under this Article occurs during the last twelve (12) months of the term of this Lease or any extension thereof. Lessor shall not be required to repair any injury or damage by fire or other cause, or to make any repairs or replacements of any panels, decoration, office fixtures, railings, floor 15 covering, partitions, or any other property installed in the Premises by Lessee. (C) The Lessee shall not be entitled to any compensation or damages from Lessor for loss of the use of the whole or any part of the Premises, Lessee's personal property or any inconvenience or annoyance occasioned by such damage, repair, reconstruction or restoration. ARTICLE 24 Authority of Parties Corporate Authority. If Lessee is a corporation, each individual executing this lease on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation, in accordance with a duly adopted resolution of the board of directors of said corporation or in accordance with the by-laws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms. Limited Partnerships. If the Lessor herein is a limited partnership, it is understood and agreed that any claims by Lessee on Lessor shall be limited to the assets of the limited partnership, and furthermore, Lessee expressly waives any and all rights to proceed against the individual partners or the officers, directors or shareholders of any corporate partner, except to the extent of their interest in said limited partnership. ARTICLE 25 Default The occurrence of any one or more of the following events shall constitute a default and breach of the Lease by Lessee. (A) The vacating or abandonment of the Premises by Lessee. (B) The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of three (3) days after written notice thereof by Lessor to Lessee. (C) The failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by the Lessee, other than described in Article 25 (B) above, where such failure shall continue for a period of thirty (30) days after written notice thereof by Lessor to Lessee; provided, however, that if the nature of Lessee's default is such that more than thirty (30) days are reasonable required for its cure, then Lessee shall not be deemed to be in default if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. 16 (D) The making by Lessee of any general assignment or general arrangement for the benefit of creditors; or the filing by or against Lessee of a petition to have Lessee adjudged a bankrupt, or a petition or reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); or the appointment of a trustee or a receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged in thirty (30) days. ARTICLE 26 Remedies in Default In the event of any such material default or breach by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of a right or remedy which Lessor may have by reason of such default or breach: (A) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default including, but not limited to, the cost of recovering possession of the Premises; expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorney's fees, any real estate commission actually paid; the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonable avoided; that portion of the leasing commission paid by Lessor and applicable to the unexpired term of this Lease. Unpaid installments of rent or other sums shall bear interest from the date due at the rate of ten (10%) per cent per annum. In the event Lessee shall have abandoned the Premises, Lessor shall have the option of: (1) taking possession of the Premises and recovering from Lessee the amount specified in this paragraph, or (2) proceeding under the provision of the following Article 26 (B). (B) Maintain Lessee's right to possession, in which case this Lease shall continue in effect whether or not Lessee shall have abandoned the Premises. In such event Lessor shall be entitled to enforce all of Lessor's rights and 17 remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (C) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decision of the State in which the Premises are located. ARTICLE 27 General Provisions (A) Plats and Riders. Clauses, plats and riders, if any, signed by the Lessor and the Lessee and endorsed on or affixed to this Lease are a part hereof. (B) Waiver. The waiver by Lessor of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition on any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Lessor shall not be deemed to be a waiver of any preceding breach by Lessee of any term, covenant or condition of this Lease, other than the failure of the Lessee to pay the particular rental so accepted, regardless of Lessor's knowledge of such preceding breach at the time of the acceptance of such rent. (C) Notices. All notices and demands which may or are to be required or permitted to be given by either party to the other hereunder shall be in writing. All notices and demands by the Lessee to the Lessor shall be sent by United States Mail, postage prepaid, addressed to the Lessor at the Office of the Building, or to such other person or place as the Lessor may from time to time designate in a notice to the Lessee. (D) Joint Obligation. If there be more than one Lessee the obligations hereunder imposed upon Lessees shall be joint and several. (E) Marginal Headings. The marginal headings and Article titles to the Articles of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. (F) Time. Time is of the essence of this Lease and each and all of its provisions in which performance is a factor. (G) Successors and Assigns. The covenants and conditions herein contained, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of the parties thereto. (H) Recordation. Neither Lessor nor Lessee shall record this Lease or a short form memorandum hereof without the prior written consent of the other party. 18 (I) Quiet Possession. Upon Lessee paying the rent reserved hereunder and observing and performing all of the covenants, conditions and provisions on Lessee's part to be observed and performed hereunder, Lessee shall have quiet possession of the Premises for the entire term hereof, subject to all the provisions of this Lease. (J) Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent or other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by terms of any mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or of a sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after said amount is due, then Lessee shall pay to Lessor a late charge equal to ten (10%) per cent of such over due amount. The parties hereby agree that such late charges represent a fair and reasonable estimate of the cost that Lessor will incur by reason of the late payment by Lessee. Acceptance of such late charges by the Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. (K) Prior Agreements. This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Lease, and no prior agreements or understanding pertaining to any such matters shall be effective for any purpose. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. This Lease shall not be effective or binding on any party until fully executed by both parties hereto. (L) Inability to Perform. This Lease and the obligations of the Lessee hereunder shall not be affected or impaired because the Lessor is unable to fulfill any of its obligations hereunder or is delayed in doing so, if such inability or delay is caused by reason of strike, labor troubles, acts of God, or any other cause beyond the reasonable control of the Lessor. (M) Attorneys' Fees. In the event of any action or proceeding brought by either party against the other under this Lease the prevailing party shall be entitled to recover all costs and expenses including the fees of its attorneys in such action or proceeding in such amount as the court may adjudge reasonable as attorneys' fees. (N) Sale of Premises by Lessor. In the event of any sale of the Building, Lessor shall be and is hereby entirely freed and relieved of all liability under any and all of its covenants and obligations contained in or after the consummation of such sale; and the purchaser, at such sale or any subsequent sale of the Premises shall be deemed, without any further agreement between 19 the parties or their successors in interest or between the parties and any such purchaser, to have assumed and agreed to carry out any and all of the covenants and obligations of the Lessor under this Lease. (O) Subordination, Attornment. Upon request of the Lessor, Lessee will in writing subordinate its rights hereunder to the lien of any first mortgage, or first deed of trust to any bank, insurance company or other lending institution, now or hereafter in force against the land and Building of which the Premises are a part, and upon any buildings hereafter placed upon the land of which the Premises are a part, and to all advances made or hereafter to be made upon the security thereof. In the event any proceedings are brought for foreclosure, or in the event of the exercise of the power of sale under any mortgage or deed or trust made by the Lessor covering the Premises, the Lessee shall attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as the Lessor under this Lease. The provision of this Article to the contrary notwithstanding, and so long as Lessee is not in default hereunder, this Lease shall remain in full force and effect for the full term hereof. (P) Name. Lessee shall not use the name of the Building or of the development in which the Building is situated for any purpose other than as an address of the business to be conducted by the Lessee in the Premises. (Q) Separability. Any provision of this Lease which shall prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other provision hereof and such other provision shall remain in full force and effect. (R) Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. (S) Choice of Law. This Lease shall be governed by the laws of the State in which the Premises are located. (T) Signs and Auctions. Lessee shall not place any sign upon the Premises or Building or conduct any auction thereon without Lessor's prior written consent. ARTICLE 28 Non-Discrimination Lessee herein covenants by and for himself, his heirs, executors, administrators and assigns, and all persons claiming under or through him, and this Lease is made and accepted upon and subject to the following conditions: That there shall be no discrimination against or segregation of any person or group of persons on account of race, color, creed, national origin or ancestry, in the 20 leasing, subleasing, transferring, use, occupancy, tenure or enjoyment of the premises herein leased, nor shall Lessee himself, or any persons claiming under or through him, establish or permit any such practice or practices of discrimination or segregation with reference to the selection, location, number, use or occupancy of Lessees, Lessors, sublessors, sublessees or vendees in the premises herein leased. ARTICLE 29 Lessor's Agents It is understood and agreed that this Lease is executed by Bressie and Company solely in their capacity as Lessor's agents and said Bressie and Company shall not be obligated to perform any of the terms, conditions or covenants to be performed by Lessor herein, nor in any way be liable hereunder. ARTICLE 30 Brokers Lessee warrants that it has had no dealings with any real estate broker or agents in connection with the negotiation of this Lease excepting only None and it knows of no other real estate broker or agent who is entitled to a commission in connection with this Lease. If this Lease has been filled in, it has been prepared for submission to your attorney for his approval. No representation or recommendation is made by the real estate broker or its agents or employees as to the legal sufficiency, legal effect, or tax consequences of this Lease or the transactions relating thereto. 21 THE PARTIES HERETO HAVE EXECUTED THIS LEASE AT THE PLACE AND ON THE DATE SPECIFIED IMMEDIATELY ADJACENT TO THEIR RESPECTIVE SIGNATURES. "LESSOR 500 THIRD STREET ASSOCIATES c/o Intereal Corporation 520 Third Street, Suite 555 San Francisco, CA 94107 By:____________________________ Title: Agent For Owner Dated: 8/17/99 ------------------------- "LESSEE" MORE.COM a Delaware corporation By: /s/ Donald M. Kendall ------------------------- Title: CEO Dated 8/16/99 ------------------------- By: _________________________ Title: COO Dated 8/16/99 ------------------------- 22 EX-10.8 11 LEASE - 485 THIRD STREET Exhibit 10.8 PROFESSIONAL OFFICE BUILDING LEASE BETWEEN CHARLES A. SEGALAS an individual ("Landlord") and more.com, inc. a Delaware corporation ("Tenant") 485 Third Street San Francisco, California TABLE OF CONTENTS 1. PREMISES AND COMMON AREAS............................................. 3 1.1 Premises.................................................... 3 1.2 Common Areas................................................ 3 (a) Common Areas Defined................................... 3 (b) Tenant's Right to Use Common Areas..................... 3 (c) Landlord's Control and Management...................... 3 2. TERM OF LEASE......................................................... 3 2.1 Term of Lease............................................... 3 2.2 Possession Before Term Commences............................ 4 3. DELIVERY OF POSSESSION................................................ 4 3.1 Delivery of Possession...................................... 4 3.2 Delay in Delivery of Premises............................... 4 4. USE OF PREMISES....................................................... 4 4.1 Permitted Use............................................... 4 4.2 Limitations on Use.......................................... 4 4.3 Compliance with Laws........................................ 5 4.4 Insurance Increases......................................... 5 4.5 Rules and Regulations....................................... 5 5. RENT.................................................................. 6 5.1 Amount of Rent; Payment..................................... 6 5.2 Prepaid Rent................................................ 6 5.3 Security Deposit............................................ 6 5.4 Short First or Last Month................................... 6 (a) Adjustments of Monthly Rent............................ 6 5.5 Late Charge................................................. 7 5.6 Additional Rent............................................. 7 6. BUILDING OPERATING COSTS; UTILITIES................................... 7 6.1 Payment of Building Costs................................... 7 6.2 Definition of Tenant's Share................................ 8 6.3 Definition of Building Costs................................ 8 6.4 Definition of Real Property Taxes........................... 8 6.5 Utilities and Services...................................... 8 6.6 Tenant's Additional Service Requirements.................... 8 6.7 Interruption of Utility Service............................. 9 6.8 Energy Conservation......................................... 9 7. PERSONAL PROPERTY TAXES............................................... 9 7.1 Personal Property Taxes..................................... 9
i 8. MAINTENANCE AND REPAIR OF THE PREMISES................................. 10 8.1 Tenant's Obligations......................................... 10 8.2 Alterations.................................................. 10 8.3 Mechanics' Liens............................................. 11 9. MAINTENANCE AND REPAIR OF STRUCTURE.................................... 11 9.1 Landlord's Obligations....................................... 11 10. INSURANCE AND INDEMNIFICATION.......................................... 11 10.1 Insurance Required of Tenant................................. 11 (a) Casualty Insurance...................................... 12 (b) Liability Insurance..................................... 12 10.2 Policy Form.................................................. 12 10.3 Subrogation.................................................. 12 10.4 Indemnification.............................................. 12 11. DESTRUCTION; CONDEMNATION.............................................. 13 11.1 Destruction.................................................. 13 11.2 Condemnation................................................. 14 12. DEFAULT; REMEDIES...................................................... 14 12.1 Default...................................................... 14 12.2 Remedies in Default.......................................... 15 13. ASSIGNMENT AND SUBLETTING.............................................. 16 13.1 Definition of Assignment..................................... 16 13.2 No Assignment................................................ 17 13.3 Costs........................................................ 17 13.4 Termination.................................................. 17 13.5 Involuntary Assignment; Attachment; Involuntary Proceedings.. 17 13.6 Consideration to Landlord.................................... 17 14. SALE OF BUILDING....................................................... 18 14.1 Sale of Building............................................. 18 15. LEASE SUBJECT TO SUBORDINATION......................................... 18 15.1 Lease Subject to Subordination............................... 18 16. GENERAL PROVISIONS..................................................... 19 16.1 Signs and Blinds............................................. 19 16.2 Entry........................................................ 19 16.3 Statement of Status.......................................... 19 16.4 Attorneys' Fees.............................................. 19 16.5 Captions..................................................... 19 16.6 Notices...................................................... 19 16.7 Successors................................................... 20 16.8 Joint and Several Obligations of Tenant...................... 20 16.9 Liability of Landlord........................................ 20
ii 16.10 Independent Covenants........................................ 20 16.11 Waiver....................................................... 20 16.12 Attachments.................................................. 20 16.13 Entire Agreement............................................. 20 16.14 Amendment.................................................... 21 16.15 Severability................................................. 21 16.16 Time of Essence.............................................. 21 16.17 Holding Over................................................. 21 16.18 Broker....................................................... 21 16.19 Parking...................................................... 22
iii PROFESSIONAL OFFICE BUILDING LEASE THIS LEASE is made and entered into by the Landlord and Tenant named herein who agree as follows: FUNDAMENTAL LEASE PROVISIONS. The fundamental provisions of this Lease are:
Section 1. Date of Lease: October 29, 1999 2. Landlord: Charles A. Segalas, an individual 3. Tenant: more.com, inc., a Delaware corporation 4. Address and Description of Premises: (a) the third floor (the "Premises") of 485 Third Street, the building 1.1 commonly known as 485 Third Street, San Francisco, California (the "Building"). (b) Approximate square footage of Premises: 1,900 square feet 1.1 5. Term: (a) Duration: Thirty-Six (36) months. 2.1 (b) Commencement Date: November 15, 1999, or the date on which 2.1 Tenant commences business at the Premises, whichever is earlier. 6. Use: (a) Permitted Use: e-commerce office. 4.1 7. Monthly Rent; Building Costs: (a) Monthly Rent: 5.1 Month Base Rent 1-12 $5,700.00 13-24 $5,985.00 25-36 $6,284.25 (b) Prepaid Rent: $5,700 plus estimated share of Building Costs of 5.2 $87.09 as first month's rent
1 (c) Security Deposit: $11,400.00 5.3 (d) Initial Estimate of Tenant's Share of Building Costs: $87.09 per 6.1 month (e) Tenant's portion of Building Costs: 27.43682% 6.2 8. Minimum Liability Insurance Amount: $2,000,000 10.1(b) Combined Single Limit 9. Addresses for Notice: 18.7 (a) Landlord: 3 Los Conejos, Orinda, CA 94563-2214 (b) Tenant: At the Premises 10. Broker or Finder: Meade N. Boutwell, Cushman Wakefield 18.16 Commission to be paid by: Landlord ($5,700) 11. Exhibits: Exhibit A - Rules and Regulations
Each reference in the Lease to any of the Fundamental Lease Provisions shall be construed to include the provisions set forth above as well as all of the additional terms and provisions of the applicable sections of the Lease. The foregoing Fundamental Lease Provisions are hereby approved. Landlord: Tenant: CHARLES A. SEGALAS, an individual More.com, inc., a Delaware corporation _____________________________________ By: _________________________________ Charles A. Segalas Name: _______________________________ Title: ______________________________ By: _________________________________ Name: _______________________________ Title: ______________________________ 2 1. PREMISES AND COMMON AREAS. 1.1 Premises. Landlord leases to Tenant, and Tenant leases from Landlord the real property described in Paragraph 4(a) of the Fundamental Lease Provisions (hereinafter called the "Premises"). The Premises consist of a portion of the Building described in Paragraph 4(a) of the Fundamental Lease Provisions, on real property which is owned by Landlord. For purposes of this Lease, the Premises shall be deemed to contain the number of square feet of floor area set forth in Paragraph 4(b) of the Fundamental Lease Provisions. 1.2 Common Areas. (a) Common Areas Defined. The term "Common Areas" means all areas and facilities outside the Premises and within the exterior boundaries of the real property that are not leaseable to other tenants and that are provided and designated by Landlord for the general use and convenience of Tenant and its authorized representatives and invitees, of other tenants of the Building and their respective authorized representatives and invitees, and/or of the general public. Common Areas are areas within and outside of the Building such as, without limitation, pedestrian walkways, landscaped areas, sidewalks and entryway, stairways, lobbies, and rear exit staircases. (b) Tenant's Right to Use Common Areas. Landlord gives to Tenant and its authorized representatives and invitees the non-exclusive right to use the Common Areas with others who are entitled to use the Common Areas, subject to Landlord's rights set forth in Section 1.2(c). (c) Landlord's Control and Management. Landlord may increase, reduce, or change in any manner the Common Areas as Landlord shall deem appropriate. Without limitation, Landlord shall also have the right, from time to time, to establish and enforce reasonable rules and regulations applicable to all tenants concerning the maintenance, management, use and operation of the Common Areas, and to select a person, firm, or entity to maintain and operate any of the Common Areas and to close temporarily parts of the Common Areas for maintenance, repair, and renovation purposes. The provisions of this Section 1.2(c) to the contrary notwithstanding, in the exercise of the rights hereunder, Landlord shall provide reasonable access to and from the Premises, subject to reasonable rules and regulations and security measures approved by Landlord. 2. TERM OF LEASE. 2.1 Term of Lease. The term of this Lease (the "Term") shall be the period stated in Paragraph 5(a) of the Fundamental Lease Provisions, commencing on the Commencement Date set forth in Paragraph 5(b) of the Fundamental Lease Provisions. 3 2.2 Possession Before Term Commences. If Landlord consents to Tenant taking possession of the Premises prior to the Commencement Date, then all of the provisions of this Lease except the payment of Monthly Rent and other periodic charges shall be applicable and in full force and effect during such period. 3. DELIVERY OF POSSESSION. 3.1 Delivery of Possession. Landlord shall deliver possession of the Premises to Tenant on the Commencement Date in their existing condition, except that the Premises shall be broom clean and free of debris, carpeting cleaned as necessary in Landlord's reasonable discretion, with touch up painting as necessary in Landlord's reasonable discretion, and the plumbing, lighting, heating, ventilating and air conditioning systems, if any, shall be in good operating condition. Unless otherwise provided, Landlord shall have no obligation to improve, remodel or otherwise modify the Premises for Tenant's use. 3.2 Delay in Delivery of Premises. If Landlord is unable to deliver possession of the Premises to Tenant on or before the Commencement Date, Landlord shall not be subject to any liability for its failure to do so. Subject to the termination right set forth below, this failure shall not affect the validity of this Lease or the obligations of Tenant under it, but the Term shall commence on the date on which Landlord delivers possession of the Premises to Tenant. If, for any reason other than a delay caused in whole or in part by Tenant, the Premises are not delivered to Tenant within three (3) months after the date set forth in Paragraph 5(b) of the Fundamental Lease Provisions, Tenant, as its sole right and remedy, shall have the option of terminating this Lease, without further obligation or liability on the part of either party, by delivering written notice of termination to Landlord at any time after such date and before the Premises are delivered. Upon such termination, any deposits previously made by Tenant shall be promptly returned. 4. USE OF PREMISES. 4.1 Permitted Use. Subject to the provisions of Section 4.2, Tenant shall use and occupy the Premises solely for the purpose set forth in Paragraph 6(a) of the Fundamental Lease Provisions, and for no other use or purpose. 4.2 Limitations on Use. Tenant shall not use the Premises for or carry on or permit in or upon the Premises, or any part thereof, any offensive, noisy, or dangerous trade, business, manufacture or occupation, or any nuisance, or anything against public policy, or interfere with the business of owners or occupants of adjacent properties, or other tenants in the Building, as the case may be. Tenant agrees not to cause, permit or suffer any waste or damage, disfigurement or injury to the Premises, to the fixtures or equipment therein, or to the Common Areas, nor to permit or suffer any overloading of the floor of the Premises and/or other parts of the Building. Tenant shall not install, operate or maintain in the Premises any electrical equipment which does not bear the Underwriters Laboratory approval, or which equipment would, in the reasonable 4 opinion of Landlord, overload any portion of the electrical system which serves the Building. 4.3 Compliance with Laws. Tenant shall, at its sole cost and expense, promptly comply with all local, state or federal laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force (collectively, "Laws") with respect to the use, operation and condition of the Premises, including, without limitation, any Laws regarding or requiring alterations to the Premises and any Laws relating to the storage, use and/or disposal of Hazardous Materials. "Hazardous Materials" as used herein shall mean any hazardous or toxic substance, material, chemical or waste which is now or may subsequently during the term hereof be defined as such by, or which is now or may subsequently during the term hereof be regulated by, any governmental or quasi-governmental law, ordinance, rule or regulation. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord is a party to it or not, that Tenant has violated any Law will be conclusive of that fact as between Landlord and Tenant. Tenant's obligations under this paragraph shall include, without limitation, any alterations to the Premises that may be required under the Americans with Disabilities Act as a result of Tenant's alterations or improvements to the Premises, but shall not include seismic or other alterations or improvements that are not required as a result of Tenant's specific and unique use of the Premises. 4.4 Insurance Increases. If the rate of any insurance carried by Landlord is increased as a result of Tenant's use of the Premises or the cost, value or nature of Tenant's improvements, equipment or personal property located in the Premises, Tenant shall pay to Landlord, upon request and at least fifteen (15) days before the date Landlord is obligated to pay a premium on such insurance and in addition to all other amounts payable hereunder, a sum equal to the difference between the increased premium and what the premium would otherwise have been, as reasonably determined by Landlord's insurer. 4.5 Rules and Regulations. Tenant's use of the Premises and the Common Areas shall be subject at all times prior to and during the term of the Lease to the rules and regulations from time to time promulgated by Landlord. The current rules and regulations are set forth in Exhibit A attached to this Lease. Landlord reserves the right at any time to change or rescind any one or more of these rules and regulations or to make any additional rules and regulations that, in Landlord's judgment, may be necessary for: (a) the management, safety, care, and cleanliness of the Premises, Building, and real property; (b) the preservation of good order; or (c) the convenience of other occupants and tenants in the Premises and Building. Such rules and regulations shall become effective and a part of this Lease when a copy of same has been delivered to Tenant. The failure of another tenant to comply with such rules and regulations will neither excuse Tenant's obligation to comply with such rules and regulations or any other obligation of Tenant under this Lease nor cause Landlord to be liable to Tenant for any damage resulting to Tenant. Tenant shall cause Tenant's employees, invitees and authorized representatives to comply with such rules and regulations. 5 5. RENT. 5.1 Amount of Rent; Payment. Beginning on the Commencement Date, Tenant shall pay monthly rent in the amount set forth in Paragraph 7(a) of the Fundamental Lease Provisions (the "Monthly Rent"). The Monthly Rent shall be subject to adjustment in accordance with Section 5.5. Monthly Rent shall be paid on the first day of each calendar month of the Lease term, without deduction, offset, prior notice or demand, and shall be mailed or paid in person at the address designated in writing by Landlord from time to time. 5.2 Prepaid Rent. Upon execution of this Lease, Tenant shall pay to Landlord the amount of prepaid rent set forth in Paragraph 7(b) of the Fundamental lease Provisions, which prepaid rent shall be applied by Landlord as provided in such paragraph. 5.3 Security Deposit. Upon execution of this Lease, Tenant shall pay to Landlord a security deposit in the amount set forth in Paragraph 7(c) of the Fundamental Lease Provisions. Such sum shall be held by Landlord as security for the faithful performance by Tenant of all the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the term hereof. If Tenant defaults with respect to any provision of this Lease, including, without limitation, the provisions relating to the payment of rent, Landlord may (but shall not be required to) use, apply or retain all or any part of the security deposit to the payment of any rent in default, or for the payment of any amount which Landlord may spend or become obligated to spend by reason of Tenant's default, or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of the security deposit is so used or applied, Tenant shall, within five (5) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the security deposit to its original amount and Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep this security deposit separate from its general funds, and shall not be deemed a trustee of the security deposit. Tenant shall not be entitled to interest on such deposit. If Tenant shall fully and faithfully perform every provision of this Lease to be performed by it, the security deposit or any balance thereof shall be returned to Tenant (or, at Landlord's option, to the last assignee of Tenant's interest hereunder) at the expiration of the Lease term. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer any remaining balance of such deposit to Landlord's successor in interest. 5.4 Short First or Last Month. If the term of this Lease begins or ends on a date other than the first or last day of the calendar month, respectively, then Tenant's Monthly Rent for that month shall be reduced proportionately on the basis of a 30-day month. (a) Adjustments of Monthly Rent. If the date of any increase in Monthly Rent falls on other than the first day of a calendar month, the increase in Monthly Rent for such month shall be prorated on the basis of a 30-day month. If the amount of the increase for any month, or part of a month, is not known 6 when Tenant pays its rent for such month, Tenant shall promptly pay Landlord the amount of the increase when such amount has been determined. Landlord shall promptly notify Tenant of any increase in Monthly Rent pursuant to this Section 5.5. 5.5 Late Charge. Tenant acknowledges that late payment by Tenant to Landlord of rent will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impracticable to fix. Such costs include, without limitation, processing and accounting charges and late charges that may be imposed on Landlord by the terms any encumbrance or note secured by any encumbrance covering the Premises. Therefore, if any installment of rent due from Tenant is not received by Landlord within ten (10) days of the day it is due, Tenant shall pay to Landlord an additional sum of ten percent (10%) of the overdue rent as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord will incur and losses Landlord will suffer by reason of late payment by Tenant. Acceptance of any late charge shall not constitute a waiver of Tenant's default with respect to the overdue amount, nor prevent Landlord from exercising any of the other rights and remedies available to Landlord. 5.6 Additional Rent. Unless otherwise provided, the terms "rent" and "rental" as used in this Lease shall be deemed to mean Monthly Rent, adjustments to Monthly Rent, Building Costs and any and all other sums, however designated, required to be paid by Tenant under this Lease, whether payable to Landlord or third parties. 6. BUILDING OPERATING COSTS; UTILITIES. 6.1 Payment of Building Costs. From and after the Commencement Date, Tenant shall pay to Landlord Tenant's Share of Building Costs, as defined below. Tenant's Share of Building Costs for each calendar year shall be paid in monthly installments on the first day of each calendar month, in advance, in an amount estimated by Landlord from time to time. It is initially estimated that Tenant's Share of Building Costs will be the amount set forth in Paragraph 7(d) of the Fundamental Lease Provisions. Within forty-five (45) days after the end of each calendar year Landlord shall furnish to Tenant a statement prepared, signed and certified to be correct by Landlord showing the total Building Costs for the calendar year just ended and the actual amount of Tenant's Share of Building Costs for such period. If the total amount paid by Tenant under this Section for such year shall be less than the actual amount due from Tenant for such year as shown on the statement, Tenant shall pay to Landlord the difference between the amount paid by Tenant and the actual amount due, such deficiency to be paid with ten (10) days after the furnishing of such statement. If the total amount paid by Tenant hereunder for any such year shall exceed the actual amount due from Tenant for such year, the excess shall be credited against the next installment due from Tenant to Landlord under this Section. Landlord may estimate the annual budget and charge the same to Tenant on a monthly basis subject to revision by Landlord of the budget from time to time and final annual adjustment based upon actual costs and expenses. 7 6.2 Definition of Tenant's Share. The term "Tenant's Share" means that portion of Building Costs determined by multiplying the total Building Costs by a fraction, the numerator of which is the square footage of the Premises and the denominator of which is the average total rentable square footage in the Building (as stated in Paragraph 7(e) of the Fundamental Lease Provisions). Tenant's Share of Building Costs for any partial calendar year at the beginning or end of the term shall be prorated on the basis of a 365-day year. 6.3 Definition of Building Costs. For purposes of this Lease, "Building Costs" shall mean all costs of insurance related to the Building (including premiums and deductible amounts) and Real Property Taxes (as defined in Section 6.4). 6.4 Definition of Real Property Taxes. The term "Real Property Taxes" shall mean and include all taxes, assessments, and other governmental charges, general and special, ordinary and extraordinary, of any kind and nature whatsoever, including, but not limited to, assessments for public improvements or benefits, which shall during the term hereof be assessed, levied, and imposed upon the Building, Common Areas and underlying land; except any increase in Real Property Taxes occurring solely as a result of a change in ownership of the Building or the underlying land shall not be included. Real Property Taxes shall also include, without limitation, any tax, fee, or excise levied, assessed and/or based on rent or gross receipts; on the square footage of the Premises, of the Building, or of the Common Areas; on the act of entering into leases affecting the Building; and/or on the occupancy of any tenant of the Building; and any other tax, fee, or excise, however described, in substitution for or in addition to taxes applicable to the Premises, including without limitation, a so-called value added tax; provided, however, Tenant shall not be required to pay any municipal, county, state or federal income or franchise taxes of Landlord. With respect to any assessment which may be levied against or upon the Building or underlying land and which under the laws then in force may be evidenced by improvement or other bonds, or may be paid in annual installments, there shall be included within the definition of "Real Property Taxes" with respect to any tax fiscal year, only the current annual installment for such tax fiscal year. 6.5 Utilities and Services. Tenant shall contract with service providers for telephone, electric, gas, sewer and water service and for trash removal for the Premises and shall directly pay all costs associated with such services. Landlord shall have no responsibility or liability with respect to such services. 6.6 Tenant's Additional Service Requirements. Tenant will not, without Landlord's prior consent, do the following: (i) Install or use special lighting beyond Building standard, or any equipment, machinery, or device in the Premises which requires a nominal voltage of more than one hundred twenty (120) volts single phase, or which in Landlord's reasonable opinion exceeds the capacity of existing feeders, conductors, risers, or wiring in or to the Premises or Building, or which requires amounts of water or their utilities in excess of that usually furnished or supplied for use in office space, or 8 which will decrease the amount of pressure of water or the amperage or voltage of electricity Landlord can furnish to other occupants of the Building; (ii) Install or use any heat or cold generating equipment, machinery or device which affects the temperature otherwise maintainable by the heat and air conditioning system, if any, of the Building; (iii) Use portions of the Premises for special purposes requiring greater or more difficult cleaning work than office areas, such as, but not limited to, kitchens, reproduction rooms, interior glass partitions, and non-Building standard materials or finishes; or (iv) Accumulate refuse or rubbish either in excess of that ordinarily accumulated in professional office occupancy or at times other than Building standard cleaning times. 6.7 Interruption of Utility Service. Landlord reserves the right, without any liability to Tenant and without affecting Tenant's obligations under this Lease, to stop or interrupt or reduce any utility services whenever and for so long as may be necessary, by reason of (i) accidents or emergencies, (ii) the making of repairs or changes which Landlord in good faith deems necessary or is required or is permitted by this Lease or by law to make, (iii) difficulty in securing proper supplies of fuel, water, electricity, labor or supplies, or (iv) the compliance by Landlord with governmental, quasi-governmental or utility company energy conservation measures. No interruption or stoppage of any of such services will be construed as an eviction of Tenant nor will such interruption or stoppage cause any abatement of the rent payable under this Lease or in any manner relieve Tenant of any of Tenant's obligations under this Lease. Landlord will not be liable for any interruption or stoppage of any of such services or for any damage to persons or property resulting from such stoppage. 6.8 Energy Conservation. Tenant shall cooperate fully with Landlord to effect energy conservation in the Building and shall use its best efforts to minimize its use of energy (including, without limitation, electricity) and water throughout the term. 7. PERSONAL PROPERTY TAXES. 7.1 Personal Property Taxes. Tenant shall pay before delinquency all taxes, assessments, license fees, and other charges that are levied and assessed on Tenant's equipment, furnishings, personal property, alterations, tenant improvements made after the commencement of the term, and/or Tenant's trade fixtures. On demand by Landlord, Tenant shall furnish Landlord with satisfactory evidence of these payments. Tenant shall also furnish Landlord with cost breakdowns relating to any tenant improvements, trade fixtures and alterations relating to the Premises made by Tenant. 9 If any such taxes are levied against the Building, or if the assessed value of the Building is increased by the inclusion of a value placed on Tenant's equipment, furnishings, personal property, alterations, tenant improvements and/or Tenant's trade fixtures, Tenant, on demand, shall immediately reimburse Landlord for the sum of the taxes levied against the Building, or the portion of the taxes resulting from the increase in Landlord's assessment, as reasonably determined by Landlord. Landlord shall have the right to pay these taxes regardless of the validity of the levy. In addition, Tenant shall pay any tax, fee, excise or business license tax based on the operation of and/or revenues received from Tenant's business in the Premises. 8. MAINTENANCE AND REPAIR OF THE PREMISES. 8.1 Tenant's Obligations. Subject to the provisions of Section 11, Tenant shall, at Tenant's sole cost and expense, maintain and keep the Premises and every part thereof in good and safe condition and repair, including necessary replacements and regular janitorial services. Tenant shall, upon the expiration or earlier termination of this Lease, surrender the Premises to Landlord in good condition, ordinary wear and tear excepted. In addition, Tenant shall be responsible for all cleaning, maintenance and repairs to the Premises and for the cleaning and maintaining of the exterior entryway, staircase and sidewalk in front of the entryway so as to keep all such areas in good and safe condition. Tenant shall also be responsible for necessary repairs to any kitchen appliances in the Premises. At all times during the Term, Tenant shall provide and maintain area rugs acceptable to Landlord in the Premises so as to protect the finished wood flooring. If the Premises are served by air conditioning, Tenant at its expense shall cause the filters to be changed on a monthly basis in accordance with manufacturer's recommendations and, on request, shall provide Landlord with evidence of such filter changes. Unless otherwise specifically provided in this Lease, Landlord shall have no obligation whatsoever to alter, remodel, improve, replace, repair, decorate or paint the Premises or any part thereof and the parties hereto affirm that Landlord has made no representations to Tenant respecting the condition of the Premises or the Building except as specifically set forth in this Lease. 8.2 Alterations. Tenant shall not alter, repair or change the Premises without the written consent of Landlord. All alterations, improvements and changes shall become the property of Landlord upon the surrender of the Premises. Provided Landlord notifies Tenant of such requirement at the time Landlord approves the alterations or additions, Landlord shall have the right to require Tenant, upon surrender, to remove any alterations or additions made by Tenant, and Tenant shall, at Tenant's cost, repair any damage to the Premises caused by this or any other removal. Any alterations or improvements shall be made by a licensed contractor approved by Landlord in accordance with plans and specifications approved by Landlord. Together with Tenant's request for approval of proposed alterations or improvements, Tenant shall submit the names and addresses of proposed contractor(s), financial and other pertinent information about such contractor(s) (including, without limitation, the labor organization affiliation or lack of affiliation of such contractor(s), certificates of insurance to be maintained by Tenant's contractor(s), hours of construction, proposed construction methods, evidence of security (such as payment and performance bonds) to assure timely 10 completion of the work by the contractor and payment of all costs of the work). All alterations and improvements shall be completed with due diligence, in a first class, workmanlike manner and in compliance with the plans and specifications and all applicable Laws. The alterations shall be performed in a manner that will not interfere with the quiet enjoyment of the other tenants in the Building. Tenant acknowledges and agrees that Landlord has made no representation or warranty regarding the tenantability, habitability or condition of the Premises. Tenant hereby waives any right to make repairs at Landlord's expense including without limitation any rights granted under California Civil Code Sections 1941 and 1942. 8.3 Mechanics' Liens. Tenant shall not allow any mechanics' or materialmen's liens to be filed against Landlord's interest in the Premises, the Building, the Common Areas, or underlying land. Tenant shall give Landlord at least ten (10) days' advance written notice of any alterations and Landlord shall have the right to post any notices which it deems necessary for protection from such liens. If such liens are filed, Landlord may pay or satisfy them, and any sums so paid shall constitute additional rent immediately due and payable by Tenant. Tenant may in good faith and at Tenant's own expense contest the validity of any such asserted lien, provided that Tenant has furnished the bond required in California Civil Code Section 3143, or any successor statute. 9. MAINTENANCE AND REPAIR OF STRUCTURE. 9.1 Landlord's Obligations. Notwithstanding the provisions of Section 8.1, Landlord shall repair and maintain the roof, structural walls, foundations, subfloors, exterior walls, and other structural portions of the Building, including the basic common plumbing, air conditioning (if any), heating, and electrical systems installed or furnished by Landlord, unless such maintenance and repairs are caused in part or in whole by the act, neglect, fault or omission of any duty by Tenant, its agents, servants, employees or invitees, in which case Tenant shall pay to Landlord the reasonable costs of such maintenance and repairs. Landlord shall not be liable for any failure to make any such repairs or to perform any maintenance unless such failure shall persist for an unreasonable time, not less than thirty (30) days, after written notice of the need for such repairs or maintenance is given to Landlord by Tenant. Except as provided in Section 11, there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Building or the Premises or in or to fixtures, appurtenances and equipment therein. Tenant waives the right to make repairs at Landlord's expense under any law, statute or ordinance now or hereafter in effect. 10. INSURANCE AND INDEMNIFICATION. 10.1 Insurance Required of Tenant. Tenant shall, at Tenant's sole cost and expense, maintain in full force and effect at all times during the term and during any pre-term occupancy period, the insurance coverages set forth in this Section. 11 (a) Casualty Insurance. Broad form property damage in an amount not less than full replacement cost, covering Tenant's equipment, fixtures, furnishings and other personal property located in the Premises. Such policy or policies of insurance shall name both Landlord as an additional insured and Tenant as insureds. Landlord and Tenant agree that the proceeds from any such policy or policies shall be used for the repair or replacement of the property so covered. (b) Liability Insurance. Commercial general liability insurance which is to include, without limitation, products liability coverage, with such limits as may reasonably be required by Landlord from time to time but not less than the amounts stated in Paragraph 8 of the Fundamental Lease Provisions, for bodily injury or death to any one person, injury and/or death to any number of persons in any one incident, and for property damage in any one occurrence. Such policy or policies shall name Landlord as an additional insured. Such liability insurance shall specifically insure the hold harmless and indemnity provisions of Section 10.4, and shall contain a provision that Landlord, although an additional insured, shall nevertheless be entitled to recover under such policy or policies for any damage to Landlord or its agents or representatives by reason of acts or omissions of Tenant. 10.2 Policy Form. All insurance required of Tenant shall be in form and written by one or more insurance companies reasonably satisfactory to Landlord and licensed to do business in the State of California. All such insurance may be carried under a blanket policy covering the Premises and other locations, provided that the coverage afforded Landlord by such blanket policy shall not be reduced or diminished by reason of the use of such blanket policy of insurance, and provided further that the requirements of Section 10.1 are otherwise satisfied. All such insurance shall contain endorsements that (i) such insurance shall not be canceled or amended except upon thirty (30) days' prior notice to Landlord by the insurance company, (ii) Tenant shall be solely responsible for payment of premiums, and (iii) Tenant's insurance is primary in the event of overlapping coverage which may be carried by Landlord. The minimum limits of the commercial general liability insurance policy required by Section 10.1(b) shall in no way limit or diminish Tenant's liability under this Lease. Tenant shall deliver to Landlord at least fifteen (15) days prior to the time such insurance is first required to be carried by Tenant and thereafter at least fifteen (15) days prior to the expiration of such policy, either a duplicate original or a certificate clearly showing compliance by Tenant with Tenant's obligations under this Lease, together with evidence satisfactory to Landlord of the payment of the premiums therefor. 10.3 Subrogation. Landlord and Tenant hereby mutually waive their respective rights of recovery against each other for any loss insured by property insurance policies existing for the benefit of the respective parties. Each party shall obtain a special endorsement, if required by its insurer, to evidence compliance with the aforementioned waiver. 10.4 Indemnification. Tenant shall indemnify, protect, defend and hold Landlord harmless from all liabilities, claims, costs, expenses and damages arising out of or in connection with (i) any damage to person or property in or about the 12 Premises, the Building and/or the Common Areas which is caused by the acts or omissions of Tenant, its agents, employees or representatives and/or (ii) any act or omission of Tenant, its agents, employees or representatives, which constitutes a breach of any obligation of Tenant under this Lease. Landlord shall not be liable to Tenant for any damage to Tenant or Tenant's property from any cause, and Tenant waives all claims against Landlord for damage to person or property arising from any reason, except that Landlord shall be liable to Tenant for damage to Tenant resulting from the gross negligence of Landlord or its authorized representatives. 11. DESTRUCTION; CONDEMNATION. 11.1 Destruction. In the event the Premises or the Building are damaged by fire or other perils covered by insurance then in effect, Landlord agrees to repair such damage and this Lease shall remain in full force and effect, except that Tenant shall be entitled to a proportionate reduction of Monthly Rent while such repairs are being made, such proportionate reduction to be based upon the extent to which the damage and/or the making of such repairs materially interferes with the business carried on by Tenant in the Premises. Provided, however, if the damage is due to the fault or neglect of Tenant or its employees, agents or invitees, there shall be no abatement of rent. In the event the Premises or the Building are damaged as a result of any cause other than the perils covered by insurance then in effect, then Landlord shall forthwith repair the same provided the extent of the destruction is less than five percent (5%) of the then full replacement cost of the Premises or the Building, as the case may be. In the event the destruction of the Premises or the Building is to an extent greater than five percent (5%) of the full replacement cost, then Landlord shall have the election to: (i) repair or restore such damage, this Lease continuing in full force and effect, but the Monthly Rent to be proportionately reduced as provided above; or (ii) give notice to Tenant at any time within sixty (60) days after such damage terminating this Lease as of the date specified in such notice, which date shall be no less than thirty (30) and no more than sixty (60) days after the giving of such notice. In the event of giving such notice, this Lease shall terminate and all interest of Tenant in the Premises shall terminate on the date so specified in such notice. Monthly Rent, reduced by a proportionate amount based upon the extent, if any, to which such damage materially interferes with the business carried on by Tenant in the Premises, shall be paid up to the date of such termination. The provisions of this Section to the contrary notwithstanding: (i) Landlord shall not have any obligation whatsoever to repair, reconstruct or restore the Premises when the damage resulting from any casualty covered under this Section occurs during the last six (6) months of the term of this Lease or any extension thereof, and (ii) Landlord's obligation to repair and/or reconstruct the Premises shall not exceed Landlord's original construction obligations under this Lease, if any, which original construction obligations shall be deemed to exclude any construction done by Landlord on Tenant's behalf and at Tenant's cost. If existing laws do not permit the Premises to be restored to substantially the same condition as they were in immediately before destruction, either party can terminate this Lease by giving written notice to the other party within thirty (30) days after such destruction. 13 Landlord shall not be required to repair any injury or damage by fire or other cause, or to make any repairs or replacements of any equipment, fixtures, furnishings or personal property of Tenant or any tenant improvements installed in the Premises by Tenant, all of which shall be Tenant's obligation to restore. Tenant shall not be entitled to any compensation or damages from Landlord for loss of the use of the whole or any part of the Premises or Tenant's personal property, or for any inconvenience or annoyance occasioned by such damage, repair, reconstruction or restoration. The provisions of California Civil Code Sections 1932(2) and 1933(4), and any successor statutes, shall be inapplicable with respect to any destruction of the Building or the Premises. 11.2 Condemnation. If the Premises are condemned and taken by any governmental authority or if such portion of the Building, Common Areas and/or underlying land is condemned and taken so that the Premises can no longer reasonably be used for the purpose allowed in this Lease, either party shall have the right to terminate this Lease and all condemnation awards shall be payable to Landlord, except for any award made to Tenant for the taking of personal property or fixtures belonging to Tenant, for the interruption of or damage of Tenant's business, or for Tenant's unamortized cost of leasehold improvements paid for by Tenant and which Tenant has the right to remove. Each party waives the provisions of California Code of Civil Procedure Section 1265.130, and any successor statute, allowing either party to petition the Superior Court to terminate this Lease in the event of condemnation. 12. DEFAULT; REMEDIES. 12.1 Default. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant: (a) The vacating or abandonment of the Premises by Tenant; (b) The failure by Tenant to make any payment of rent when due, where such failure continues for a period of five (5) days after written notice thereof by Landlord to Tenant; (c) The failure by Tenant to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Tenant, other than the payment of money, where such failure shall continue for a period of thirty (30) days after written notice thereof by Landlord to Tenant; provided, however, that if the nature of Tenant's default is such that more than 30 days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commences such cure within such 30-day period and thereafter diligently prosecutes such cure to completion; (d) The making by Tenant of any general assignment or general arrangement for the benefit of creditors, or the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt, or a petition of reorganization or 14 arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days), or the appointment of a trustee or a receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease where possession is not restored to Tenant within thirty (30) days, or the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within thirty (30) days; (e) An assignment or subletting, or a purported assignment or subletting, in violation of Section 13; or (f) If Tenant, any of Tenant's owners or any entity in which Tenant has an ownership interest is a partner in the partnership entity which constitutes Landlord, a failure by such partner to perform any obligation or duty it may have as a partner in such partnership. The notices required under this Section 12.1 are the only notices required to be given by Landlord to Tenant in the event of Tenant's default and are not in addition to any statutory notices otherwise required by the unlawful detainer statutes of California. 12.2 Remedies in Default. In the event of any such default or breach by Tenant, Landlord may at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of a right or remedy which Landlord may have by reason of such default or breach: (a) Terminate Tenant's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. In such event Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default including, without limitation: (i) the cost of recovering possession of the Premises; (ii) expenses of reletting, including necessary renovation and alteration of the Premises; (iii) the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Tenant proves could be reasonably avoided; (iv) that portion of any leasing commission paid by Landlord and applicable to the unexpired term of this Lease; and (v) any other amounts allowed by law. Unpaid installments of rent or other sums shall bear interest from the date due at the maximum rate allowed by law from time to time. In the event Tenant shall have abandoned the Premises, Landlord shall have the option of (1) taking possession of the Premises and recovering from Tenant the amount specified in this paragraph, or (2) proceeding under the following provisions of this Section. (b) Maintain Tenant's right to possession, in which case this Lease shall continue in effect whether or not Tenant shall have abandoned the Premises. In such event Landlord shall be entitled to enforce all of Landlord's rights and remedies under this Lease, including the right to recover the rent as it becomes due or to relet the 15 Premises or any part thereof for such term and on such provisions as Landlord, in its sole discretion, may deem advisable. (c) Re-enter the Premises, with or without terminating this Lease, and remove all property and persons therefrom, which property may be stored at a public warehouse or elsewhere at Tenant's cost. (d) After ten (10) days' notice to Tenant, or a shorter period if additional damage may result, cure the default for the account and at the expense of Tenant, which amount shall be due from Tenant to Landlord immediately upon demand. (e) Pursue any other remedy now or hereafter available to Landlord under the laws of the State of California. 13. ASSIGNMENT AND SUBLETTING. 13.1 Definition of Assignment. The use of the words "assignment," "assign," "assigned," "subletting," or "sublet," or any derivation thereof, in this Section 13 shall include: (a) The pledging, mortgaging or encumbering of Tenant's interest in this Lease, or the Premises or any part thereof; (b) The total or partial occupation of all or any part of the Premises by any person, firm, partnership, or corporation, or any groups of persons, firms, partnerships, or corporations, or any combination thereof, other than Tenant; (c) An assignment or transfer by operation of law; (d) If Tenant is a partnership or limited liability company ("LLC"), a withdrawal or change, voluntary, involuntary, or by operation of law, of the partner or partners (or member(s) in the case of an LLC) owning a majority of the partnership or LLC interest as of the date of this Lease, or the dissolution of the partnership or LLC; provided, however, that the transfer of a partnership or LLC interest by testacy or intestacy shall not be deemed an assignment prohibited by this Section; (e) If Tenant consists of more than one person, a purported assignment, voluntary, involuntary, or by operation of law, from a majority of such persons to the others; (f) If Tenant is a corporation, any dissolution, merger, consolidation, or other reorganization of the corporation, or the sale or other transfer of a controlling voting interest, direct or indirect, of the corporate stock of Tenant, or the sale of 51% of the value of the assets of the corporation; provided, however, the transfer of a controlling voting interest of the corporate stock of Tenant by testacy or intestacy shall not be deemed an assignment prohibited by this Section. 16 13.2 No Assignment. Tenant shall not voluntarily assign or encumber all or any portion of its interest in this Lease or in the Premises, or sublease (except as provided in the following sentence) all or any part of the Premises, or allow any other person or entity (except Tenant's authorized representatives) to occupy or use all or any part of the Premises. The preceding sentence notwithstanding, Tenant shall have the limited night to sublease all or a portion of the Premises, subject to the following conditions: (i) Tenant shall obtain Landlord's prior written approval of the proposed sublessee (which approval Landlord shall not unreasonably withhold) and (ii) the sublease document shall be subject to Landlord's prior written approval and shall be prepared by Landlord's counsel at Tenant's expense. Any assignment, encumbrance, or sublease made without Landlord's consent shall be voidable and, at Landlord's election, shall constitute a default. No consent to any assignment, encumbrance, or sublease shall constitute a waiver of the provisions of this Section. 13.3 Costs. In the event Tenant requests Landlord to consent to a proposed assignment, subletting or encumbrance, Tenant shall pay to Landlord, on demand, whether or not such consent is ultimately given, Landlord's reasonable, administrative costs and attorneys' fees incurred in connection with each such request, including without limitation, attorneys' fees for preparing and negotiation any sublease as provided in Section 13.2. 13.4 Termination. At the option of Landlord, if this Lease is terminated for any reason Landlord will either (i) terminate all subleases, or (ii) treat all subleases as being assigned to Landlord, in which case the sublessees will attorn directly to Landlord. 13.5 Involuntary Assignment; Attachment; Involuntary Proceedings. If an involuntary assignment occurs, Landlord shall have the election to terminate this Lease and this Lease shall not be treated as an asset of Tenant, and Tenant shall have no further rights under this Lease. If an attachment or execution is levied against Tenant, Tenant shall have thirty (30) days in which to cause the attachment or execution to be removed. If any involuntary proceedings in bankruptcy are brought against Tenant, or if a receiver is appointed, Tenant shall have thirty (30) days in which to have the involuntary proceeding dismissed or the receiver removed. 13.6 Consideration to Landlord. Without in any way limiting the prohibitions under Section 13.2 above, if Landlord agrees to consent to an assignment or sublease, (i) Tenant shall pay Landlord seventy-five percent (75%) of the consideration received by Tenant attributable to the assignment of Tenant's interest in this Lease and (ii) Tenant shall pay to Landlord from time to time, immediately after Tenant's receipt thereof, seventy-five percent (75%) of all rent or other consideration Tenant receives from such subtenant in excess of the rent payable under this Lease, as appropriately prorated with respect to a sublease of a portion of the Premises. In making the calculations provided for this Section, the consideration paid to Tenant shall first be reduced by Tenant's expenses associated with an assignment or sublease, including without limitation, brokerage fees, remodeling costs, attorneys' fees or other fees charged by Landlord. 17 14. SALE OF BUILDING. 14.1 Sale of Building. If Landlord sells or transfers its interest in the Building, Landlord shall deliver or credit any security deposit to Landlord's successor in interest and thereupon be relieved of further responsibility with respect to the Security Deposit. In the event of any sale or transfer of the Building, Landlord shall be and is hereby entirely released and relieved of all liability under this Lease arising out of any act, occurrence or omission occurring after the consummation of such sale, and the purchaser at such sale or any subsequent sale of the Building shall be deemed, without any further agreement between the parties or their successors in interest or between the parties and any such purchaser, to have assumed and agreed to carry out any and all of the covenants and obligations of Landlord under this Lease. Tenant shall, upon request of any person or party succeeding to the interest of Landlord, attorn to such successor in interest and recognize such successor in interest as Landlord under this Lease. 15. LEASE SUBJECT TO SUBORDINATION. 15.1 Lease Subject to Subordination. This Lease is and shall be subject and subordinate to all ground or underlying leases which now exist or may hereafter be executed affecting the Building, to any underlying covenants, conditions and restrictions, and to the lien and provisions of any mortgage or deeds of trust now or hereafter placed against the Building or against Landlord's interest or estate in the Building or on or against any ground or underlying lease, and any renewals, modifications, consolidations and extensions of such lease(s), any covenants, conditions and restrictions, and any mortgages and deeds of trust without the necessity of the execution and delivery of any further instruments on the part of Tenant to effect such subordination. If any mortgagee, beneficiary, trustee or ground lessor elects to have this Lease prior to the lien of such mortgagee's, beneficiary's, trustee's or ground lessor's mortgage or deed of trust or ground lease, and gives notice of such election to Tenant, this Lease shall be deemed prior to the lien of such mortgage or deed or trust or ground lease, whether this Lease is dated prior or subsequent to the date of such mortgage, deed of trust, or the date of the recording thereof. Tenant shall execute and deliver within ten (10) days of request from Landlord, without charge, such further instruments evidencing the subordination of this Lease to any ground or underlying lease, any covenants, conditions and restrictions, and any mortgage or deed of trust; provided, such instrument shall provide that as long as Tenant is not in default of this Lease, Tenant's possession of the Premises shall not be affected by any foreclosure proceedings or ground lease termination. In the event any proceedings are brought for default under any ground or underlying lease or under any covenants, conditions and restrictions, or in the event of foreclosure or the exercise of the power of sale under any mortgage or deed of trust against the Premises, Tenant shall, upon request of any person or party succeeding to the interest of Landlord as a result of such proceedings, attorn to such successor in interest and recognize such successor in interest as Landlord under this Lease. 18 16. GENERAL PROVISIONS. 16.1 Signs and Blinds. The parties recognize that Landlord shall maintain uniform signage, directory, and blind systems for the Building. Accordingly, Tenant agrees not to place any signs or other marking upon any externally visible parts of the Premises or remove or replace the window blinds without Landlord's written consent. Landlord shall have the right to remove any signs, advertisements, displays, or similar items, without notice to Tenant. Landlord shall have the exclusive right to the use of the roof, exterior walls of the Building, and the airspace above the roof. Landlord has the exclusive right to erect and maintain signs and shall have access thereto. All revenue arising from such signs shall be solely and exclusively that of Landlord, and Tenant shall have no right or claim thereto. Except with the express prior written consent of Landlord, no advertising medium shall be utilized by Tenant which can be heard or seen outside the Premises including, without limitation, any signs, searchlights, loudspeakers, phonographs, radio, television, or musical instruments. 16.2 Entry. Tenant shall permit Landlord and its agents to enter the Premises at all reasonable times for the purpose of inspecting the Premises, or for the purpose of maintaining the Building or making repairs or alterations to any other portion of the Building. Landlord may erect scaffolding or other equipment reasonably required for such work, and may post notices of nonresponsibility. Landlord shall give Tenant reasonable notice before entering the Premises, except that notice shall not be required in the case of emergency. Landlord's rights under this Section extend to the owner of the adjacent property on which excavation or construction is to take place and to the representatives, agents and contractors of such adjacent property owner. 16.3 Statement of Status. Upon request by Landlord, Tenant agrees to execute and return within ten (10) days of request a customary and reasonable statement of status of its tenancy and estoppel certificate. 16.4 Attorneys' Fees. In the event that either party to this Lease commences any action or proceeding against the other by reason of any breach or alleged breach of any term or condition of this Lease, or for the interpretation of this Lease, the prevailing party in such an action or proceeding shall be entitled to recover such amount as the court may judge to be reasonable attorneys' fees, and all reasonable costs incurred. 16.5 Captions. The captions of articles and paragraphs of this Lease are for reference only, and shall not be construed in any way as a part of this Lease. 16.6 Notices. Any notice, demand, request, consent, approval, or communication that either party desires or is required to give to the other party or any other person shall be in writing and either served personally or sent by prepaid, certified or registered mail, return receipt requested, and shall be addressed to the other party at the address set forth in Paragraph 9 of the Fundamental Lease Provisions. Either party may change its address by notifying the other party of the change of address in the manner as provided in this Section. 19 16.7 Successors. Subject to the restrictions of Section 13, all of the provisions of this Lease shall bind and inure to the benefit of the parties and their respective heirs, legal representatives, successors and assigns. 16.8 Joint and Several Obligations of Tenant. If more than one individual or entity comprises Tenant, the obligations imposed on each individual or entity that comprises Tenant under this Lease shall be joint and several. 16.9 Liability of Landlord. Except as otherwise provided in this Lease or applicable law, for any breach of this Lease the liability of Landlord (including all persons and entities that comprise Landlord, and any successor landlord) and any recourse by Tenant against Landlord shall be limited to the interest of Landlord and Landlord's successors in interest in and to the Building. On behalf of itself and all persons claiming by, through, or under Tenant, Tenant expressly waives and releases Landlord from any personal liability with respect to this Lease. 16.10 Independent Covenants. This Lease shall be construed as though the covenants between Landlord and Tenant are independent and not dependent. Tenant expressly waives the benefit of any statute to the contrary and agrees that if Landlord fails to perform its obligations under this Lease, Tenant shall not be entitled: (a) To make any repairs or perform any acts at Landlord's expense; or (b) To any setoff of the Rent or other amounts owing under this Lease against Landlord. The foregoing, however, shall in no way impair Tenant's right to bring a separate action against Landlord for any violation by Landlord of the provisions of this Lease if notice is first given to Landlord and any lender of whose address Tenant has been notified, and a reasonable opportunity (in no event less than thirty (30) days after notice from Tenant) is granted to Landlord and that lender to correct those violations. 16.11 Waiver. No covenant, term or condition or the breach thereof shall be deemed waived, except by written consent of the party against whom the waiver is claimed and any waiver of the breach of any covenant, term or condition shall not be deemed to be a waiver of any preceding or succeeding breach of the same or any other covenant, term or condition. Acceptance by Landlord of any performance by Tenant after the time the same was due shall not constitute a waiver by Landlord of the breach or default of any covenant, term or condition unless otherwise expressly agreed to by Landlord in writing. 16.12 Attachments. Exhibits, addenda, schedules and riders attached hereto and listed in Paragraph 11 of the Fundamental Lease Provisions are deemed to constitute part of this Lease and are incorporated into this Lease. 16.13 Entire Agreement. This Lease, including any exhibits and attachments hereto listed in the Fundamental Lease Provisions, constitutes the entire 20 agreement between Landlord and Tenant relative to the Premises. Landlord and Tenant agree here-by that all prior or contemporaneous oral or written agreements, or letters of intent, between and among themselves or their agents including any leasing agents and representatives, relative to the leasing of the Premises are merged in or revoked by this Lease. 16.14 Amendment. This Lease and the exhibits and attachments may be altered, amended or revoked only by an instrument in writing signed by both Landlord and Tenant. 16.15 Severability. If any term or provision of this Lease is, to any extent, determined by a court of competent jurisdiction to be invalid or unenforceable, the remainder of this Lease shall not be affected thereby, and each remaining term and provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. 16.16 Time of Essence. Time is of the essence of this Lease and each and every provision of this Lease. 16.17 Holding Over. If Tenant, or any party claiming rights to the Premises through Tenant, retains possession of the Premises with or without the written consent of Landlord after the expiration or earlier termination of this Lease, such possession shall constitute a tenancy at will, subject to all the terms and provisions of this Lease. If Tenant fails to surrender the Premises to Landlord on the date as required herein, Tenant shall hold Landlord harmless from all damages resulting from Tenant's failure to surrender the Premises, including, without limitation, claims made by a succeeding tenant resulting from Tenant's failure to surrender the Premises. If Tenant remains in possession of the Premises after expiration or earlier termination of this Lease without Landlord's written consent, Tenant's continued possession shall be on the basis of a tenancy at sufferance and Tenant shall pay as rent during the holdover period an amount equal to the greater of: (a) One hundred fifty percent (150%) of the then fair market rental (as reasonably determined by Landlord) for the Premises; or (b) Two hundred percent (200%) of the Monthly Rent and Additional Rent payable under this Lease for the last full month before the date of expiration or termination. 16.18 Broker. Landlord and Tenant each warrant and represent to the other that neither has had any dealings with any real estate broker, agent or finder in connection with the negotiation of this Lease or the introduction of the parties to this transaction, except for any broker named in Paragraph 10 of the Fundamental Lease Provisions (whose commission shall be paid by the party designated in Paragraph 10), and that it knows of no other real estate broker, agent or finder who is or might be entitled to a commission or fee in connection with this Lease. In the event of any such additional claims for brokers' or finders' fees with respect to this Lease, Tenant shall 21 indemnify, hold harmless, protect and defend Landlord from and against such claims if they shall be based upon any statement or representation or agreement made, or alleged to have been made, by Tenant, and Landlord shall indemnify, hold harmless, protect and defend Tenant if such claims shall be based upon any statement, representation or agreement made, or alleged to have been made, by Landlord. 16.19 Parking. Tenant acknowledges that there is no on-site parking at the Premises or the Building and that Landlord makes no representations or warranties regarding the availability of off-site parking. EXECUTED on the date stated in the Fundamental Lease Provisions. LANDLORD: TENANT: CHARLES A. SEGALAS, an individual more.com, inc., a Delaware corporation - ------------------------------------- By: _________________________________ Charles A. Segalas Name:________________________________ Title:_______________________________ By: _________________________________ Name:________________________________ Title:_______________________________ 22 EXHIBIT A RULES AND REGULATIONS Tenant shall comply with the following Rules and Regulations: 1. Locks; Keys. Tenant shall not alter any lock or install any new or additional locks or bolts on any doors or windows of the Premises without obtaining Landlord's prior written consent. Tenant shall bear the cost of any lock changes or repairs required by Tenant. Two keys shall be furnished by Landlord for the Premises. Tenant shall provide Landlord with keys to all locks affixed to the Premises. 2. Securing Doors; Admission to Building. Landlord reserves the right to close and keep locked all entrance and exit doors and gates of the Building during the hours when comparable Buildings are customarily closed and locked. When departing after the Building's normal working hours, Tenant and Tenant's employees and agents shall ensure that the last employee to leave shall turn off the lights, lock the entry and deadbolt locks if there is no light in the other unit sharing the Common Entry stairs, shall lock the double-deadbolt lock on the ironwork gate; however, if there is a light on in the other unit, such employee shall not lock the double-deadbolt ironwork gate. Landlord and its agents shall not be liable for damages for any error concerning the admission to, or exclusion from, the Building of any person. Landlord reserves the right, in the event of invasion, mob, riot, public excitement, or other commotion, to prevent access to the Building during the continuance of that event by any means it considers appropriate for the safety and protection of life and property. 3. No Disturbance of Other Occupants. Tenant shall not disturb, solicit, or canvass any occupant of the Building and shall cooperate with Landlord and Landlord's agents to prevent those actions. 4. Use of Restrooms; Responsibility for Damage. The restrooms, urinals, wash bowls, and other apparatus shall not be used for any purpose other than that for which they were constructed, and no foreign substance of any kind shall be thrown into them. The expense of any breakage, stoppage, or damage resulting from violation of this rule shall be borne by the tenant who caused, or whose employees or agents caused, the breakage, stoppage, or damage. 5. Restrictions on Defacement of Premises. Tenant shall not mark, drive nails or screws into, or drill into the partitions, woodwork, or plaster, or in any way deface the Premises or any part of the Premises, without Landlord's prior written consent. 6. Permitted Machines. Except for vending machines intended for the sole use of Tenant's employees and invitees, no machines other than office machines of less than one horsepower shall be installed, maintained, or operated on the Premises without Landlord's prior written consent. A-1 7. Inflammable or Combustible Fluids or Materials. Tenant shall not use, or keep in or on the Premises, Building, or real property, any kerosene, gasoline, or other inflammable or combustible fluid or material. 8. Animals, Birds, and Vehicles. Tenant shall not bring into, or keep within, the Premises, Building, or real property any animals, birds, or vehicles (e.g., bicycles). 9. Cooking; No Use of Premises for Improper Purposes. Only Underwriters' Laboratory (UL)-approved equipment and microwave ovens may be used in the Premises for cooking, heating food and brewing coffee, tea, hot chocolate, and similar beverages for employees and visitors. This use must be in accordance with all applicable federal, state, and city laws, codes, ordinances, rules, and regulations. The Premises shall not be used for the storage of merchandise, for lodging, or for any improper, objectionable, or immoral purposes. 10. Telephone and Other Wires. Tenant may not introduce telephone wires or other wires into the Premises without first obtaining Landlord's approval of the method and location of such introduction. No boring or cutting for telephone wires or other wires shall be allowed without Landlord's consent. The location of telephones, call boxes, and other office equipment affixed to the Premises shall be subject to Landlord's prior approval. 11. Exclusion or Expulsion. Landlord reserves the right to exclude or expel from the Real Property any person who, in Landlord's judgment, is under the influence of alcohol or drugs or commits any act in violation of any of these Rules and Regulations. 12. Loitering Prohibited. Tenant and Tenant's employees and agents shall not loiter in or on the entrances, corridors, sidewalks, lobbies, halls, stairways, elevators, or common areas for the purpose of smoking tobacco products or for any other purpose. Tenant and Tenant's employees and agents shall not obstruct those areas but use them only as a means of ingress to and egress from the Premises. 13. Disposal of Trash and Garbage. Tenant shall store all trash and garbage within the interior of the Premises. Tenant shall not place or have placed in the trash boxes or receptacles any material that may not or cannot be disposed of in the ordinary and customary manner of removing and disposing of trash in the vicinity of the Building. In disposing of trash and garbage, Tenant shall comply fully with any law or ordinance governing that disposal. All trash, garbage, and refuse disposal shall be made only through entry-ways provided for that purpose and shall be made only at times designated by Landlord. 14. Compliance With Safety Regulations. Tenant shall comply with all safety, fire protection, and evacuation procedures and regulations established by Landlord or by any government agency. A-2 15. Protection of Premises. Tenant shall assume all responsibility, including keeping doors locked and other means of entry to the Premises closed, for protecting the Premises from theft, robbery, and pilferage. 16. Awnings, Curtains, and Electrical Ceiling Fixtures. No awnings or other projection shall be attached to the outside walls of the Building without Landlord's prior written consent. No curtains, blinds, shades, or screens shall be attached to, hung in, or used in connection with any window or door of the Premises without Landlord's prior written consent. All electrical fixtures must be of a quality, type, design, and bulb color approved by Landlord. Tenant shall abide by Landlord's regulations concerning the opening and closing of window coverings attached to those windows, if any, in the Premises that have a view of any interior portion of the Building or Building Common Areas. 17. Provision of Information to Tenant's Employees. Tenant shall comply with requests by Landlord that Tenant inform Tenant's employees of items of importance to Landlord. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenants. No waiver by Landlord shall be construed as a waiver of those Rules and Regulations in favor of any other tenant, and no waiver shall prevent Landlord from enforcing those Rules or Regulations against any other tenant of the Building. Tenant shall be considered to have read these Rules and Regulations and to have agreed to abide by them as a condition of Tenant's occupancy of the Premises. A-3 EX-10.9 12 LEASE - 495 THIRD STREET Exhibit 10.9 PROFESSIONAL OFFICE BUILDING LEASE BETWEEN CHARLES A. SEGALAS an individual ("Landlord") and more.com, inc., a Delaware corporation ("Tenant") 495 Third Street San Francisco, California Table of Contents Page ---- 1. PREMISES AND COMMON AREAS.......................................... 3 1.1 Premises...................................................... 3 1.2 Common Areas.................................................. 3 2. TERM OF LEASE...................................................... 3 2.1 Term of Lease................................................. 3 2.2 Possession Before Term Commences.............................. 3 3. DELIVERY OF POSSESSION............................................. 4 3.1 Delivery of Possession........................................ 4 3.2 Delay in Delivery of Premises................................. 4 4. USE OF PREMISES.................................................... 4 4.1 Permitted Use................................................. 4 4.2 Limitations on Use............................................ 4 4.3 Compliance with Laws.......................................... 5 4.4 Insurance Increases........................................... 5 4.5 Rules and Regulations......................................... 5 5. RENT............................................................... 6 5.1 Amount of Rent; Payment....................................... 6 5.2 Prepaid Rent.................................................. 6 5.3 Security Deposit.............................................. 6 5.4 Short First or Last Month..................................... 6 5.5 Adjustments of Monthly Rent................................... 7 5.6 Late Charge................................................... 7 5.7 Additional Rent............................................... 7
i 6. BUILDING OPERATING COSTS; UTILITIES................................ 7 6.1 Payment of Building Costs..................................... 7 6.2 Definition of Tenant's Share.................................. 8 6.3 Definition of Building Costs.................................. 8 6.4 Definition of Real Property Taxes............................. 8 6.5 Utilities and Services........................................ 8 6.6 Tenant's Additional Service Requirements...................... 8 6.7 Interruption of Utility Service............................... 9 6.8 Energy Conservation........................................... 9 7. PERSONAL PROPERTY TAXES............................................ 9 7.1 Personal Property Taxes....................................... 9 8. MAINTENANCE AND REPAIR OF THE PREMISES............................. 10 8.1 Tenant's Obligations.......................................... 10 8.2 Alterations................................................... 10 8.3 Mechanics' Liens.............................................. 11 9. MAINTENANCE AND REPAIR OF STRUCTURE................................ 11 9.1 Landlord's Obligations........................................ 11 10. INSURANCE AND INDEMNIFICATION...................................... 12 10.1 Insurance Required of Tenant................................. 12 10.2 Policy Form.................................................. 12 10.3 Subrogation.................................................. 12 10.4 Indemnification.............................................. 13 11. DESTRUCTION; CONDEMNATION.......................................... 13 11.1 Destruction.................................................. 13 11.2 Condemnation................................................. 14 12. DEFAULT; REMEDIES.................................................. 14 12.1 Default...................................................... 14
ii 12.2 Remedies in Default.......................................... 15 13. ASSIGNMENT AND SUBLETTING.......................................... 16 13.1 Definition of Assignment..................................... 16 13.2 No Assignment................................................ 17 13.3 Costs........................................................ 17 13.4 Termination.................................................. 17 13.5 Involuntary Assignment; Attachment; Involuntary Proceedings.. 17 13.6 Consideration to Landlord.................................... 18 14. SALE OF BUILDING................................................... 18 14.1 Sale of Building............................................. 18 15. LEASE SUBJECT TO SUBORDINATION..................................... 18 15.1 Lease Subject to Subordination............................... 18 16. GENERAL PROVISIONS................................................. 19 16.1 Signs and Blinds............................................. 19 16.2 Entry........................................................ 19 16.3 Statement of Status.......................................... 19 16.4 Attorneys' Fees.............................................. 19 16.5 Captions..................................................... 20 16.6 Notices...................................................... 20 16.7 Successors................................................... 20 16.8 Joint and Several Obligations of Tenant...................... 20 16.9 Liability of Landlord........................................ 20 16.10 Independent Covenants........................................ 20 16.11 Waiver....................................................... 21 16.12 Attachments.................................................. 21
iii 16.13 Entire Agreement............................................. 21 16.14 Amendment.................................................... 21 16.15 Severability................................................. 21 17. Time of Essence..................................................... 21 17.1 Holding Over.................................................. 22 17.2 Broker........................................................ 22 17.3 Parking....................................................... 22
iv PROFESSIONAL OFFICE BUILDING LEASE THIS LEASE is made and entered into by the Landlord and Tenant named herein who agree as follows: FUNDAMENTAL LEASE PROVISIONS. The fundamental provisions of this Lease are:
Section 1. Date of Lease: October 29, 1999 2. Landlord: Charles A. Segalas, an individual 3. Tenant: more.com, inc., a Delaware corporation 4. Address and Description of Premises: (a) the second floor (the "Premises") of 495 Third Street, building 1.1 the commonly known as 495 Third Street, San Francisco, California (the "Building"). (b) Approximate square footage of Premises: 2,125 square feet 1.1 5. Term: (a) Duration: Thirty-Six (36) months. 2.1 (b) Commencement Date: November 1, 1999, or the date on which 2.1 Tenant commences business at the Premises, whichever is earlier. 6. Use: (a) Permitted Use: e-commerce office. 4.1 7. Monthly Rent; Building Costs: (a) Monthly Rent: 5.1 Mouth Base Rent 1-12 $6,375.00 13-24 $6,693.75 25-36 $7,028.44 (b) Prepaid Rent: $6,375.00 plus estimated share of Building 5.2 Costs of $75.39 as first month's rent. (c) Security Deposit: $12,750.00 5.3
1 (d) Initial Estimate of Tenant's Share of Building Costs: 6.1 $75.39 per month (e) Tenant's portion of Building Costs: 40.47619% 6.2 8. Minimum Liability Insurance Amount: $2,000,000 10.1(b) Combined Single Limit 9. Addresses for Notice: 18.7 (a) Landlord: 3 Los Conejos, Orinda, CA 94563-2214 (b) Tenant: At the Premises 10. Broker or Finder: Meade N. Boutwell, Cushman Wakefield 18.16 Commission to be paid by: Landlord ($6,375.00) 11. Exhibits: Exhibit A - Rules and Regulations
Each reference in the Lease to any of the Fundamental Lease Provisions shall be construed to include the provisions set forth above as well as all of the additional terms and provisions of the applicable sections of the Lease. The foregoing Fundamental Lease Provisions are hereby approved. Landlord: Tenant: CHARLES A. SEGALAS, an individual more.com, inc., a Delaware corporation By:_____________________________ ________________________________ Charles A. Segalas Name:___________________________ Title:____________________________ By:______________________________ Name:____________________________ Title:_____________________________ 2 1. PREMISES AND COMMON AREAS. 1.1 Premises. Landlord leases to Tenant, and Tenant leases from Landlord the real property described in Paragraph 4(a) of the Fundamental Lease Provisions (hereinafter called the "Premises"). The Premises consist of a portion of the Building described in Paragraph 4(a) of the Fundamental Lease Provisions, on real property which is owned by Landlord. For purposes of this Lease, the Premises shall be deemed to contain the number of square feet of floor area set forth in Paragraph 4(b) of the Fundamental Lease Provisions. 1.2 Common Areas. (a) Common Areas Defined. The term "Common Areas" means all areas and facilities outside the Premises and within the exterior boundaries of the real property that are not leaseable to other tenants and that are provided and designated by Landlord for the general use and convenience of Tenant and its authorized representatives and invitees, of other tenants of the Building and their respective authorized representatives and invitees, and/or of the general public. Common Areas are areas within and outside of the Building such as, without limitation, pedestrian walkways, landscaped areas, sidewalks and entryway, stairways, lobbies, and rear exit staircases. (b) Tenant's Right to Use Common Areas. Landlord gives to Tenant and its authorized representatives and invitees the non-exclusive right to use the Common Areas with others who are entitled to use the Common Areas, subject to Landlord's rights set forth in Section 1.2(c). (c) Landlord's Control and Management. Landlord may increase, reduce, or change in any manner the Common Areas as Landlord shall deem appropriate. Without limitation, Landlord shall also have the right, from time to time, to establish and enforce reasonable rules and regulations applicable to all tenants concerning the maintenance, management, use and operation of the Common Areas, and to select a person, firm, or entity to maintain and operate any of the Common Areas and to close temporarily parts of the Common Areas for maintenance, repair, and renovation purposes. The provisions of this Section 1.2(c) to the contrary notwithstanding, in the exercise of the rights hereunder, Landlord shall provide reasonable access to and from the Premises, subject to reasonable rules and regulations and security measures approved by Landlord. 2. TERM OF LEASE. 2.1 Term of Lease. The term of this Lease (the "Term") shall be the period stated in Paragraph 5(a) of the Fundamental Lease Provisions, commencing on the Commencement Date set forth in Paragraph 5(b) of the Fundamental Lease Provisions. 2.2 Possession Before Term Commences. If Landlord consents to Tenant taking possession of the Premises prior to the Commencement Date, then all of the provisions of this Lease except the payment of Monthly Rent and other periodic charges shall be applicable and in full force and effect during such period. 3 3. DELIVERY OF POSSESSION. 3.1 Delivery of Possession. Landlord shall deliver possession of the Premises to Tenant on the Commencement Date in their existing condition, except that the Premises shall be broom clean and free of debris, and the plumbing, lighting, heating, ventilating and air conditioning systems, if any, shall be in good operating condition. Unless otherwise provided, Landlord shall have no obligation to improve, remodel or otherwise modify the Premises for Tenant's use. 3.2 Delay in Delivery of Premises. If Landlord is unable to deliver possession of the Premises to Tenant on or before the Commencement Date, Landlord shall not be subject to any liability for its failure to do so. Subject to the termination right set forth below, this failure shall not affect the validity of this Lease or the obligations of Tenant under it, but the Term shall commence on the date on which Landlord delivers possession of the Premises to Tenant. If, for any reason other than a delay caused in whole or in part by Tenant, the Premises are not delivered to Tenant within three (3) months after the date set forth in Paragraph 5(b) of the Fundamental Lease Provisions, Tenant, as its sole right and remedy, shall have the option of terminating this Lease, without further obligation or liability on the part of either party, by delivering written notice of termination to Landlord at any time after such date and before the Premises are delivered. Upon such termination, any deposits previously made by Tenant shall be promptly returned. 4. USE OF PREMISES. 4.1 Permitted Use. Subject to the provisions of Section 4.2, Tenant shall use and occupy the Premises solely for the purpose set forth in Paragraph 6(a) of the Fundamental Lease Provisions, and for no other use or purpose. 4.2 Limitations on Use. Tenant shall not use the Premises for or carry on or permit in or upon the Premises, or any part thereof, any offensive, noisy, or dangerous trade, business, manufacture or occupation, or any nuisance, or anything against public policy, or interfere with the business of owners or occupants of adjacent properties, or other tenants in the Building, as the case may be. Tenant agrees not to cause, permit or suffer any waste or damage, disfigurement or injury to the Premises, to the fixtures or equipment therein, or to the Common Areas, nor to permit or suffer any overloading of the floor of the Premises and/or other parts of the Building. Tenant shall not install, operate or maintain in the Premises any electrical equipment which does not bear the Underwriters Laboratory approval, or which equipment would, in the reasonable opinion of Landlord, overload any portion of the electrical system which serves the Building. 4.3 Compliance with Laws. Tenant shall, at its sole cost and expense, promptly comply with all local, state or federal laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force (collectively, "Laws") with respect to the use, operation and condition of the Premises, including, without limitation, any Laws regarding or requiring alterations to the Premises and any Laws relating to the storage, use and/or disposal of Hazardous Materials. "Hazardous Materials" as used herein shall mean any hazardous or toxic substance, material, chemical or waste which is now or may 4 subsequently during the term hereof be defined as such by, or which is now or may subsequently during the term hereof be regulated by, any governmental or quasi-governmental law, ordinance, rule or regulation. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord is a party to it or not, that Tenant has violated any Law will be conclusive of that fact as between Landlord and Tenant. Tenant's obligations under this paragraph shall include, without limitation, any alterations to the Premises that may be required under the Americans with Disabilities Act as a result of Tenant's alterations or improvements to the Premises, but shall not include seismic or other alterations or improvements that are not required as a result of Tenant's specific and unique use of the Premises. 4.4 Insurance Increases. If the rate of any insurance carried by Landlord is increased as a result of Tenant's use of the Premises or the cost, value or nature of Tenant's improvements, equipment or personal property located in the Premises, Tenant shall pay to Landlord, upon request and at least fifteen (15) days before the date Landlord is obligated to pay a premium on such insurance and in addition to all other amounts payable hereunder, a sum equal to the difference between the increased premium and what the premium would otherwise have been, as reasonably determined by Landlord's insurer. 4.5 Rules and Regulations. Tenant's use of the Premises and the Common Areas shall be subject at all times prior to and during the term of the Lease to the rules and regulations from time to time promulgated by Landlord. The current rules and regulations are set forth in Exhibit A attached to this Lease. Landlord reserves the right at any time to change or rescind any one or more of these rules and regulations or to make any additional rules and regulations that, in Landlord's judgment, may be necessary for: (a) the management, safety, care, and cleanliness of the Premises, Building, and real property; (b) the preservation of good order; or (c) the convenience of other occupants and tenants in the Premises and Building. Such rules and regulations shall become effective and a part of this Lease when a copy of same has been delivered to Tenant. The failure of another tenant to comply with such rules and regulations will neither excuse Tenant's obligation to comply with such rules and regulations or any other obligation of Tenant under this Lease nor cause Landlord to be liable to Tenant for any damage resulting to Tenant. Tenant shall cause Tenant's employees, invitees and authorized representatives to comply with such rules and regulations. 5. RENT. 5.1 Amount of Rent; Payment. Beginning on the Commencement Date, Tenant shall pay monthly rent in the amount set forth in Paragraph 7(a) of the Fundamental Lease Provisions (the "Monthly Rent"). The Monthly Rent shall be subject to adjustment in accordance with Section 5.5. Monthly Rent shall be paid on the first day of each calendar month of the Lease term, without deduction, offset, prior notice or demand, and shall be mailed or paid in person at the address designated in writing by Landlord from time to time. 5.2 Prepaid Rent. Upon execution of this Lease, Tenant shall pay to Landlord the amount of prepaid rent set forth in Paragraph 7(b) of the Fundamental lease Provisions, which prepaid rent shall be applied by Landlord as provided in such paragraph. 5 5.3 Security Deposit. Upon execution of this Lease, Tenant shall pay to Landlord a security deposit in the amount set forth in Paragraph 7(c) of the Fundamental Lease Provisions. Such sum shall be held by Landlord as security for the faithful performance by Tenant of all the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the term hereof. If Tenant defaults with respect to any provision of this Lease, including, without limitation, the provisions relating to the payment of rent, Landlord may (but shall not be required to) use, apply or retain all or any part of the security deposit to the payment of any rent in default, or for the payment of any amount which Landlord may spend or become obligated to spend by reason of Tenant's default, or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of the security deposit is so used or applied, Tenant shall, within five (5) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the security deposit to its original amount and Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep this security deposit separate from its general funds, and shall not be deemed a trustee of the security deposit. Tenant shall not be entitled to interest on such deposit. If Tenant shall fully and faithfully perform every provision of this Lease to be performed by it, the security deposit or any balance thereof shall be returned to Tenant (or, at Landlord's option, to the last assignee of Tenant's interest hereunder) at the expiration of the Lease term. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer any remaining balance of such deposit to Landlord's successor in interest. 5.4 Short First or Last Month. If the term of this Lease begins or ends on a date other than the first or last day of the calendar month, respectively, then Tenant's Monthly Rent for that month shall be reduced proportionately on the basis of a 30-day month. 5.5 Adjustments of Monthly Rent. If the date of any increase in Monthly Rent falls on other than the first day of a calendar month, the increase in Monthly Rent for such month shall be prorated on the basis of a 30-day month. If the amount of the increase for any month, or part of a month, is not known when Tenant pays its rent for such month, Tenant shall promptly pay Landlord the amount of the increase when such amount has been determined. 5.6 Late Charge. Tenant acknowledges that late payment by Tenant to Landlord of rent will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impracticable to fix. Such costs include, without limitation, processing and accounting charges and late charges that may be imposed on Landlord by the terms any encumbrance or note secured by any encumbrance covering the Premises. Therefore, if any installment of rent due from Tenant is not received by Landlord within ten (10) days of the day it is due, Tenant shall pay to Landlord an additional sum of ten percent (10%) of the overdue rent as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord will incur and losses Landlord will suffer by reason of late payment by Tenant. Acceptance of any late charge shall not constitute a waiver of Tenant's default with respect to the overdue amount, nor prevent Landlord from exercising any of the other nights and remedies available to Landlord. 5.7 Additional Rent. Unless otherwise provided, the terms "rent" and 41 rental" as used in this Lease shall be deemed to mean Monthly Rent, adjustments to Monthly 6 Rent, Building Costs and any and all other sums, however designated, required to be paid by Tenant under this Lease, whether payable to Landlord or third parties. 6. BUILDING OPERATING COSTS; UTILITIES. 6.1 Payment of Building Costs. From and after the Commencement Date, Tenant shall pay to Landlord Tenant's Share of Building Costs, as defined below. Tenant's Share of Building Costs for each calendar year shall be paid in monthly installments on the first day of each calendar month, in advance, in an amount estimated by Landlord from time to time. It is initially estimated that Tenant's Share of Building Costs will be the amount set forth in Paragraph 7(d) of the Fundamental Lease Provisions. Within forty-five (45) days after the end of each calendar year Landlord shall furnish to Tenant a statement prepared, signed and certified to be correct by Landlord showing the total Building Costs for the calendar year just ended and the actual amount of Tenant's Share of Building Costs for such period. If the total amount paid by Tenant under this Section for such year shall be less than the actual amount due from Tenant for such year as shown on the statement, Tenant shall pay to Landlord the difference between the amount paid by Tenant and the actual amount due, such deficiency to be paid with ten (10) days after the furnishing of such statement. If the total amount paid by Tenant hereunder for any such year shall exceed the actual amount due from Tenant for such year, the excess shall be credited against the next installment due from Tenant to Landlord under this Section. Landlord may estimate the annual budget and charge the same to Tenant on a monthly basis subject to revision by Landlord of the budget from time to time and final annual adjustment based upon actual costs and expenses. 6.2 Definition of Tenant's Share. The term "Tenant's Share" means that portion of Building Costs determined by multiplying the total Building Costs by a fraction, the numerator of which is the square footage of the Premises and the denominator of which is the average total rentable square footage in the Building (as stated in Paragraph 7(e) of the Fundamental Lease Provisions). Tenant's Share of Building Costs for any partial calendar year at the beginning or end of the term shall be prorated on the basis of a 365-day year. 6.3 Definition of Building Costs. For purposes of this Lease, "Building Costs" shall mean all costs of insurance related to the Building (including premiums and deductible amounts) and Real Property Taxes (as defined in Section 6.4). 6.4 Definition of Real Property Taxes. The term "Real Property Taxes" shall mean and include all taxes, assessments, and other governmental charges, general and special, ordinary and extraordinary, of any kind and nature whatsoever, including, but not limited to, assessments for public improvements or benefits, which shall during the term hereof be assessed, levied, and imposed upon the Building, Common Areas and underlying land; except any increase in Real Property Taxes occurring solely as a result of a change in ownership of the Building or the underlying land shall not be included. Real Property Taxes shall also include, without limitation, any tax, fee, or excise levied, assessed and/or based on rent or gross receipts; on the square footage of the Premises, of the Building, or of the Common Areas; on the act of entering into leases affecting the Building; and/or on the occupancy of any tenant of the Building; and any other tax, fee, or excise, however described, in substitution for or in addition to taxes applicable to the Premises, including without limitation, a so-called value added tax 7 provided, however, Tenant shall not be required to pay any municipal, county, state or federal income or franchise taxes of Landlord. With respect to any assessment which may be levied against or upon the Building or underlying land and which under the laws then in force may be evidenced by improvement or other bonds, or may be paid in annual installments, there shall be included within the definition of "Real Property Taxes" with respect to any tax fiscal year, only the current annual installment for such tax fiscal year. 6.5 Utilities and Services. Tenant shall contract with service providers for telephone, electric, gas, sewer and water service and for trash removal for the Premises and shall directly pay all costs associated with such services. Landlord shall have no responsibility or liability with respect to such services. 6.6 Tenant's Additional Service Requirements. Tenant will not, without Landlord's prior consent, do the following: (i) Install or use special lighting beyond Building standard, or any equipment, machinery, or device in the Premises which requires a nominal voltage of more than one hundred twenty (120) volts single phase, or which in Landlord's reasonable opinion exceeds the capacity of existing feeders, conductors, risers, or wiring in or to the Premises or Building, or which requires amounts of water or their utilities in excess of that usually furnished or supplied for use in office space, or which will decrease the amount of pressure of water or the amperage or voltage of electricity Landlord can furnish to other occupants of the Building; (ii) Install or use any heat or cold generating equipment, machinery or device which affects the temperature otherwise maintainable by the heat and air conditioning system, if any, of the Building; (iii) Use portions of the Premises for special purposes requiring greater or more difficult cleaning work than office areas, such as, but not limited to, kitchens, reproduction rooms, interior glass partitions, and non- Building standard materials or finishes; or (iv) Accumulate refuse or rubbish either in excess of that ordinarily accumulated in professional office occupancy or at times other than Building standard cleaning times. 6.7 Interruption of Utility Service. Landlord reserves the right, without any liability to Tenant and without affecting Tenant's obligations under this Lease, to stop or interrupt or reduce any utility services whenever and for so long as may be necessary, by reason of (i) accidents or emergencies, (ii) the making of repairs or changes which Landlord in good faith deems necessary or is required or is permitted by this Lease or by law to make, (iii) difficulty in securing proper supplies of fuel, water, electricity, labor or supplies, or (iv) the compliance by Landlord with governmental, quasi -governmental or utility company energy conservation measures. No interruption or stoppage of any of such services will be construed as an eviction of Tenant nor will such interruption or stoppage cause any abatement of the rent payable under this Lease or in any manner relieve Tenant of any of Tenant's obligations under this Lease. Landlord will not be liable for any interruption or stoppage of any of such services or for any damage to persons or property resulting from such stoppage. 8 6.8 Energy Conservation. Tenant shall cooperate fully with Landlord to effect energy conservation in the Building and shall use its best efforts to minimize its use of energy (including, without limitation, electricity) and water throughout the term. 7. PERSONAL PROPERTY TAXES. 7.1 Personal Property Taxes. Tenant shall pay before delinquency all taxes, assessments, license fees, and other charges that are levied and assessed on Tenant's equipment, furnishings, personal property, alterations, tenant improvements made after the commencement of the term, and/or Tenant's trade fixtures. On demand by Landlord, Tenant shall furnish Landlord with satisfactory evidence of these payments. Tenant shall also furnish Landlord with cost breakdowns relating to any tenant improvements, trade fixtures and alterations relating to the Premises made by Tenant. If any such taxes are levied against the Building, or if the assessed value of the Building is increased by the inclusion of a value placed on Tenant's equipment, furnishings, personal property, alterations, tenant improvements and/or Tenant's trade fixtures, Tenant, on demand, shall immediately reimburse Landlord for the sum of the taxes levied against the Building, or the portion of the taxes resulting from the increase in Landlord's assessment, as reasonably determined by Landlord. Landlord shall have the right to pay these taxes regardless of the validity of the levy. In addition, Tenant shall pay any tax, fee,, excise or business license tax based on the operation of and/or revenues received from Tenant's business in the Premises. 8. MAINTENANCE AND REPAIR OF THE PREMISES. 8.1 Tenant's Obligations. Subject to the provisions of Section 11, Tenant shall, at Tenant's sole cost and expense, maintain and keep the Premises and every part thereof in good and safe condition and repair, including necessary replacements and regular janitorial services. Tenant shall, upon the expiration or earlier termination of this Lease, surrender the Premises to Landlord in good condition, ordinary wear and tear excepted. In addition, Tenant shall be responsible for all cleaning, maintenance and repairs to the Premises and for the cleaning and maintaining of the exterior entryway, staircase and sidewalk in front of the entryway so as to keep all such areas in good and safe condition. Tenant shall also be responsible for necessary repairs to any kitchen appliances in the Premises. At all times during the Term, Tenant shall provide and maintain area rugs acceptable to Landlord in the Premises so as to protect the finished wood flooring. If the Premises are served by air conditioning, Tenant at its expense shall cause the filters to be changed on a monthly basis in accordance with manufacturer's recommendations and, on request, shall provide Landlord with evidence of such filter changes. Unless otherwise specifically provided in this Lease, Landlord shall have no obligation whatsoever to alter, remodel, improve, replace, repair, decorate or paint the Premises or any part thereof and the parties hereto affirm that Landlord has made no representations to Tenant respecting the condition of the Premises or the Building except as specifically set forth in this Lease. 8.2 Alterations. Tenant shall not alter, repair or change the Premises without the written consent of Landlord. All alterations, improvements and changes shall become the property of Landlord upon the surrender of the Premises. Provided Landlord notifies Tenant of 9 such requirement at the time Landlord approves the alterations or additions, Landlord shall have the right to require Tenant, upon surrender, to remove any alterations or additions made by Tenant, and Tenant shall, at Tenant's cost, repair any damage to the Premises caused by this or any other removal. Any alterations or improvements shall be made by a licensed contractor approved by Landlord in accordance with plans and specifications approved by Landlord. Together with Tenant's request for approval of proposed alterations or improvements, Tenant shall submit the names and addresses of proposed contractor(s), financial and other pertinent information about such contractor(s) (including, without limitation, the labor organization affiliation or lack of affiliation of such contractor(s), certificates of insurance to be maintained by Tenant's contractor(s), hours of construction, proposed construction methods, evidence of security (such as payment and performance bonds) to assure timely completion of the work by the contractor and payment of all costs of the work). All alterations and improvements shall be completed with due diligence, in a first class, workmanlike manner and in compliance with the plans and specifications and all applicable Laws. The alterations shall be performed in a manner that will not interfere with the quiet enjoyment of the other tenants in the Building. Tenant acknowledges and agrees that Landlord has made no representation or warranty regarding the tenantability, habitability or condition of the Premises. Tenant hereby waives any right to make repairs at Landlord's expense including without limitation any rights granted under California Civil Code Sections 1941 and 1942. 8.3 Mechanics' Liens. Tenant shall not allow any mechanics' or materialmen's liens to be filed against Landlord's interest in the Premises, the Building, the Common Areas, or underlying land. Tenant shall give Landlord at least ten (10) days' advance written notice of any alterations and Landlord shall have the right to post any notices which it deems necessary for protection from such liens. If such liens are filed, Landlord may pay or satisfy them, and any sums so paid shall constitute additional rent immediately due and payable by Tenant. Tenant may in good faith and at Tenant's own expense contest the validity of any such asserted lien, provided that Tenant has furnished the bond required in California Civil Code Section 3143, or any successor statute. 9. MAINTENANCE AND REPAIR OF STRUCTURE. 9.1 Landlord's Obligations. Notwithstanding the provisions of Section 8.1, Landlord shall repair and maintain the roof, structural walls, foundations, subfloors, exterior walls, and other structural portions of the Building, including the basic common plumbing, air conditioning (if any), heating, and electrical systems installed or furnished by Landlord, unless such maintenance and repairs are caused in part or in whole by the act, neglect, fault or omission of any duty by Tenant, its agents, servants, employees or invitees, in which case Tenant shall pay to Landlord the reasonable costs of such maintenance and repairs. Landlord shall not be liable for any failure to make any such repairs or to perform any maintenance unless such failure shall persist for an unreasonable time, not less than thirty (30) days, after written notice of the need for such repairs or maintenance is given to Landlord by Tenant. Except as provided in Section 11, there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Building or the Premises or in or to fixtures, appurtenances and equipment therein. Tenant waives the right to make repairs at Landlord's expense under any law, statute or ordinance now or hereafter in effect. 10 10. INSURANCE AND INDEMNIFICATION. 10.1 Insurance Required of Tenant. Tenant shall, at Tenant's sole cost and expense, maintain in full force and effect at all times during the term and during any pre-term occupancy period, the insurance coverages set forth in this Section. (a) Casualty Insurance. Broad form property damage in an amount not less than full replacement cost, covering Tenant's equipment, fixtures, furnishings and other personal property located in the Premises. Such policy or policies of insurance shall name both Landlord as an additional insured and Tenant as insureds. Landlord and Tenant agree that the proceeds from any such policy or policies shall be used for the repair or replacement of the property so covered. (b) Liability Insurance. Commercial general liability insurance which is to include, without limitation, products liability coverage, with such limits as may reasonably be required by Landlord from time to time but not less than the amounts stated in Paragraph 8 of the Fundamental Lease Provisions, for bodily injury or death to any one person, injury and/or death to any number of persons in any one incident, and for property damage in any one occurrence. Such policy or policies shall name Landlord as an additional insured. Such liability insurance shall specifically insure the hold harmless and indemnity provisions of Section 10.4, and shall contain a provision that Landlord, although an additional insured, shall nevertheless be entitled to recover under such policy or policies for any damage to Landlord or its agents or representatives by reason of acts or omissions of Tenant. 10.2 Policy Form. All insurance required of Tenant shall be in form and written by one or more insurance companies reasonably satisfactory to Landlord and licensed to do business in the State of California. All such insurance may be carried under a blanket policy covering the Premises and other locations, provided that the coverage afforded Landlord by such blanket policy shall not be reduced or diminished by reason of the use of such blanket policy of insurance, and provided further that the requirements of Section 10.1 are otherwise satisfied. All such insurance shall contain endorsements that (i) such insurance shall not be canceled or amended except upon thirty (30) days' prior notice to Landlord by the insurance company, (11) Tenant shall be solely responsible for payment of premiums, and (iii) Tenant's insurance is primary in the event of overlapping coverage which may be carried by Landlord. The minimum limits of the commercial general liability insurance policy required by Section 10.1(b) shall in no way limit or diminish Tenant's liability under this Lease. Tenant shall deliver to Landlord at least fifteen (15) days prior to the time such insurance is first required to be carried by Tenant and thereafter at least fifteen (15) days prior to the expiration of such policy, either a duplicate original or a certificate clearly showing compliance by Tenant with Tenant's obligations under this Lease, together with evidence satisfactory to Landlord of the payment of the premiums therefor. 10.3 Subrogation. Landlord and Tenant hereby mutually waive their respective rights of recovery against each other for any loss insured by property insurance policies existing for the benefit of the respective parties. Each party shall obtain a special endorsement, if required by its insurer, to evidence compliance with the aforementioned waiver. 11 10.4 Indemnification. Tenant shall indemnify, protect, defend and hold Landlord harmless from all liabilities, claims, costs, expenses and damages arising out of or in connection with (i) any damage to person or property in or about the Premises, the Building and/or the Common Areas which is caused by the acts or omissions of Tenant, its agents, employees or representatives and/or (ii) any act or omission of Tenant, its agents, employees or representatives, which constitutes a breach of any obligation of Tenant under this Lease. Landlord shall not be liable to Tenant for any damage to Tenant or Tenant's property from any cause, and Tenant waives all claims against Landlord for damage to person or property arising from any reason, except that Landlord shall be liable to Tenant for damage to Tenant resulting from the gross negligence of Landlord or its authorized representatives. 11. DESTRUCTION; CONDEMNATION. 11.1 Destruction. In the event the Premises or the Building are damaged by fire or other perils covered by insurance then in effect, Landlord agrees to repair such damage and this Lease shall remain in full force and effect, except that Tenant shall be entitled to a proportionate reduction of Monthly Rent while such repairs are being made, such proportionate reduction to be based upon the extent to which the damage and/or the making of such repairs materially interferes with the business carried on by Tenant in the Premises. Provided, however, if the damage is due to the fault or neglect of Tenant or its employees, agents or invitees, there shall be no abatement of rent. In the event the Premises or the Building are damaged as a result of any cause other than the perils covered by insurance then in effect, then Landlord shall forthwith repair the same provided the extent of the destruction is less than five percent (5%) of the then full replacement cost of the Premises or the Building, as the case may be. In the event the destruction of the Premises or the Building, is to an extent greater than five percent (5%) of the full replacement cost, then Landlord shall have the election to: (i) repair or restore such damage, this Lease continuing in full force and effect, but the Monthly Rent to be proportionately reduced as provided above; or (ii) give notice to Tenant at any time within sixty (60) days after such damage. In terminating this Lease as of the date specified in such notice, which date shall be no less than thirty (30) and no more than sixty (60) days after the giving of such notice. In the event of giving such notice, this Lease shall terminate and all interest of Tenant in the Premises shall terminate on the date so specified in such notice. Monthly Rent, reduced by a proportionate amount based upon the extent, if any, to which such damage materially interferes with the business carried on by Tenant in the Premises, shall be paid up to the date of such termination. The provisions of this Section to the contrary notwithstanding: (i) Landlord shall not have any obligation whatsoever to repair, reconstruct or restore the Premises when the damage resulting from any casualty covered under this Section occurs during the last six (6) months of the term of this Lease or any extension thereof; and (ii) Landlord's obligation to repair and/or reconstruct the Premises shall not exceed Landlord's original construction obligations under this Lease, if any, which original construction obligations shall be deemed to exclude any construction done by Landlord on Tenant's behalf and at Tenant's cost. If existing laws do not permit the Premises to be restored to substantially the same condition as they were in immediately before destruction, either party can terminate this Lease by giving written notice to the other party within thirty (30) days after such destruction. 12 Landlord shall not be required to repair any injury or damage by fire or other cause, or to make any repairs or replacements of any equipment, fixtures, furnishings or personal property of Tenant or any tenant improvements installed in the Premises by Tenant, all of which shall be Tenant's obligation to restore. Tenant shall not be entitled to any compensation or damages from Landlord for loss of the use of the whole or any part of the Premises or Tenant's personal property, or for any inconvenience or annoyance occasioned by such damage, repair, reconstruction or restoration. The provisions of California Civil Code Sections 1932(2) and 1933(4), and any successor statutes, shall be inapplicable with respect to any destruction of the Building or the Premises. 11.2 Condemnation. If the Premises are condemned and taken by any governmental authority or if such portion of the Building, Common Areas and/or underlying land is condemned and taken so that the Premises can no longer reasonably be used for the purpose allowed in this Lease, either party shall have the right to terminate this Lease and all condemnation awards shall be payable to Landlord, except for any award made to Tenant for the taking of personal property or fixtures belonging to Tenant, for the interruption of or damage of Tenant's business, or for Tenant's unamortized cost of leasehold improvements paid for by Tenant and which Tenant has the right to remove. Each party waives the provisions of California Code of Civil Procedure Section 1265.130, and any successor statute, allowing either party to petition the Superior Court to terminate this Lease in the event of condemnation. 12. DEFAULT; REMEDIES. 12.1 Default. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant: (a) The vacating or abandonment of the Premises by Tenant; (b) The failure by Tenant to make any payment of rent when due, where such failure continues for a period of five (5) days after written notice thereof by Landlord to Tenant; (c) The failure by Tenant to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Tenant, other than the payment of money, where such failure shall continue for a period of thirty (30) days after written notice thereof by Landlord to Tenant; provided, however, that if the nature of Tenant's default is such that more than 30 days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commences such cure within such 30-day period and thereafter diligently prosecutes such cure to completion; (d) The making by Tenant of any general assignment or general arrangement for the benefit of creditors, or the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt, or a petition of reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days), or the appointment of a trustee or a receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease 13 where possession is not restored to Tenant within thirty (30) days, or the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within thirty (30) days; (e) An assignment or subletting, or a purported assignment or subletting, in violation of Section 13; or (f) If Tenant, any of Tenant's owners or any entity in which Tenant has an ownership interest is a partner in the partnership entity which constitutes Landlord, a failure by such partner to perform any obligation or duty it may have as a partner in such partnership. The notices required under this Section 12.1 are the only notices required to be given by Landlord to Tenant in the event of Tenant's default and are not in addition to any statutory notices otherwise required by the unlawful detainer statutes of California. 12.2 Remedies in Default. In the event of any such default or breach by Tenant, Landlord may at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of a right or remedy which Landlord may have by reason of such default or breach: (a) Terminate Tenant's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. In such event Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default including, without limitation: (i) the cost of recovering possession of the Premises; (11) expenses of reletting, including necessary renovation and alteration of the Premises; (iii) the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Tenant proves could be reasonably avoided; (iv) that portion of any leasing commission paid by Landlord and applicable to the unexpired term of this Lease; and (v) any other amounts allowed by law. Unpaid installments of rent or other sums shall bear interest from the date due at the maximum rate allowed by law from time to time. In the event Tenant shall have abandoned the Premises, Landlord shall have the option of (1) taking possession of the Premises and recovering from Tenant the amount specified in this paragraph, or (2) proceeding under the following provisions of this Section ID. (b) Maintain Tenant's right to possession, in which case this Lease shall continue in effect whether or not Tenant shall have abandoned the Premises. In such event Landlord shall be entitled to enforce all of Landlord's fights and remedies under this Lease, including the right to recover the rent as it becomes due or to relet the Premises or any part thereof for such term and on such provisions as Landlord, in its sole discretion, may deem advisable. (c) Re-enter the Premises, with or without terminating this Lease, and remove all property and persons therefrom, which property may be stored at a public warehouse or elsewhere at Tenant's cost. 14 (d) After ten (10) days' notice to Tenant, or a shorter period if additional damage may result, cure the default for the account and at the expense of Tenant, which amount shall be due from Tenant to Landlord immediately upon demand. (e) Pursue any other remedy now or hereafter available to Landlord under the laws of the State of California. 13. ASSIGNMENT AND SUBLETTING. 13.1 Definition of Assignment. The use of the words "assignment," "assign," "assigned," "subletting," or "sublet," or any derivation thereof, in this Section 13 shall include: (a) The pledging, mortgaging or encumbering of Tenant's interest in this Lease, or the Premises or any part thereof, (b) The total or partial occupation of all or any part of the Premises by any person, firm, partnership, or corporation, or any groups of persons, firms, partnerships, or corporations, or any combination thereof, other than Tenant; (c) An assignment or transfer by operation of law; (d) If Tenant is a partnership or limited liability company ("LLC"), a withdrawal or change, voluntary, involuntary, or by operation of law, of the partner or partners (or member(s) in the case of an LLC owning a majority of the partnership or LLC interest as of the date of this Lease, or the dissolution of the partnership or LLC; provided, however, that the transfer of a partnership or LLC interest by testacy or intestacy shall not be deemed an assignment prohibited by this Section; (e) If Tenant consists of more than one person, a purported assignment, voluntary, involuntary, or by operation of law, from a majority of such persons to the others; (f) If Tenant is a corporation, any dissolution, merger, consolidation, or other reorganization of the corporation, or the sale or other transfer of a controlling voting interest, direct or indirect, of the corporate stock of Tenant, or the sale of 51% of the value of the assets of the corporation; provided, however, the transfer of a controlling voting interest of the corporate stock of Tenant by testacy or intestacy shall not be deemed an assignment prohibited by this Section. 13.2 No Assignment. Tenant shall not voluntarily assign or encumber all or any portion of its interest in this Lease or in the Premises, or sublease (except as provided in the following sentence) all or any part of the Premises, or allow any other person or entity (except Tenant's authorized representatives) to occupy or use all or any part of the Premises. The preceding sentence notwithstanding, Tenant shall have the limited night to sublease all or a portion of the Premises, subject to the following conditions: (i) Tenant shall obtain Landlord's prior written approval of the proposed sublessee (which approval Landlord shall not unreasonably withhold) and (ii) the sublease document shall be subject to Landlord's prior written approval and shall be prepared by Landlord's counsel at Tenant's expense, Any 15 assignment, encumbrance, or sublease made without Landlord's consent shall be voidable and, at Landlord's election, shall constitute a default. No consent to any assignment, encumbrance, or sublease shall constitute a waiver of the provisions of this Section. 13.3 Costs. In the event Tenant requests Landlord to consent to a proposed assignment, subletting or encumbrance, Tenant shall pay to Landlord, on demand, whether or not such consent is ultimate]), given, Landlord's reasonable administrative costs and attorneys' fees incurred in connection with each such request, including without limitation, attorneys' fees for preparing and negotiation any sublease as provided in Section 13.2 13.4 Termination. At the option of Landlord, if this Lease is terminated for any reason Landlord will either (i) terminate all subleases, or (ii) treat all subleases as being assigned to Landlord, in which case the sublessees will attorn directly to Landlord. 13.5 Involuntary Assignment; Attachment; Involuntary Proceedings. If an involuntary assignment occurs, Landlord shall have the election to terminate this Lease and this Lease shall not be treated as an asset of Tenant, and Tenant shall have no further rights under this Lease, If an attachment or execution is levied against Tenant, Tenant shall have thirty (30) days in which to cause the attachment or execution to be removed. If any involuntary proceedings in bankruptcy are brought against Tenant, or if a receiver is appointed, Tenant shall have thirty (30) days in which to have the involuntary proceeding dismissed or the receiver removed. 13.6 Consideration to Landlord. Without in any way limiting the prohibitions under Section 13.2 above, if Landlord agrees to consent to an assignment or sublease, (i) Tenant shall pay Landlord seventy-five percent (75%) of the consideration received by Tenant attributable to the assignment of Tenant's interest in this Lease and (ii) Tenant shall pay to Landlord from time to time, immediately after Tenant's receipt thereof, seventy-five percent (75%) of all rent or other consideration Tenant receives from such subtenant in excess of the rent payable under this Lease, as appropriately prorated with respect to a sublease of a portion of the Premises. In making the calculations provided for this Section, the consideration paid to Tenant shall first be reduced by Tenant's expenses associated with an assignment or sublease, including without limitation, brokerage fees, remodeling costs, attorneys' fees or other fees charged by Landlord. 14. SALE OF BUILDING. 14.1 Sale of Building. If Landlord sells or transfers its interest in the Building, Landlord shall deliver or credit any security deposit to Landlord's successor in interest and thereupon be relieved of further responsibility with respect to the Security Deposit. In the event of any sale or transfer of the Building, Landlord shall be and is hereby entirely released and relieved of all liability under this Lease arising out of any act, occurrence or omission occurring after the consummation of such sale, and the purchaser at such sale or any subsequent sale of the Building shall be deemed, without any further agreement between the parties or their successors in interest or between the parties and any such purchaser, to have assumed and agreed to carry out any and all of the covenants and obligations of Landlord under this Lease. Tenant shall, upon request of any person or party succeeding to the interest of Landlord, attorn to such successor in interest and recognize such successor in interest as Landlord under this Lease. 16 15. LEASE SUBJECT TO SUBORDINATION. 15.1 Lease Subject to Subordination. This Lease is and shall be subject and subordinate to all ground or underlying leases which now exist or may hereafter be executed affecting the Building, to any underlying covenants, conditions and restrictions, and to the lien and provisions of any mortgage or deeds of trust now or hereafter placed against the Building or against Landlord's interest or estate in the Building or on or against any ground or underlying lease, and any renewals, modifications, consolidations and extensions of such lease(s), any covenants, conditions and restrictions, and any mortgages and deeds of trust without the necessity of the execution and delivery of any further instruments on the part of Tenant to effect such subordination. If any mortgagee, beneficiary, trustee or ground lessor elects to have this Lease prior to the lien of such mortgagee's, beneficiary's, trustee's or ground lessor's mortgage or deed of trust or ground lease, and gives notice of such election to Tenant, this Lease shall be deemed prior to the lien of such mortgage or deed or trust or ground lease, whether this Lease is dated prior or subsequent to the date of such mortgage, deed of trust, or the date of the recording thereof. Tenant shall execute and deliver within ten (10) days of request from Landlord, without charge, such further instruments evidencing the subordination of this Lease to any ground or underlying lease, any covenants, conditions and restrictions, and any mortgage or deed of trust; provided, such instrument shall provide that as long, as Tenant is not in default of this Lease, Tenant's possession of the Premises shall not be affected by any foreclosure proceedings or ground lease termination. In the event any proceedings are brought for default under any ground or underlying lease or under any covenants, conditions and restrictions, or in the event of foreclosure or the exercise of the power of sale under any mortgage or deed of trust against the Premises, Tenant shall, upon request of any person or party succeeding to the interest of Landlord as a result of such proceedings, attorn to such successor in interest and recognize such successor in interest as Landlord under this Lease. 16. GENERAL PROVISIONS. 16.1 Signs and Blinds. The parties recognize that Landlord shall maintain uniform signage, directory, and blind systems for the Building. Accordingly, Tenant agrees not to place any signs or other marking upon any externally visible parts of the Premises or remove or replace the window blinds without Landlord's written consent. Landlord shall have the right to remove any signs, advertisements, displays, or similar items, without notice to Tenant. Landlord shall have the exclusive night to the use of the roof, exterior walls of the Building, and the airspace above the roof Landlord has the exclusive right to erect and maintain signs and shall have access thereto. All revenue arising from such signs shall be solely and exclusively that of Landlord, and Tenant shall have no night or claim thereto. Except with the express prior written consent of Landlord, no advertising medium shall be utilized by Tenant which can be heard or seen outside the Premises including, without limitation, any signs, searchlights, loudspeakers, phonographs, radio, television, or musical instruments. 16.2 Entry. Tenant shall permit Landlord and its agents to enter the Premises at all reasonable times for the purpose of inspecting the Premises, or for the purpose of maintaining the Building or making repairs or alterations to any other portion of the Building. Landlord may erect scaffolding or other equipment reasonably required for such work, and may post notices of nonresponsibility. Landlord shall give Tenant reasonable notice before entering 17 the Premises, except that notice shall not be required in the case of emergency, Landlord's rights under this Section extend to the owner of the adjacent property on which excavation or construction is to take place and to the representatives, agents and contractors of such adjacent property owner. 16.3 Statement of Status. Upon request by Landlord, Tenant agrees to execute and return within ten (10) days of request a customary and reasonable statement of status of its tenancy and estoppel certificate. 16.4 Attorneys' Fees. In the event that either party to this Lease commences any action or proceeding against the other by reason of any breach or alleged breach of any term or condition of this Lease, or for the interpretation of this Lease, the prevailing party in such an action or proceeding shall be entitled to recover such amount as the court may judge to be reasonable attorneys' fees, and all reasonable costs incurred. 16.5 Captions. The captions of articles and paragraphs of this Lease are for reference only, and shall not be construed in any way as a part of this Lease. 16.6 Notices. Any notice, demand, request, consent, approval, or communication that either party desires or is required to give to the other party or any other person shall be in writing and either served personally or sent by prepaid, certified or registered mail, return receipt requested, and shall be addressed to the other party at the address set forth in Paragraph 9 of the Fundamental Lease Provisions. Either party may change its address by notifying the other party of the change of address in the manner as provided in this Section. 16.7 Successors. Subject to the restrictions of Section 13, all of the provisions of this Lease shall bind and inure to the benefit of the parties and their respective heirs, legal representatives, successors and assigns. 16.8 Joint and Several Obligations of Tenant. If more than one individual or entity comprises Tenant, the obligations imposed on each individual or entity that comprises Tenant under this Lease shall be joint and several. 16.9 Liability of Landlord. Except as otherwise provided in this Lease or applicable law, for any breach of this Lease the liability of Landlord (including all persons and entities that comprise Landlord, and any successor landlord) and any recourse by Tenant against Landlord shall be limited to the interest of Landlord and Landlord's successors in interest in and to the Building. On behalf of itself and all persons claiming by, through, or under Tenant, Tenant expressly waives and releases Landlord from any personal liability with respect to this Lease. 16.10 Independent Covenants. This Lease shall be construed as though the covenants between Landlord and Tenant are independent and not dependent. Tenant expressly waives the benefit of any statute to the contrary and agrees that if Landlord fails to perform its obligations under this Lease, Tenant shall not be entitled: (a) To make any repairs or perform any acts at Landlord's expense; or 18 (b) To any setoff of the Rent or other amounts owing under this Lease against Landlord. The foregoing, however, shall in no way impair Tenant's right to bring a separate action against Landlord for any violation by Landlord of the provisions of this Lease if notice is first given to Landlord and any lender of whose address Tenant has been notified, and a reasonable opportunity (in no event less than thirty (30) days after notice from Tenant) is granted to Landlord and that lender to correct those violations, 16.11 Waiver. No covenant, term or condition or the breach thereof shall be deemed waived, except by written consent of the party against whom the waiver is claimed and any waiver of the breach of any covenant, term or condition shall not be deemed to be a waiver of any preceding or succeeding breach of the same or any other covenant, term or condition. Acceptance by Landlord of any performance by Tenant after the time the same was due shall not constitute a waiver by Landlord of the breach or default of any covenant, term or condition unless otherwise expressly agreed to by Landlord in writing. 16.12 Attachments. Exhibits, addenda, schedules and riders attached hereto and listed in Paragraph 11 of the Fundamental Lease Provisions are deemed to constitute part of this Lease and are incorporated into this Lease. 16.13 Entire Agreement. This Lease, including any exhibits and attachments hereto listed in the Fundamental Lease Provisions, constitutes the entire agreement between Landlord and Tenant relative to the Premises. Landlord and Tenant agree here-by that all prior or contemporaneous oral or written agreements, or letters of intent, between and among themselves or their agents including any leasing agents and representatives, relative to the leasing of the Premises are merged in or revoked by this Lease. 16.14 Amendment. This Lease and the exhibits and attachments may be altered, amended or revoked only by an instrument in writing signed by both Landlord and Tenant. 16.15 Severability. If any term or provision of this Lease is, to any extent, determined by a court of competent jurisdiction to be invalid or unenforceable, the remainder of this Lease shall not be affected thereby; and each remaining term and provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. 17. TIME OF ESSENCE. Time is of the essence of this Lease and each and every provision of this Lease. 17.1 Holding Over. If Tenant, or any party claiming rights to the Premises through Tenant, retains possession of the Premises with or without the written consent of Landlord after the expiration or earlier termination of this Lease, such possession shall constitute a tenancy at will, subject to all the terms and provisions of this Lease. If Tenant fails to surrender the Premises to Landlord on the date as required herein, Tenant shall hold Landlord harmless from all damages resulting from Tenant's failure to surrender the Premises, including, without limitation, claims made by a succeeding tenant resulting from Tenant's failure to surrender the Premises. If Tenant remains in possession of the Premises after expiration or 19 earlier termination of this Lease without Landlord's written consent, Tenant's continued possession shall be on the basis of a tenancy at sufferance and Tenant shall pay as rent during the holdover period an amount equal to the greater of. (a) One hundred fifty percent (150%) of the then fair market rental (as reasonably determined by Landlord) for the Premises; or (b) Two hundred percent (200%) of the Monthly Rent and Additional Rent payable under this Lease for the last full month before the date of expiration or termination. 17.2 Broker. Landlord and Tenant each warrant and represent to the other that neither has had any dealings with any real estate broker, agent or finder in connection with the negotiation of this Lease or the introduction of the parties to this transaction, except for any broker named in Paragraph 10 of the Fundamental Lease Provisions (whose commission shall be paid by the party designated in Paragraph 10), and that it knows of no other real estate broker, agent or finder who is or might be entitled to a commission or fee in connection with this Lease. In the event of any such additional claims for brokers' or finders' fees with respect to this Lease, Tenant shall indemnify, hold harmless, protect and defend Landlord from and against such claims if they shall be based upon any statement or representation or agreement made, or alleged to have been made, by Tenant, and Landlord shall indemnify, hold harmless, protect and defend Tenant if such claims shall be based upon any statement, representation or agreement made, or alleged to have been made, by Landlord. 17.3 Parking. Tenant acknowledges that there is no on-site parking at the Premises or the Building and that Landlord makes no representations or warranties regarding the availability of off-site parking. EXECUTED on the date stated in the Fundamental Lease Provisions. LANDLORD: TENANT: CHARLES A. SEGALAS, an individual more.com, inc., a Delaware corporation ____________________________________ By: ____________________________________ \s\ Charles A . Segalas Name: __________________________________ Title: _________________________________ By: ____________________________________ Name: __________________________________ Title: _________________________________ 20 EX-10.10 13 LEASE - 3401 MARKET STREET Exhibit 10.10 LETTER OF AGREEMENT BETWEEN: UNIVERSITY CITY SCIENCE CENTER (LESSOR) AND GREENTREE NUTRITION, INC. (LESSEE) RE: 3401 Market Street, Suite 225 Effective February 1, 1999, the lease agreement dated February 13, 1997 between Lessor and Lessee now consisting of approximately 1,789 gross square feet is modified as follows: 1. The demised premises shall increase by Suite 228, approximately 650 gross square feet (as noted on the attached floor plan). Therefore, the total space occupied shall be approximately 2,439 gross square feet. 2. The lease term shall be the same as Lessee's existing space. 3. The minimum fixed annual rent shall increase to Thirty-five Thousand Seven Hundred Forty-Six Dollars ($35,746.00), payable in equal monthly installments in advance and without demand, of Two Thousand Nine Hundred Seventy-Eight Dollars and Thirty-Four Cents ($2,978.34). GROSS ANNUAL MONTHLY SUITE SQ.FT. RATE RENT 225 539 $18.00 $11,502.00 $ 958.50 224 824 $16.00 $13,184.00 $1,098.67 224A 326 $10.00 $ 3,260.00 $ 271.67 228 650 $12.00 $ 7,800.00 $ 650.00 TOTAL 2,439 $35,746.00 $2,978.84 4. The monthly use and occupancy tax shall be $94.17. 5. Any additional improvements, including electrical and/or lighting, shall be at Lessee's sole expense, and they must be presented to Lessor for approval. 6. Lessee shall pay an additional security deposit in the amount of $650.00 to Lessor upon execution of this Agreement. Except as expressly stated in this Agreement, all other terms and conditions of the Lease Agreement dated February 13, 1997 remain in full force and effect. ACCEPTED FOR: ACCEPTED FOR: UNIVERSITY SCIENCE CENTER GREENTREE NUTRITION, INC. _____________________________ _____________________________ Name Name _____________________________ _____________________________ Title Title _____________________________ _____________________________ Date Date ASSIGNMENT OF LEASE AGREEMENT THIS AGREEMENT made this 7th day of December, 1998, by and between UNIVERSITY SCIENCE CENTER (hereinafter called "Lessor") whose address is 3624 Market Street, Philadelphia, Pennsylvania 19104, and ACUMIN CORPORATION (hereinafter called "Lessee") whose address is 3401 Market Street, Suite 225, Philadelphia, Pennsylvania 19103. WITNESSETH: WHEREAS, Lessor entered into a certain Lease, dated February 13, 1997 (hereinafter called "Lease") with Lessee, covering the premises consisting of approximately 639 gross square feet of laboratory space in the building known as 3401 Market Street, Philadelphia, Pennsylvania, as amended to consist of approximately 1,789 gross square feet of office and laboratory space. WHEREAS, the Lessor and Lessee are desirous of amending the Lease as to certain terms and conditions, and NOW, THEREFORE, in consideration of their mutual covenants and intending to be bound hereby, the parties agree as follows: 1. Consent by Lessor to Assignment of Lease. UNIVERSITY SCIENCE CENTER, the Lessor named in the above-referenced Lease dated February 13, 1997, hereby agrees that Acumin Corporation, the Lessee under said Lease, may assign all its rights under the said Lease to GREENTREE NUTRITION, INC., whose address is 520 3rd Street, Suite 245, San Francisco, CA 94107, its successors and assigns, for the remaining term of the said Lease. This consent is subject to the payment of all rents reserved in said Lease and the performance of all duties, covenants, obligations, conditions, and terms contained therein. This assignment does not relieve Acumin Corporation of its liability under the Lease. 2. Amendment of Lease. The Lease is hereby amended as hereinafter set forth, effective as of January 1, 1999. IN WITNESS WHEREOF, the parties hereto have executed this amendment the day and year aforesaid. - -------------------------------------------------------------------------------- BY: s/Bradford S. BY: s/Bradford S. BY: s/Charles Oberwager Oberwager ______________ - -------------------------------------------------------------------------------- ASSIGNOR: ASSIGNEE: LESSOR: ACUMIN CORPORATION GREENTREE NUTRITION, UNIVERSITY CITY SCIENCE INC. CENTER - -------------------------------------------------------------------------------- Name: s/_____________ Name: s/_____________ Name: s/_____________ - -------------------------------------------------------------------------------- Title: s/President Title: s/CFO Title: s/SVP - -------------------------------------------------------------------------------- Date: s/12/7/98 Date: s/12/7/98 Date: s/12/11/98 - ------------------------------------------------------------------------------- EX-10.11 14 INTERNET FULFILLMENT SERVICES AGREEMENT Exhibit 10.11 INTERNET FULFILLMENT SERVICES AGREEMENT This Internet Fulfillment Services Agreement ("Agreement") is made as of July 1, 1999 by and between Bergen Brunswig Drug Company, a California corporation ("BBDC"), and more.com, a Delaware corporation ("IR"). RECITALS A. IR is an Internet retailer and has created a marketing and sales program designed to supply pharmaceutical products and related services to individuals utilizing an Internet web site; B. BBDC is a national distributor of, among other things, products in the categories of over-the-counter pharmaceutical products, nutritional, health and beauty care products and home health care products, described on Schedule 1.1 to ------------ the Terms and Conditions attached as Exhibit 1 (collectively, "Products"); --------- C. IR wishes to contract with a fulfillment service provider to ship the Products and provide related services to IR's consumers in the United States; D. BBDC wishes to provide the services described in this Agreement to IR; E. Under no circumstances will the Products include any prescription pharmaceutical products; and F. The parties wish to enter into this Agreement in order to set forth their obligations to each other. NOW THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, the parties agree as follows: 1. TERMS AND CONDITIONS. The Terms and Conditions in Exhibit 1 ("Terms and Conditions") are --------- incorporated by this reference. Capitalized terms used without definition have meanings in the Terms and Conditions. 2. TERM. Subject to Sections 9 and 10 of the Terms and Conditions, the Term of this Agreement will be ten (10) years from the date of this Agreement. 3. MINIMUM ORDERS. IR will submit Orders for at least [**]. 4. FEES. In addition to payment for Products, IR will pay BBDC the following service fees. **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 1 4.1 Set-Up Fee. [**] 4.2 Fulfillment Fee. [**] 4.3 [**] Such election may be changed by IR effective on the first business day of any calendar quarter upon thirty (30) days' prior written notice to BBDC. 4.3.1. [**] in addition to the amount set forth below: --------------------------------------------------------------------- Category [**] --------------------------------------------------------------------- Traditional OTC and HBC [**] --------------------------------------------------------------------- Nutritionals and natural remedies [**] --------------------------------------------------------------------- Fragrances [**] --------------------------------------------------------------------- Cosmetics [**] --------------------------------------------------------------------- Home healthcare [**] --------------------------------------------------------------------- Private label [**] --------------------------------------------------------------------- Bulk/case goods [**] --------------------------------------------------------------------- 4.3.2. [**] per Order in addition to the amount set forth below. --------------------------------------------------------------------- Category [**] --------------------------------------------------------------------- Traditional OTC and HBC [**] --------------------------------------------------------------------- Nutritionals and natural remedies [**] --------------------------------------------------------------------- Fragrances [**] --------------------------------------------------------------------- Cosmetics [**] --------------------------------------------------------------------- Home healthcare [**] --------------------------------------------------------------------- Private label [**] --------------------------------------------------------------------- Bulk/case goods [**] --------------------------------------------------------------------- 4.3.3 [**] per line in addition to the amounts set forth below ([**] maximum is subject to further review after October 1, 1999). --------------------------------------------------------------------- Category [**] --------------------------------------------------------------------- Traditional OTC and HBC [**] --------------------------------------------------------------------- Nutritionals and natural remedies [**] --------------------------------------------------------------------- Fragrances [**] --------------------------------------------------------------------- Cosmetics [**] --------------------------------------------------------------------- Home healthcare [**] --------------------------------------------------------------------- Private label [**] --------------------------------------------------------------------- Bulk/case goods [**] --------------------------------------------------------------------- **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 2 [**] represented on the manufacturers' current wholesale price list, adjusted to reflect all applicable discounts including free goods, promotional allowances and special manufacturers pricing and IR contract pricing intended by the manufacturer or supplier to be passed on to retailers or consumers. Cash discounts, rebates and ancillary benefits extended by any manufacturer or supplier to the distributor are excluded from the definition of "Cost". Any sales, use and business and occupational taxes levied and/or paid by BBDC are IR's responsibility and are added to IR's cost. Net-billed items are primarily specific product categories including home healthcare and durable medical equipment from the Today's Healthcare (THC) catalog, private label over-the-counter health and beauty care merchandise, and certain consumer paper goods/bulk items sold by the case. Net-billed items are not subject to additional discounts or cost plus mark-ups, however such purchases qualify towards total purchase volume. Consumer Image and Ingredient Database License Fee. IR will be invoiced a licensing fee of [**] 4.5 Special Services Fee. [Omitted] 4.6 Niche Products Storage Fee. At IR's reasonable request, BBDC will provide storage space for additional items not generally stocked by BBDC ("Niche Products"), subject to available suitable warehouse space. [**] Each Niche Product will be subject to BBDC's standard Product set-up fee to enter it in BBDC's order and inventory systems. Storage space will be [**] per standard pallet (or portion thereof), payable per calendar quarter in advance, plus any special handling or storage charges (e.g., security, refrigeration, insurance, etc.) reasonably determined by BBDC on a case-by-case basis, adjusted to reflect BBDC's experience. Niche Products are subject to a [**] (in lieu of the cost- plus mark-up) in addition to the normal per-Order charge pursuant to Section 4.3. Niche Products do not qualify towards total [**] 4.7 Rebate. On a quarterly basis, BBDC will pay IR rebates pursuant to the following schedule set forth below: [**] **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 3 [**] 4.8 Collateral Materials. IR will also be permitted to include in each shipment up to [**] ("Collateral Materials") that are printed material no bigger than 8 1/2 inches by 11 inches, each at no additional charge so long as such Collateral Materials are to be included in all IR shipments. Order-specific Collateral Materials, or Collateral Materials in excess of, or exceeding the dimensions of, the allowable pieces of Collateral Materials described above will be subject to an additional charge of [**] or as agreed upon by the parties. All Collateral Materials will be paid for by IR. 5. PRICING. BBDC will offer and make available to IR pricing programs under which Products would be provided under this Agreement [**]. 6. SERVICE LEVELS. During the first sixty (60) days following the date BBDC begins shipping Products under this Agreement ("Start-up Period"), BBDC will comply with the "Start-Up Service Levels" in Exhibit A. After the Start-Up Period, BBDC will --------- comply with the "Service Levels" in Exhibit A. Each of the Service Levels and --------- Start-Up Service Levels will be deemed a material term of this Agreement, and any failure to comply with them will entitle IR to terminate this Agreement pursuant to Section 10.1.3 of the Terms and Conditions. 7. NOTICES. Subject to Section 17.18 of the Terms and Conditions, notices to IR under this Agreement will be sent to: more.com, Inc. 520 Third Street, Suite 245 San Francisco, California 94107 Attn: Brad Oberwager Fax: (415) 979-9598 with a copy to: Howard, Rice et al. 3 Embarcadero Center, 7/th/ Floor San Francisco, California 94111 Attn: Ronald Star, Esq. Fax: (415) 217-5910 **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 4 6. EXHIBITS. All exhibits to this Agreement listed below are incorporated by this reference. Exhibit Number Exhibit Name -------------- ------------ 1 Terms and Conditions A Service Levels IN WITNESS WHEREOF, the parties have executed this Internet Fulfillment Services Agreement as of the date first written above. IR: more.com By:_______________________________________ Name: Title: BBDC: Bergen Brunswig Drug Company By:_______________________________________ Name: Chuck Prieve Title: Vice President, e-Commerce Sales 5 EXHIBIT 1 TO INTERNET FULFILLMENT SERVICES AGREEMENT TERMS AND CONDITIONS 1. PRODUCTS AND TERRITORY. 1.1 Products. A list of the categories of the Products ("Product -------- Categories") is set forth in Schedule 1.1. BBDC will provide IR a list of ------------ specific products ("Products") and related information ("Item Catalog Information" [EDI 832 Transaction Set]) from time to time. [**] 1.2 Niche Products. BBDC may elect to store and ship additional -------------- products requested by IR, including private label products and other products that BBDC does not otherwise carry, upon payment of the Niche Product fees set forth on the cover page. 1.3 Territory. BBDC will provide fulfillment services for the Products --------- in the Unites States of America and its territories and possessions and each other territory listed on Schedule 1.3 ("Territory"). In no event will BBDC ------------ provide or ship Products to IR's consumers outside the Territory. 1.4 Exclusivity. [Omitted] ----------- 1.5 Right of First Refusal. [Omitted] ---------------------- 2. ORDERS; SHIPPING; RETURNS. 2.1 Operations Manual. The Operations Manual in Schedule 2.1 ("Operations ----------------- ------------ Manual") is incorporated by this reference. 2.2 Orders. Orders for Products will be initially placed by IR's consumers ------ using IR's Internet web site. IR will forward all orders for Products to BBDC by electronic data interchange ("EDI") pursuant to Section 3.8 at least four (4) times per day ("Orders"). Orders will set forth a description of the Products, SKU designations, quantities, requested method of delivery, the designated delivery locations and other required information as agreed upon by the parties from time to time. 2.3 Inventory. Subject to Section 4.2, BBDC will maintain sufficient --------- inventory of the Products in an effort to facilitate the delivery of all Orders for the Products. Inquiries by IR to BBDC's customer service representatives concerning any Products must reference BBDC's Product number. 2.4 Shipping. BBDC will cause all lawful Orders to be shipped in -------- accordance with the Operations Manual. Shipping guidelines may change due to legal and product shipping requirements. Certain Products may be subject to special shipping and handling fees. Title to, and risk of loss of, all Products will pass from BBDC to IR upon BBDC's delivery of the Products to the shipper for delivery to IR's consumer. [**] BBDC will use commercially reasonable efforts to ensure that all Orders for Products received before the daily "cut- off time" will be shipped by the corresponding shipping time for such day. Out- of-stock or back-ordered Products will be shipped promptly after BBDC's receipt of such Products from the manufacturer or other supplier. Inquiries about shipping status will be first directed to the shipper and any such initial inquires to BBDC's customer service representatives where BBDC has provided IR with a shipper's tracking number will be subject to an additional charge. BBDC will not process any of the following shipments of Products: (i) international shipments, (ii) COD shipments, (iii) shipments requiring a declared value, (iv) shipments to freight **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 6 forwarding agents, (v) shipments of hazardous materials or other products requiring specialized shipping that shipper and/or BBDC are not prepared to provide, and (vi) Drug Enforcement Administration ("DEA") Schedule II controlled substances. 2.5 Labels and Invoices. Unless modified by Exhibit 2, if any, IR will ------------------- --------- provide BBDC standard packaging (standard size cardboard boxes, plain colored plastic tape and plain bubble/paper packing material), labels and invoice forms bearing IR's, and not BBDC's, name, logo and telephone number for BBDC's use in shipping Products. IR may select from BBDC's standard invoice formats (inserting IR's logo and return address) at no additional charge. Modifications and custom work is subject to an additional charge at BBDC's then-current rates. If IR's standard packaging, labels and invoice forms are not ordered through BBDC's designated vendor (or IR uses non-standard packaging, labels or forms), IR will be subject to additional charges for handling, storage and administration. 2.6 Returns. The Returned Goods Policy in Schedule 2.6 is incorporated by ------- ------------ this reference. 3. PRICING; PAYMENT. 3.1 Pricing and Fees. [**] ---------------- 3.2 Price Adjustments. BBDC may change the pricing of any Product at any ----------------- time; provided, however, any such change will not be effective with respect to Products ordered by IR's consumers within twenty-four (24) hours of BBDC's electronic notice to IR. 3.3 Rebates. [**] ------- 3.4 Taxes. IR will obtain and maintain a resale tax certificate in ----- Kentucky and each other jurisdiction in which BBDC delivers Products to IR's shipper. IR will collect and remit all applicable sales taxes and other taxes on the sale or provision of Products to IR's consumers. IR will be responsible for and will pay any excise, sales or use tax or other similar charge in the nature of a tax imposed with respect to transactions under this Agreement (other than income or other taxes on BBDC's net income) and, if paid or required to be paid by BBDC, such amount will be added to and become part of the amount payable by IR. 3.5 Timing of Payment. BBDC will submit invoices for the Products to IR on ----------------- a per-Order basis for each Order received from IR's consumer. [**] IR's obligation to pay for all purchases invoiced will be absolute and unconditional and will not be subject to any abatement, reduction, set-off, defense, counterclaim, interruption, deferment or recoupment for any reason whatsoever, and such payments will be and continue to be payable in all events. 3.6 Late Payment. If payment is not received as described in Section 3.5, ------------ a late payment penalty of the [**] **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 7 date. The right of BBDC to assess penalties for IR's payment delays will not relieve IR of its obligation to make prompt payment in accordance with this Section 3. 3.7 Financial Reconciliation. The Financial Reconciliation Process in ------------------------ Schedule 3.7 ("Financial Reconciliation Process") is incorporated by this - ------------ reference. 3.8 EDI/EFT. The EDI/EFT Agreement in Schedule 3.8 is incorporated by ------- ------------ this reference. All Orders, IR sales reports, BBDC invoices and remittance detail information will be transmitted by EDI. All funds will be transferred between the parties by electronic funds transfers ("EFT"). All data files transmitted over the public Internet will be encrypted in adherence with EDIINT standards. 4. IR'S COVENANTS. 4.1 Web Site. IR will, at its cost, develop, produce, implement and test -------- its web site and supporting electronic commerce enabling software, as well as provide technical support, including developing and procuring credit card processing and encryption software, subject, however, to the reasonable approval of BBDC in relation to its fulfillment responsibilities under this Agreement. In addition, IR will, at its cost, develop and procure all software interfaces or programs necessary to enable IR to connect with BBDC's systems and operations facilities. All software and hardware developed or purchased by IR to support BBDC under this Agreement will remain the property of IR. Each screen accessible to consumers on IR's web site will clearly identify IR. Unless modified by Exhibit 2, if any, no content on IR's web site will directly or indirectly (a) - --------- identify BBDC or (b) lead any consumer or potential consumer to believe that IR or its web site is the manufacturer of a Product. IR will update its web site to indicate that a Product is unavailable or subject to other special conditions based upon BBDC's Product notices and any failure to do so that results in additional handling, storage, administrative or other costs to BBDC will subject IR to an additional charge. 4.2 Marketing. [**] BBDC acknowledges that IR has sole authority and --------- control over each stage of marketing for its program; provided however, if IR is prohibited by law from performing any contemplated marketing activities, BBDC may perform such functions at IR's expense to the extent BBDC may lawfully do so. IR will provide reasonable advance notice of special offers, such as bundled items, featured items and sales, advertising campaigns and other events that can be reasonably expected to generate unusual volume (either overall or for specific Products) in order to allow BBDC to have adequate inventory, staff and other resources available to handle such volume. 4.3 Consumer Enrollment. IR will have sole responsibility for soliciting ------------------- orders from consumers under this Agreement. 4.4 Records. IR will retain all documentation required by federal and ------- state statutes and regulations. 4.5 License Revocation. IR will inform BBDC in writing within three (3) ------------------ business days after receiving notice of any action or proceeding from any federal, state, or local agency to restrict, suspend, or revoke any of IR's required licenses, permits or registrations or any other approval required to supply the services described in this Agreement. 4.6 Compliance with Law. IR will perform all of its duties under this ------------------- Agreement in full compliance with all applicable federal, state, and local laws and regulations. 4.7 Adequate Space and Personnel. IR represents and warrants it has, and ---------------------------- agrees that it will continue to maintain or enlarge, as appropriate, such space, equipment, resources, and personnel at its sole cost and expense necessary to promote its web site and perform under this Agreement. **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 8 4.8 Prohibition Against Publication of Certain Materials. IR will not ---------------------------------------------------- knowingly or unknowingly incorporate in IR's web site any of the following material (including pictures, links, or any other content, whether visible or invisible with a web browser): 4.8.1 any material which violates or infringes any national or international copyright, trademark, trade secret, patent, statutory, common law or other proprietary rights of others, including any party's privacy right or right of publicity, in effect or which may hereafter be enacted and applicable to this Agreement or web sites; 4.8.2 any material that is libelous, slanderous, harmful, abusive, threatening, obscene or pornographic; or 4.8.3 distribution lists to be used for unsolicited electronic mail or other mass electronic mailings. 4.9 Adverse Event Reporting. IR will report all adverse events relating to ----------------------- the Products pursuant to the requirements of the Food and Drug Administration. 4.10 Listed Chemicals. IR will obtain and maintain a Listed Chemicals ---------------- license from the DEA and will report the sale and shipment of all Products pursuant to the requirements of the DEA and comply with all comparable state requirements. 4.11 Product Recalls. IR acknowledges and agrees that BBDC will not be --------------- obligated to recall any Product which is the subject of a manufacturer or supplier recall but that either party may elect to do so from time to time in its sole discretion, provided that any recall undertaken by BBDC at the request of IR will be at IR's sole cost and expense. 4.12 Support. BBDC and IR will jointly evaluate which party will provide ------- other support functions relating to the Products. 5. BBDC'S COVENANTS. 5.1 Records. BBDC agrees that it will retain all documentation required by ------- federal and state statutes and regulations. If and to the extent required by Section 1395x(v) (1) of Title 42 of the United States Code, as subsequently amended from time to time, until the expiration of four (4) years after the termination of this Agreement, BBDC will make available upon written request to the Secretary of the United States Department of Health and Human Services, or upon request to the Comptroller General of the United States General Accounting Office, or any of their duly authorized representatives, a copy of this Agreement and such books, documents, and records as are adequate to certify the nature and extent of the costs of the goods and services provided by BBDC under this Agreement. BBDC further agrees that in the event BBDC carries out any of its duties under this Agreement through a subcontract, with a value or cost of Ten Thousand Dollars ($10,000) or more over a twelve (12) month period, with a related organization, such contract will contain a clause to the effect that until the expiration of four (4) years after the furnishing of such services pursuant to such subcontract, the related organization will make available, upon written request to the Secretary of the United States Department of Health and Human Services, or upon request to the Comptroller General of the United States General Accounting Office, or any of their duly authorized representatives, a copy of such subcontract and such books, documents and records of such organizations as are necessary to verify the nature and extent of such costs. Notwithstanding anything set forth in this Agreement to the contrary, BBDC will have no obligation under this Agreement to make public attorney-client privileged documents. 5.2 Records. BBDC will retain all documentation required by federal and ------- state statutes and regulations. 9 5.3 License Revocation. BBDC agrees that it will inform IR promptly after ------------------ receiving notice of any action or proceeding from any federal, state, or local agency to restrict, suspend, or revoke any of BBDC's required licenses, permits or registrations or any other approval required to supply the services described in this Agreement. 5.4 Compliance with Law. BBDC agrees that it will perform all of its ------------------- duties under this Agreement in full compliance with all applicable federal, state, and local laws and regulations. 5.5 Adequate Space and Personnel. BBDC represents and warrants it has, ---------------------------- and agrees that it will continue to maintain or enlarge, as appropriate, such space, equipment, resources, and personnel at its sole cost and expense necessary to promote its web site and perform under this Agreement. 6. REPRESENTATIONS OF THE PARTIES. 6.1 Representations and Warranties of BBDC. BBDC hereby represents and -------------------------------------- warrants to IR that (i) it is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it was organized; (ii) the person executing this Agreement on its behalf is duly authorized to bind it to all terms of this Agreement; (iii) it will have good title to all Products delivered pursuant to this Agreement (unless such Product is subject to a chargeback agreement); (iv) except as otherwise provided, all such Products will be free from any security interest or other lien (unless such Product is subject to a chargeback agreement); (v) all Products will be delivered without damage to IR's shipper for delivery to IR's consumer; (vi) this Agreement, when executed and delivered by it, will be its legal, valid, and binding obligation, enforceable against it in accordance with its terms; and (vii) its execution, delivery and performance of this Agreement will not conflict with or breach its charter documents, delegations of authority or any material agreement to which it is a party, or require the consent of or notice to any third party or governmental authority. 6.2 No Representations or Warranties Regarding Products. BBDC makes, and --------------------------------------------------- will be deemed to make, no representations or warranties, express or implied, written or oral, as to the value, absence of defect, absence of infringement, or the absence of any obligation based on strict liability in tort, or any other representation or warranty whatsoever, express or implied, with respect to the Products and services provided in this Agreement. BBDC EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, WRITTEN OR ORAL, INCLUDING BUT NOT LIMITED TO THOSE OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE REGARDING THE PRODUCTS AND SERVICES PROVIDED IN THIS AGREEMENT. IR understands that BBDC is not the manufacturer of any Products and agrees that IR will settle all claims, defenses, set-offs and counterclaims it may have with or against any manufacturer directly with the manufacturer and will not assert any such claims, defenses, set-offs or counterclaims against BBDC. IR agrees BBDC has made no such representations or warranties, written or oral, express or implied, about the Products or their fitness for any purpose. Accordingly, IR agrees that BBDC, its subsidiaries and affiliates and the directors, officers, shareholders and agents of each will not be liable to IR for any liability, claim, loss, damage (consequential or otherwise) or expense of any kind caused, directly or indirectly by (i) the inadequacy of the Products for any purpose, (ii) any deficiency or defect, (iii) any delay in providing the Products, (iv) failure to provide the Products, or (v) death or bodily injury which may be caused by the Products. 6.3 Representations and Warranties of IR. IR hereby represents and ------------------------------------ warrants to BBDC that (i) it is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it was organized; (ii) the person executing this Agreement on behalf of IR is duly authorized to bind IR to all terms of this Agreement; (iii) this Agreement, when executed and delivered by IR, will be the legal, valid, and binding obligation of IR, enforceable against IR in accordance with its terms; (iv) its execution, delivery and performance of this Agreement will not conflict with or breach its charter documents, delegations of authority or any material agreement to which it is a party, or require the consent of or notice to any third party or governmental authority; and (v) IR holds all valid licenses, permits and registrations in appropriate jurisdictions to permit IR to operate its Internet services. 10 7. SOFTWARE AND DATABASE LICENSE. 7.1 Grant of License. For BBDC's Consumer Image and Ingredient Database ---------------- and each software application and/or database BBDC may provide to IR, to the extent of BBDC's legal capacity to do so, grants IR a non-exclusive, nontransferable and revocable license for the use of such software and/or database ("Software") and its related documentation ("Documentation") subject to payment by IR of the applicable licensing fee established by BBDC from time to time. Each license is granted solely during the Term. BBDC does not grant to IR any rights to any copyright, patent, trademark, trade name or similar rights with respect to any Software or Documentation or any other information provided to IR by BBDC. IR will not use the name, trade name, trademarks, service marks, trade dress, logos or other intellectual property of BBDC, Product manufacturers or suppliers or any of BBDC's affiliates in its web site, publicity releases, advertising, sales literature or materials, or in any similar activity without BBDC's prior written consent. 7.2 No Sublicense. IR may not sublicense, lease, distribute or otherwise ------------- transfer Software or Documentation or IR's right to use the Software or Documentation. 7.3 No Copies. IR may not make, or allow anyone else to make, copies of --------- the Software or related Products, beyond one copy for backup and archival purposes, except as BBDC may otherwise agree in writing. IR may not remove, obscure, or deface any proprietary notices contained in the Software or Documentation, and IR must include such notices in any permitted copy of the Software. 7.4 No Alterations. IR may not alter, modify or adapt any Software or -------------- Documentation or create derivative works from them. IR may not translate, reverse engineer, disassemble or decompile the Software. BBDC will have no liability for any claims by third parties or IR based upon altered Software or Documentation. 7.5 Termination of License. The license to any part of the Software and ---------------------- Documentation will terminate automatically if IR fails to comply with the terms of this license or any other material provision in this Agreement, or if the Products for which IR is using the Software are discontinued. Upon termination of a license, IR must cease using the Software and Documentation and, at BBDC's election, return or destroy all copies of the Software and Documentation IR may have in its possession or under its control, and certify to BBDC that IR has done so. All of IR's obligations in this Agreement will survive termination of any license. 7.6 Disclaimer. BBDC disclaims any representation or warranty regarding ---------- the Software and Documentation. IR acknowledges the possibility that (i) the Software may not operate in combination with other software or hardware or in the manner IR or its consumers may select for use and (ii) Software may not operate without interruption or be error-free. 7.7 No Rights in Data. All files, input materials and output materials, ----------------- the media upon which they are located (including cards, tapes, discs and other storage facilities), and all Software (together with any Documentation, source codes, object codes, upgrades, revisions, modifications and any related materials) which are utilized by or developed for IR in connection with this Agreement will be the property of BBDC. 7.8 Notice of Claims; Removal of Products and Content. Notwithstanding ------------------------------------------------- Section 14.2.1, IR will immediately notify BBDC of any written or oral claim that any Software or Documentation used by IR in its web site or otherwise infringes on the rights of any third party. Immediately upon notice from BBDC, IR will discontinue the offering of any Product and the use of any Software and Documentation that BBDC determines may subject BBDC or IR to liability to any third party. Failure to notify BBDC in writing within three (3) business days of the receipt of an oral or written claim that any Software or Documentation used by IR in its web site or otherwise infringes on the rights of any third party will terminate and rescind all of 11 BBDC's representations, warranties, and indemnification obligations with respect to the subject matter of the claim. 8. [Omitted] 9. TERM. Unless terminated earlier pursuant to Section 10, the term of this Agreement will be for the period years set forth on the cover page of this Agreement from the date of this Agreement and will be automatically extended for additional, successive one (1) year terms (collectively, the "Term") unless either party gives written notice to the other of its intention to not extend at least ninety (90) days prior to the end of the then current Term. 10. TERMINATION OF AGREEMENT. 10.1 Default. This Agreement may be terminated by IR by providing written ------- notice of termination to BBDC upon a default by BBDC under this Agreement. This Agreement may be terminated by BBDC by providing written notice of termination to IR upon a default by IR under this Agreement. For purposes of this provision, a default will be deemed to have occurred upon the happening of any of the following: 10.1.1 With respect to either party (A) filing an application by such party for, or consent to, appointment of a trustee, receiver, or custodian of its assets; (B) entry of an order for relief in proceedings under the United States Bankruptcy Code, as amended or superseded from time to time; (C) making a general assignment for the benefit of creditors; (D) entry of an order by any court of competent jurisdiction appointing a trustee, receiver, or custodian of its assets unless the proceedings and the person appointed are dismissed within ninety (90) days; or (E) failure generally to pay its debts as the debts become due within the meaning of Section 303(h)(1) as amended or superseded from time to time, of the United States Bankruptcy Code, as determined by a Bankruptcy Court, or in the event of a party's admission in writing of its inability to pay its debts as they become due. 10.1.2 A party's failure to pay any amount that is due to the other party under this Agreement or a consistent failure to make timely payments or shipments under this Agreement and such failure continues for ten (10) days after written notice from the other party; or 10.1.3 A party's failure to perform any other material obligation under this Agreement, and such failure continues for thirty (30) days after such party receives written notice of such breach from the non-breaching party; provided, however, if the breaching party has commenced to cure such breach within such thirty (30) days, but such cure is not completed within the thirty (30) days, such party will be afforded the amount of additional time reasonably necessary to complete its cure, provided it diligently pursues doing so until completion. 10.2 Adverse Regulatory Changes. In the event of a material adverse -------------------------- change in the laws of any jurisdiction so as to affect through increased regulations, liability, or otherwise, BBDC's fulfillment operations or the Internet sale of Products, then either party may terminate this Agreement upon thirty (30) days' written notice to the other without further obligation. 10.3 Licenses. If any required licenses, permits or registrations of BBDC -------- or IR are revoked or suspended so as to materially impair such party's ability to perform under this Agreement, BBDC or IR may terminate this Agreement upon thirty (30) days' written notice without further obligation. 10.4 Effect of Termination or Expiration. Upon termination or expiration of ----------------------------------- this Agreement for any reason, BBDC will be entitled to payment of any amounts owed to it by IR for Products ordered prior to termination or expiration and shipped to IR's consumers. The obligations of the parties described in 12 Sections 4, 5, 6, 7 (except the license granted thereunder), 8, 11, 12, 13, 14, 15 and 16 and any provision the context of which shows that the parties intended the provision to survive will remain in effect notwithstanding the expiration or termination of this Agreement. Additionally, termination of this Agreement will have no effect upon the obligation of the parties under the terms of any other agreements entered into between the parties, except as set forth otherwise in such other agreements. 11. CONFIDENTIALITY. 11.1 "Confidential Information". "Confidential Information" will mean any ------------------------ and all information disclosed in writing or orally by either party to the other party, which is either confidential or proprietary in nature. "Confidential Information" will not include: (i) information that is or will become generally available to the public through no fault of the receiving party; (ii) information that was known to the receiving party before that party received it under this Agreement and was free of any obligation of nondisclosure; or (iii) information that is disclosed in good faith to the receiving party by a third party lawfully in possession of such information and who is not under an obligation of nondisclosure with respect to such information. 11.2 Nondisclosure. During the Term and for ten (10) years thereafter, ------------- neither party will, without the prior written consent of the other party, disclose to any third party (unless such disclosures are required by law) or use for its own purposes (except as contemplated by this Agreement) this Agreement or any other Confidential Information concerning the other party's business, operations, or products that is obtained in the course of performing this Agreement. Notwithstanding the foregoing, the parties may issue a joint press release as promptly as practicable after the execution of this Agreement and may continue to communicate with employees, customers, suppliers, lenders, shareholders and others as may be legally required or appropriate and not inconsistent with the best interests of the other party or the prompt consummation of the activities contemplated by this Agreement. 11.3 Customer Lists. BBDC and IR will each retain ownership of its own -------------- customer lists. 12. NON-SOLICITATION. 12.1 Covenant Not to Solicit. Each party agrees that neither it nor its ----------------------- employees, agents, or representatives will, during the ("Non-Solicitation Period") without the other party's prior written consent, solicit for hire any person who is employed by the other party or any of its subsidiaries or affiliates 12.2 Damages. Because of the difficulty of measuring economic losses as a ------- result of the breach of any of the foregoing covenants, and because of the immediate and irreparable damage that would be caused for which the other party would have no other adequate remedy, each party agrees that, in the event of a breach by it of any of the covenants set forth in this Section, the other party or its subsidiary or affiliate may, at its option, in addition to obtaining any other remedy or relief available to them (including damages at law), enforce the provisions of this Section by injunction and other equitable relief. 12.3 Reasonable Restraint. Each party agrees that the covenants contained -------------------- in this Section impose a reasonable restraint in light of the other party's activities, business and future plans. 12.4 Severability; Reformation. The covenants in this Section are severable ------------------------- and separate, and the unenforcability of any specific covenant will not affect the provisions of any other covenant in this Section or in this Agreement. In the event any court of competent jurisdiction will determine that the scope, time or territorial restrictions set forth in this Section are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the provisions of this Section will thereby be reformed. 12.5 Independent Covenant. Each of the covenants in this Section will be -------------------- construed as a covenant independent of any other provision of this Agreement, and the existence of any claim or cause 13 of action of one party against the other, or any of its subsidiaries or affiliates, whether predicated on this Agreement or otherwise, will not constitute a defense to the enforcement by such party or such subsidiaries or affiliates of such covenants. 12.6 Computation of the Non-Solicitation Period. The Non-Solicitation ------------------------------------------ Period will be computed by excluding from such computation any time during which either party is in violation of any provision of this Section and any time during which there is pending in any court of competent jurisdiction any action (including any appeal from any judgment) in which a party seeks to enforce the covenants contained in this Section or in which the other party contests the validity or enforceability of any such covenant or seeks to avoid the performance or enforcement of any such covenant. 12.7 Materiality. Each party acknowledges and agrees that the covenants ----------- set forth in this Section are a material and substantial part of this Agreement. 13. INSURANCE. During the Term and for two (2) years thereafter, IR will maintain at its own cost and expense the following insurance together with such other insurance as reasonably requested by BBDC in light of experience and changing risk exposure: (a) Commercial General Liability Insurance covering its premises, including bodily injury, property damage, broad form contractual liability, independent contractors and products liability/completed operations coverages, with limits of not less than [**] per occurrence and [**] aggregate or [**] single limit. (b) Workers' Compensation Insurance as mandated or allowed by all states in which IR's business is being performed, including at least $1,000,000 coverage for Employer's Liability. (c) All Risk Property Insurance in an amount adequate to cover the cost of replacement of all equipment, improvements, and betterments at IR locations in the event of loss or damage. (d) Errors and Omissions Insurance in the amount of [**], naming BBDC as an additional insured. All such policies will be written by a carrier or carriers rated "A" or above by Best, will contain a clause requiring the carrier to give BBDC at least thirty (30) days' prior written notice of any material change or cancellation of coverage for any reason, and simultaneously with IR's execution of this Agreement and annually thereafter, IR will deliver to BBDC original Certificates of Insurance evidencing coverage required by this Section. 14. INDEMNIFICATION. 14.1 Indemnification by IR. IR will indemnify, defend, and hold harmless --------------------- BBDC and its officers, directors, agents and affiliates from and against any and all claims, demands, actions, causes of action, losses, judgments, damages, costs and expenses (including, but not limited to, attorneys' fees, court costs, and costs of settlement) ("Claim") to the extent arising out of claims against BBDC for: (1) the death of, or bodily injury to, any person on account of the use of a Product that results from IR's sale of such Product; or (2) any breach by IR of any of its representations, warranties or covenants in this Agreement. 14.1.1 Notice by BBDC. Upon receipt of any notice of a Claim, BBDC -------------- will promptly notify IR in writing of any such Claim; provided, however, any failure to so notify IR will not relieve BBDC of any liability it may have to IR except to the extent such liability was caused by such failure. **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 14 14.1.2 Retention of Counsel. IR will retain counsel at its expense to -------------------- act as lead counsel in the defense of all Claims against BBDC. The Indemnified Party may retain counsel. BBDC may retain counsel of its own choice at BBDC's expense to the extent necessary to protect BBDC's interests and to act as co- counsel in the litigation or settlement of any Claim or threatened Claim. So long as IR does not enter into any settlement agreement or consent judgment that admits liability on the part of BBDC or that fails to include an unconditional release of BBDC from all liability from all asserted or threatened Claims, IR will have the right to control the defense, settlement, and prosecution of any litigation. 14.2 Indemnification by BBDC. BBDC will indemnify, defend, and hold ----------------------- harmless IR and its officers and directors from and against any and all Claims to the extent arising out of claims against IR for: (1) the dishonest, fraudulent, negligent, willful, or criminal acts of BBDC or BBDC's employees, agents, or representatives acting alone or in collusion with others; or (2) any breach by BBDC of any of its representations, warranties or covenants in this Agreement. 14.2.1 Notice by IR. Upon receipt of any notice of a Claim, IR will ------------ promptly notify BBDC in writing of any such claim; provided, however, any failure to so notify BBDC will not relieve IR of any liability it may have to BBDC except to the extent such liability was caused by such failure or as provided in Section 7.8. 14.2.2 Retention of Counsel. BBDC will retain counsel at its expense -------------------- to act as lead counsel in the defense of all Claims against IR. IR may retain counsel of its own choice at IR's expense to the extent necessary to protect IR's interests and to act as co-counsel in the litigation or settlement of any Claim or threatened Claim. So long as BBDC does not enter into any settlement agreement or consent judgment that admits liability on the part of IR or that fails to include an unconditional release of IR from all liability from all asserted or threatened Claims, BBDC will have the right to control the defense, settlement, and prosecution of any litigation. 15. LIMIT ON LIABILITY. NEITHER PARTY WILL BE LIABLE FOR ANY CLAIM ARISING OUT OF THIS AGREEMENT FOR INDIRECT, CONSEQUENTIAL, SPECIAL, OR PUNITIVE DAMAGES, WHETHER OR NOT IT KNEW OR HAD REASON TO KNOW OF THE POSSIBILITY OF SUCH DAMAGES AND, EXCEPT FOR PAYMENT OF MONEY DUE UNDER THIS AGREEMENT AND EXCEPT AS PROVIDED IN SECTION 14.1 OR SECTION 14.2, NEITHER PARTY'S AGGREGATE LIABILITY TO THE OTHER UNDER THIS AGREEMENT FOR ANY AND ALL CLAIMS, WHETHER IN CONTRACT, TORT, OR OTHERWISE, WILL EXCEED $1,000,000. 16. INDEPENDENT CONTRACTOR. Each party is an independent contractor and is solely responsible for all taxes, withholdings, and other similar statutory obligations, including, but not limited to, workers' compensation insurance. None of a party's employees, agents, or associates are employees the other party and each party agrees to defend, indemnify and hold the other harmless from any and all claims made by any of its employees, agents, or associates, or by any entity or agency on account of an alleged failure to satisfy any such tax or withholding obligations. Neither party has authority to act on behalf of or to enter into any contract, incur any liability, or make any representation on behalf of the other. 17. MISCELLANEOUS. 17.1 Extraordinary Events. In the event BBDC's delivery or arranging for -------------------- delivery of Products under this Agreement is prevented, impaired, reduced or restricted by reason of force majeure, labor disputes, fire, acts of God, or any other similar or dissimilar cause beyond its control, including but not limited to the unavailability of such Products, transportation, shortage of materials or fuel, delay in delivery or failure to deliver by BBDC's suppliers, loss of facilities of distribution, the voluntary foregoing of the right 15 to acquire or use any materials in order to accommodate or comply with the orders, requests, regulations, recommendation or instructions of any governmental authority (whether in furtherance of national defense or war activities or to meet any other emergency), or the compliance with any law, order, ruling, regulation, instruction or requirements of any governmental authority or any political subdivision or agency thereof, or for any other cause whether of the same or different character than specified in this Agreement, beyond the reasonable control of the affected party, BBDC, without liability or obligation, may reduce or eliminate Products during the period of any such disability. In any such case, Products that BBDC is unable to supply will be eliminated from this contract by written notice describing the amounts eliminated and the estimated time period during which deliveries are to be suspended; and BBDC will be relieved of any liability with respect to such Products during the time BBDC may be unable to deliver such Products. 17.2 Severability. In the event that any provision in this Agreement is ------------ held to be invalid, unenforceable, void or illegal, in whole or in part, by any court of competent jurisdiction, it will be deemed severable from the remainder of this Agreement and will in no way affect, impair or invalidate any other provision in this Agreement. If such provision will be deemed invalid due to its scope or breadth, such provision will be deemed valid to the extent of the scope of breadth permitted by law. 17.3 Governing Law, Choice of Forum and Time for Bringing Action. The ----------------------------------------------------------- validity, construction and performance of this Agreement will be governed by and construed in accordance with the internal laws of the State of California without regard to its choice of laws provisions and, if applicable, the laws of the United States. In the event any legal action is necessary to enforce or interpret the terms of this Agreement, the parties agree that such action will be brought in Superior Court for the State of California, and the parties hereby submit to exclusive jurisdiction of such courts. Each party further agrees that personal jurisdiction over it may be effected by service of process by registered or certified mail, return receipt requested, and that when so made will be as if served upon it personally within the State of California. Any action for a breach of this Agreement must commence within two (2) year after the cause of action has accrued. 17.4 Entire Agreement. This Agreement and all exhibits and schedules and ---------------- related agreements incorporated by reference constitute the complete agreement between IR and BBDC with respect to the subject matter of this Agreement and replace and supersede all prior written and oral agreements or statements by and among the parties concerning the subject matter. No representation or warranty concerning the subject matter not contained in this Agreement will be binding on the parties or have any force or effect whatsoever. 17.5 Amendments. This Agreement may not be amended, modified or waived in ---------- any respect without further written agreement of both parties, signed by their respective authorized representatives. 17.6 Counterparts. This Agreement may be executed in one or more ------------ counterparts, which will together constitute but one and the same instrument. 17.7 Waivers. Neither party's failure to insist, in one or more instances, ------- upon the performance of any term of this Agreement will be construed as a waiver or relinquishment of its right to such performance or other performance of such term, and the other party's obligations will continue in full force. Either party's consent to any act by the other party on any one occasion will not be deemed a consent of the same act on any other occasion. 17.8 Time Is of the Essence. Time is of the essence in each provision of ---------------------- this Agreement. 17.9 Captions. The captions and heading in this Agreement are for -------- convenience only and will not affect in any way the meaning or interpretation of this Agreement. 16 17.10 Assignment. Neither party may assign any rights or delegate any ---------- duties under this Agreement without the prior written consent of the other party, which will not be unreasonably withheld or delayed, which consent will be based on the financial capability and business reputation of the proposed assignee, or in the case of IR, a proposed assignment to any affiliate of a major national pharmaceutical wholesale distributor that competes with BBDC. Notwithstanding the foregoing, IR acknowledges that BBDC has affiliates and subsidiaries and may assign performance of some or all of the terms of this Agreement to one or more such related entities. For purposes of this Section, any transfer, sale, merger or consolidation of IR, or a substantial portion of IR's assets, whether by contract or operation of law, or any other transaction or series of related transactions transferring all or substantially all of IR's business, assets (including this Agreement), stock or control will be deemed an assignment and require such prior written consent by BBDC, but will not modify, supplement or terminate the rights or obligations of the parties under this Agreement. For purposes of the preceding sentence, "control" means, with respect to a corporation or limited liability company, the right to exercise, directly or indirectly, more than fifty percent (50%) of the voting rights attributable to the controlled corporation or limited liability company and, with respect to any individual, partnership, trust, other entity or association, the possession, directly or indirectly, of the power to direct or cause the direction of any management or policies of the controlled entity. Subject to the foregoing, the provisions of this Agreement will be binding upon and will inure to the benefit of the successors and assigns of the respective parties, including without limitation any partnerships, corporations, or other entities in which the parties may have a controlling interest or position. Except as expressly provided, this Section will not be construed as a consent by either party to an assignment of this Agreement or any interest in it by either party. 17.11 Further Assurances. Each party, at its own cost and expense, and at ------------------ the reasonable request of the other party, agrees to undertake all such further acts and to execute all such further documents as may be necessary and reasonably requested by either party to effectuate the performance of this Agreement in accordance with the parties' intentions. 17.12 Affiliate Companies. In order to better serve the needs of IR, ------------------- Products may, from time to time, be provided by an affiliate company of BBDC. IR hereby acknowledges this fact and expressly consents to this distribution arrangement. IR further agrees to be liable for all payments due under this Agreement to any such affiliate. 17.13 Interpretation. In the event of any claimed conflict, omission or -------------- ambiguity in this Agreement, no presumption or burden of proof or persuasion will be implied by virtue of the fact that this Agreement was prepared by or at the request of a particular party. This Agreement will be interpreted equally as to both parties and not against the party that drafted it. Whenever the context requires, the gender of all words will include the masculine, feminine and neuter, and the number of all words will include the singular and plural. The word "and" includes the word "or". The word "or" is disjunctive but not necessarily exclusive. 17.14 Parties in Interest. Nothing in this Agreement will confer any rights ------------------- on any third parties other than IR and BBDC and their respective successors and assigns, nor will any provision give any third person any right of subrogation or action over or against any party to this Agreement. 17.15 Information Reviewed. IR has received and reviewed all information it -------------------- considers necessary or appropriate for deciding whether to purchase Products from BBDC. IR has had an opportunity to ask questions and receive answers from BBDC regarding the terms of the purchase of the Products and has further had the opportunity to obtain all information which it deems necessary to evaluate the purchase of the Products and to verify the accuracy of information otherwise provided to IR by BBDC. 17.16 Reliance on Authority of Person Signing Agreement. Neither IR nor ------------------------------------------------- BBDC will be required to determine the authority of the individual signing this Agreement to make any commitment or 17 undertaking on behalf of such entity or to determine any fact or circumstance bearing upon the existence of the authority of such individual. 17.17 Attorneys' Fees. In the event that any dispute between IR and --------------- BBDC should result in litigation, arbitration, or mediation the prevailing party in such dispute will be entitled to recover from the other party all reasonable fees, costs and expenses of enforcing any right of the prevailing party, including reasonable attorneys' fees and expenses, all of which will be deemed to have accrued upon the commencement of such action and will be paid whether or not such action is prosecuted to judgment. Any judgment or order entered in such action will contain a specific provision providing for the recovery of attorneys' fees and costs incurred in enforcing such judgment and an award of prejudgment interest from the date of the breach at the maximum rate of interest allowed by law. "Attorneys' fees" include (1) post-judgment motions; (2) contempt proceedings; (3) garnishment, levy, and debtor and third party examinations; (4) discovery; and (5) bankruptcy litigation. "Prevailing party" means the party who is determined in the proceeding to have prevailed or who prevails by dismissal, default or otherwise. 17.18 Notices. All notices must be given in writing and be personally ------- delivered or delivered by facsimile or by certified or registered mail, return receipt requested, postage prepaid, addressed to the parties as set forth opposite their respective names below: IR: To the address set forth on the cover page of this Agreement. BBDC: Bergen Brunswig Drug Company 4000 Metropolitan Drive Orange, CA 92868 Attn: Vice President, eCommerce Sales & Marketing Fax: (714) 385-6826 with a copy to: Bergen Brunswig Corporation 4000 Metropolitan Drive Orange, CA 92868 Attn: Executive Vice President, Chief Legal Officer & Secretary Fax: (714) 978-1148 Items delivered personally will be deemed delivered on the date of actual delivery. Items sent electronically or by facsimile will be deemed delivered on the first business day after the date of transmission. Items sent by certified or registered mail will be deemed delivered three (3) business days after mailing. A party may change the foregoing information or notices by notifying the other party of such change in writing in accordance with the foregoing. [END OF TERMS AND CONDITIONS] 18 EX-10.12 15 PRESCRIPTION PHARMACEUTICALS INTERNET FULFILLMENT Exhibit 10.12 PRESCRIPTION PHARMACEUTICALS INTERNET FULFILLMENT SERVICES AGREEMENT This Internet Fulfillment Services Agreement ("Agreement") is made as of August 18, 1999, by and between Medi-Mail, Inc., a Nevada corporation ("MM"), and more.com, Inc., a Delaware corporation ("IR"). RECITALS A. IR is an Internet retailer and has created a marketing and sales program designed to supply pharmaceutical products and related services to individuals utilizing an Internet web site; B. MM is a licensed mail-order pharmacy providing certain prescription pharmaceutical drugs and related products ("Products") to consumers across the United States; C. IR wishes to contract with a fulfillment service provider to dispense the Products and provide related services, including pharmacist counseling about medication as needed, to IR's consumers in the United States; D. MM wishes to provide the services described herein to IR; and E. The parties wish to enter into this Agreement in order to set forth their obligations to each other. NOW THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, the parties agree as follows: 1. TERMS AND CONDITIONS. Terms and conditions in Exhibit 1 as modified by Exhibit 2 (collectively, --------- --------- "Terms and Conditions") are incorporated by this reference. Capitalized terms used without definition have meanings in the Terms and Conditions. All references to BBDC in Exhibit 1 will mean MM for purposes of this Agreement. --------- 2. PRODUCTS. A list of Products maintained by MM has been provided to IR for IR's initial selection, which selection may be revised by IR from time to time as provided in this Agreement. MM will, from time to time, update the specific products to be included as Products under this Agreement. MM may add or delete available Products upon ten (10) days' prior written notice to IR; provided, however, IR may elect not to offer added Products, in which case any deleted product will no longer be considered a Product. 3. TERM. Subject to Sections 9 and 10 of the Terms and Conditions, the Term of this Agreement will be until June 30, 2009. 4. FEES. In addition to payment for Products, IR will pay MM the following service fees for MM's 1 fulfillment services, including dispensing Products and providing pharmacist counseling about medication as needed and other related services to IR's consumers pursuant to this Agreement. 4.1 Dispensing Fees. [**] 4.2 Favorable Pricing. [**] 4.3 Third Party Payer Pricing. [**] 4.4 Niche Products Storage Fee. At IR's reasonable request, MM will provide storage space for additional items not generally stocked by MM ("Niche Products"), subject to available suitable warehouse space and terms. 4.5 Early Termination Fee. In addition to the provisions of Section 10 of the Terms and Conditions, IR may terminate this Agreement during the Term without cause effective upon sixty (60) days prior written notice to MM and payment of an early termination fee with such notice in the amount set forth below. [**] 5. SERVICE LEVELS. In dispensing prescriptions under this Agreement, MM will comply with the service levels in Exhibit A. Those service levels associated with pharmacy --------- operations (but not other customer service) will be deemed a material term of this Agreement and any failure to comply with them will entitle IR to suspend the exclusivity provisions under Section 1.4 of the Terms and Conditions. Final service levels will be adopted by the parties within ninety (90) days after MM's call center system is enhanced and programmed for interactive voice response capability (IVR) and such function is tested, for call center service levels; within ninety (90) days after MM's **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 2 Pfastship shipping system is operation, integrated and tested, for shipping service levels; and within sixty (60) days after MM's HBS system is operational and implementation has been fully tested, for drug furnishing irregularity service levels. 6. ACCESS TO MM'S PAYERS. IR does not have access to MM's payers and/or third-party plans outside the scope of the PlusCare network. 7. AUDIT AND INSPECTION. During the Term, upon reasonable prior notice and during normal business hours, each party will be entitled to audit and inspect those relevant records maintained by the other in direct connection with its performance under this Agreement. 8. VIPPS CERTIFICATION. MM will assist IR at IR's expense in obtaining its VIPPS certification from the National Association of Boards of Pharmacy. 9. TOLL-FREE TELEPHONE LINES. MM will provide a toll-free telephone line for IR consumers, which will be a direct pass through expense to IR billed on a monthly basis. Consumer calls will be answered with an IR greeting. 10. PHARMACY AND CUSTOMER SERVICE SUPPORT. If any of IR's consumers require pharmacist counseling in connection with any Products, MM will provide such services to each such consumer from Monday through Friday, 7:00 a.m. through 5:00 p.m. (Pacific Time). MM will also provide customer service from Monday through Friday, 6:00 a.m. through 5:00 p.m. (Pacific Time) to respond to inquiries from IR consumers. IR may, at its sole discretion, determine to contract with MM to hire additional pharmacists or personnel on staff to provide additional functions or to provide similar functions during expanded hours and days. [**] 11. COLLATERAL MATERIAL. IR will also be permitted to include in each shipment up to two (2) pieces of advertising materials, coupons or other promotional materials ("Collateral Materials") that are printed material no bigger than 8 1/2 inches by 11 inches, each at no additional charge so long as such Collateral Materials are to be included in all IR shipments. Order-specific Collateral Materials, or Collateral Materials in excess of, or exceeding the dimensions of, the allowable pieces of Collateral Materials described above will be subject to additional charges to be agreed upon by the parties. All Collateral Materials described above will be paid for by IR. 12. NOTICES. Subject to Section 17.19 of the Terms and Conditions, notices to IR under this Agreement will be **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 3 sent to: more.com, Inc. 520 Third Street, Suite 245 San Francisco, California 94107 Attn: Brad Oberwager Fax: (415) 979-9598 with a copy to: Howard, Rice et al. 3 Embarcadero Center, 7/th/ Floor San Francisco, California 94111 Attn: Ronald Star, Esq. Fax: (415) 217-5910 13. EXHIBITS. All exhibits to this Agreement listed below are incorporated by this reference. Exhibit Number Exhibit Name 1 Terms and Conditions 2 Prescription Pharmaceuticals Addendum A Service Levels IN WITNESS WHEREOF, the parties have executed this Internet Fulfillment Services Agreement as of the date first written above. IR: more.com, Inc. By: /s/ Laureen De Buono Name: Laureen De Buono Title: CFO MM: Medi-Mail, Inc. By:/s/ Carol E. Scherman Name: Carol E. Scherman Title: Chief Executive Officer 4 EXHIBIT 1 TO PRESCRIPTION PHARMACEUTICALS INTERNET FULFILLMENT SERVICES AGREEMENT TERMS AND CONDITIONS 1. PRODUCTS AND TERRITORY. 1.1 Products. A list of the categories of the Products ("Product -------- Categories") is set forth in Schedule 1.1. BBDC will provide IR a list of ------------ specific products ("Products") and related information ("Item Catalog Information" [EDI 832 Transaction Set]) from time to time. BBDC may add or delete available Products upon two (2) days' notice to IR; provided, however, IR may elect not to offer added Products. 1.2 Niche Products. BBDC may elect to store and ship additional products -------------- requested by IR, including private label products and other products that BBDC does not otherwise carry, upon payment of the Niche Product fees set forth on the cover page. 1.3 Territory. BBDC will provide fulfillment services for the Products in --------- the Unites States of America and its territories and possessions and each other territory listed on Schedule 1.3 ("Territory"). In no event will BBDC provide ------------ or ship Products to IR's consumers outside the Territory. 1.4 Exclusivity. [Omitted] ----------- 1.5 Right of First Refusal. [Omitted] ---------------------- 2. ORDERS; SHIPPING; RETURNS. 2.1 Operations Manual. The Operations Manual in Schedule 2.1 ("Operations ----------------- ------------ Manual") is incorporated by this reference. 2.2 Orders. Orders for Products will be initially placed by IR's ------ consumers using IR's Internet web site. IR will forward all orders for Products to BBDC by electronic data interchange ("EDI") pursuant to Section 3.8 at least four (4) times per day ("Orders"). Orders will set forth a description of the Products, SKU designations, quantities, requested method of delivery, the designated delivery locations and other required information as agreed upon by the parties from time to time. 2.3 Inventory. Subject to Section 4.2, BBDC will maintain sufficient --------- inventory of the Products in an effort to facilitate the delivery of all Orders for the Products. Inquiries by IR to BBDC's customer service representatives concerning any Products must reference BBDC's Product number. 2.4 Shipping. BBDC will cause all lawful Orders to be shipped in -------- accordance with the Operations Manual. Shipping guidelines may change due to legal and product shipping requirements. Certain Products may be subject to special shipping and handling fees. Title to, and risk of loss of, all Products will pass from BBDC to IR upon BBDC's delivery of the Products to the shipper for delivery to IR's consumer. [**] will use commercially reasonable efforts to ensure that all Orders for Products received before the daily "cut-off time" will be shipped by the corresponding shipping time for such day. Out-of-stock or back-ordered Products will be shipped promptly after BBDC's receipt of such Products from the manufacturer or other supplier. Inquiries about shipping status will be first directed to the shipper and any such initial inquires to BBDC's customer service representatives where BBDC has provided IR with a shipper's tracking number will be subject to an additional charge. BBDC will not process any of the following shipments of Products: (i) international shipments, (ii) COD shipments, (iii) shipments requiring a declared value, (iv) shipments to freight **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 5 forwarding agents, (v) shipments of hazardous materials or other products requiring specialized shipping that shipper and/or BBDC are not prepared to provide, and (vi) Drug Enforcement Administration ("DEA") Schedule II controlled substances. 2.5 Labels and Invoices. Unless modified by Exhibit 2, if any, IR will ------------------- --------- provide BBDC standard packaging (standard size cardboard boxes, plain colored plastic tape and plain bubble/paper packing material), labels and invoice forms bearing IR's, and not BBDC's, name, logo and telephone number for BBDC's use in shipping Products. IR may select from BBDC's standard invoice formats (inserting IR's logo and return address) at no additional charge. Modifications and custom work is subject to an additional charge at BBDC's then-current rates. If IR's standard packaging, labels and invoice forms are not ordered through BBDC's designated vendor (or IR uses non-standard packaging, labels or forms), IR will be subject to additional charges for handling, storage and administration. 2.6 Returns. The Returned Goods Policy in Schedule 2.6 is incorporated by ------- ------------ this reference. 3. PRICING; PAYMENT. 3.1 Pricing and Fees. [**] ---------------- 3.2 Price Adjustments. BBDC may change the pricing of any Product at any ----------------- time; provided, however, any such change will not be effective with respect to Products ordered by IR's consumers within twenty-four (24) hours of BBDC's electronic notice to IR. 3.3 Rebates. [**] ------- 3.4 Taxes. IR will obtain and maintain a resale tax certificate in ----- Kentucky and each other jurisdiction in which BBDC delivers Products to IR's shipper. IR will collect and remit all applicable sales taxes and other taxes on the sale or provision of Products to IR's consumers. IR will be responsible for and will pay any excise, sales or use tax or other similar charge in the nature of a tax imposed with respect to transactions under this Agreement (other than income or other taxes on BBDC's net income) and, if paid or required to be paid by BBDC, such amount will be added to and become part of the amount payable by IR. 3.5 Timing of Payment. BBDC will submit invoices for the Products to IR ----------------- on a per-Order basis for each Order received from IR's consumer. [**] IR's obligation to pay for all purchases invoiced will be absolute and unconditional and will not be subject to any abatement, reduction, set-off, defense, counterclaim, interruption, deferment or recoupment for any reason whatsoever, and such payments will be and continue to be payable in all events. 3.6 Late Payment. If payment is not received as described in Section 3.5, ------------ a late payment penalty of the lower of [**] **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 6 [**]. The right of BBDC to assess penalties for IR's payment delays will not relieve IR of its obligation to make prompt payment in accordance with this Section 3. 3.7 Financial Reconciliation. The Financial Reconciliation Process in ------------------------ Schedule 3.7 ("Financial Reconciliation Process") is incorporated by this - ------------ reference. 3.8 EDI/EFT. The EDI/EFT Agreement in Schedule 3.8 is incorporated by ------- ------------ this reference. All Orders, IR sales reports, BBDC invoices and remittance detail information will be transmitted by EDI. All funds will be transferred between the parties by electronic funds transfers ("EFT"). All data files transmitted over the public Internet will be encrypted in adherence with EDIINT standards. 4. IR'S COVENANTS. 4.1 Web Site. IR will, at its cost, develop, produce, implement and test -------- its web site and supporting electronic commerce enabling software, as well as provide technical support, including developing and procuring credit card processing and encryption software, subject, however, to the reasonable approval of BBDC in relation to its fulfillment responsibilities under this Agreement. In addition, IR will, at its cost, develop and procure all software interfaces or programs necessary to enable IR to connect with BBDC's systems and operations facilities. All software and hardware developed or purchased by IR to support BBDC under this Agreement will remain the property of IR. Each screen accessible to consumers on IR's web site will clearly identify IR. Unless modified by Exhibit 2, if any, no content on IR's web site will directly or --------- indirectly (a) identify BBDC or (b) lead any consumer or potential consumer to believe that IR or its web site is the manufacturer of a Product. IR will update its web site to indicate that a Product is unavailable or subject to other special conditions based upon BBDC's Product notices and any failure to do so that results in additional handling, storage, administrative or other costs to BBDC will subject IR to an additional charge. 4.2 Marketing. [**]. BBDC acknowledges that IR has sole authority and --------- control over each stage of marketing for its program; provided however, if IR is prohibited by law from performing any contemplated marketing activities, BBDC may perform such functions at IR's expense to the extent BBDC may lawfully do so. IR will provide reasonable advance notice of special offers, such as bundled items, featured items and sales, advertising campaigns and other events that can be reasonably expected to generate unusual volume (either overall or for specific Products) in order to allow BBDC to have adequate inventory, staff and other resources available to handle such volume. 4.3 Consumer Enrollment. IR will have sole responsibility for soliciting ------------------- orders from consumers under this Agreement. 4.4 Records. IR will retain all documentation required by federal and ------- state statutes and regulations. 4.5 License Revocation. IR will inform BBDC in writing within three (3) ------------------ business days after receiving notice of any action or proceeding from any federal, state, or local agency to restrict, suspend, or revoke any of IR's required licenses, permits or registrations or any other approval required to supply the services described in this Agreement. 4.6 Compliance with Law. IR will perform all of its duties under this ------------------- Agreement in full compliance with all applicable federal, state, and local laws and regulations. 4.7 Adequate Space and Personnel. IR represents and warrants it has, and ---------------------------- agrees that it will continue to maintain or enlarge, as appropriate, such space, equipment, resources, and personnel at its sole cost and expense necessary to promote its web site and perform under this Agreement. **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 7 4.8 Prohibition Against Publication of Certain Materials. IR will not ---------------------------------------------------- knowingly or unknowingly incorporate in IR's web site any of the following material (including pictures, links, or any other content, whether visible or invisible with a web browser): 4.8.1 any material which violates or infringes any national or international copyright, trademark, trade secret, patent, statutory, common law or other proprietary rights of others, including any party's privacy right or right of publicity, in effect or which may hereafter be enacted and applicable to this Agreement or web sites; 4.8.2 any material that is libelous, slanderous, harmful, abusive, threatening, obscene or pornographic; or 4.8.3 distribution lists to be used for unsolicited electronic mail or other mass electronic mailings. 4.9 Adverse Event Reporting. IR will report all adverse events relating ----------------------- to the Products pursuant to the requirements of the Food and Drug Administration. 4.10 Listed Chemicals. IR will obtain and maintain a Listed Chemicals ---------------- license from the DEA and will report the sale and shipment of all Products pursuant to the requirements of the DEA and comply with all comparable state requirements. 4.11 Product Recalls. IR acknowledges and agrees that BBDC will not be --------------- obligated to recall any Product which is the subject of a manufacturer or supplier recall but that either party may elect to do so from time to time in its sole discretion, provided that any recall undertaken by BBDC at the request of IR will be at IR's sole cost and expense. 4.12 Support. BBDC and IR will jointly evaluate which party will provide ------- other support functions relating to the Products. 5. BBDC'S COVENANTS. 5.1 Records. BBDC agrees that it will retain all documentation required ------- by federal and state statutes and regulations. If and to the extent required by Section 1395x(v) (1) of Title 42 of the United States Code, as subsequently amended from time to time, until the expiration of four (4) years after the termination of this Agreement, BBDC will make available upon written request to the Secretary of the United States Department of Health and Human Services, or upon request to the Comptroller General of the United States General Accounting Office, or any of their duly authorized representatives, a copy of this Agreement and such books, documents, and records as are adequate to certify the nature and extent of the costs of the goods and services provided by BBDC under this Agreement. BBDC further agrees that in the event BBDC carries out any of its duties under this Agreement through a subcontract, with a value or cost of Ten Thousand Dollars ($10,000) or more over a twelve (12) month period, with a related organization, such contract will contain a clause to the effect that until the expiration of four (4) years after the furnishing of such services pursuant to such subcontract, the related organization will make available, upon written request to the Secretary of the United States Department of Health and Human Services, or upon request to the Comptroller General of the United States General Accounting Office, or any of their duly authorized representatives, a copy of such subcontract and such books, documents and records of such organizations as are necessary to verify the nature and extent of such costs. Notwithstanding anything set forth in this Agreement to the contrary, BBDC will have no obligation under this Agreement to make public attorney-client privileged documents. 5.2 Records. BBDC will retain all documentation required by federal and ------- state statutes and regulations. 8 5.3 License Revocation. BBDC agrees that it will inform IR promptly after ------------------ receiving notice of any action or proceeding from any federal, state, or local agency to restrict, suspend, or revoke any of BBDC's required licenses, permits or registrations or any other approval required to supply the services described in this Agreement. 5.4 Compliance with Law. BBDC agrees that it will perform all of its ------------------- duties under this Agreement in full compliance with all applicable federal, state, and local laws and regulations. 5.5 Adequate Space and Personnel. BBDC represents and warrants it has, ---------------------------- and agrees that it will continue to maintain or enlarge, as appropriate, such space, equipment, resources, and personnel at its sole cost and expense necessary to promote its web site and perform under this Agreement. 6. REPRESENTATIONS OF THE PARTIES. 6.1 Representations and Warranties of BBDC. BBDC hereby represents and -------------------------------------- warrants to IR that (i) it is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it was organized; (ii) the person executing this Agreement on its behalf is duly authorized to bind it to all terms of this Agreement; (iii) it will have good title to all Products delivered pursuant to this Agreement (unless such Product is subject to a chargeback agreement); (iv) except as otherwise provided, all such Products will be free from any security interest or other lien (unless such Product is subject to a chargeback agreement); (v) all Products will be delivered without damage to IR's shipper for delivery to IR's consumer; (vi) this Agreement, when executed and delivered by it, will be its legal, valid, and binding obligation, enforceable against it in accordance with its terms; and (vii) its execution, delivery and performance of this Agreement will not conflict with or breach its charter documents, delegations of authority or any material agreement to which it is a party, or require the consent of or notice to any third party or governmental authority. 6.2 No Representations or Warranties Regarding Products. BBDC makes, and --------------------------------------------------- will be deemed to make, no representations or warranties, express or implied, written or oral, as to the value, absence of defect, absence of infringement, or the absence of any obligation based on strict liability in tort, or any other representation or warranty whatsoever, express or implied, with respect to the Products and services provided in this Agreement. BBDC EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, WRITTEN OR ORAL, INCLUDING BUT NOT LIMITED TO THOSE OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE REGARDING THE PRODUCTS AND SERVICES PROVIDED IN THIS AGREEMENT. IR understands that BBDC is not the manufacturer of any Products and agrees that IR will settle all claims, defenses, set-offs and counterclaims it may have with or against any manufacturer directly with the manufacturer and will not assert any such claims, defenses, set-offs or counterclaims against BBDC. IR agrees BBDC has made no such representations or warranties, written or oral, express or implied, about the Products or their fitness for any purpose. Accordingly, IR agrees that BBDC, its subsidiaries and affiliates and the directors, officers, shareholders and agents of each will not be liable to IR for any liability, claim, loss, damage (consequential or otherwise) or expense of any kind caused, directly or indirectly by (i) the inadequacy of the Products for any purpose, (ii) any deficiency or defect, (iii) any delay in providing the Products, (iv) failure to provide the Products, or (v) death or bodily injury which may be caused by the Products. 6.3 Representations and Warranties of IR. IR hereby represents and ------------------------------------ warrants to BBDC that (i) it is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it was organized; (ii) the person executing this Agreement on behalf of IR is duly authorized to bind IR to all terms of this Agreement; (iii) this Agreement, when executed and delivered by IR, will be the legal, valid, and binding obligation of IR, enforceable against IR in accordance with its terms; (iv) its execution, delivery and performance of this Agreement will not conflict with or breach its charter documents, delegations of authority or any material agreement to which it is a party, or require the consent of or notice to any third party or governmental authority; and (v) IR holds all valid licenses, permits and registrations in appropriate jurisdictions to permit IR to operate its Internet services. 9 7. SOFTWARE AND DATABASE LICENSE. 7.1 Grant of License. For BBDC's Consumer Image and Ingredient Database ---------------- and each software application and/or database BBDC may provide to IR, to the extent of BBDC's legal capacity to do so, grants IR a non-exclusive, nontransferable and revocable license for the use of such software and/or database ("Software") and its related documentation ("Documentation") subject to payment by IR of the applicable licensing fee established by BBDC from time to time. Each license is granted solely during the Term. BBDC does not grant to IR any rights to any copyright, patent, trademark, trade name or similar rights with respect to any Software or Documentation or any other information provided to IR by BBDC. IR will not use the name, trade name, trademarks, service marks, trade dress, logos or other intellectual property of BBDC, Product manufacturers or suppliers or any of BBDC's affiliates in its web site, publicity releases, advertising, sales literature or materials, or in any similar activity without BBDC's prior written consent. 7.2 No Sublicense. IR may not sublicense, lease, distribute or otherwise ------------- transfer Software or Documentation or IR's right to use the Software or Documentation. 7.3 No Copies. IR may not make, or allow anyone else to make, copies of --------- the Software or related Products, beyond one copy for backup and archival purposes, except as BBDC may otherwise agree in writing. IR may not remove, obscure, or deface any proprietary notices contained in the Software or Documentation, and IR must include such notices in any permitted copy of the Software. 7.4 No Alterations. IR may not alter, modify or adapt any Software or -------------- Documentation or create derivative works from them. IR may not translate, reverse engineer, disassemble or decompile the Software. BBDC will have no liability for any claims by third parties or IR based upon altered Software or Documentation. 7.5 Termination of License. The license to any part of the Software and ---------------------- Documentation will terminate automatically if IR fails to comply with the terms of this license or any other material provision in this Agreement, or if the Products for which IR is using the Software are discontinued. Upon termination of a license, IR must cease using the Software and Documentation and, at BBDC's election, return or destroy all copies of the Software and Documentation IR may have in its possession or under its control, and certify to BBDC that IR has done so. All of IR's obligations in this Agreement will survive termination of any license. 7.6 Disclaimer. BBDC disclaims any representation or warranty regarding ---------- the Software and Documentation. IR acknowledges the possibility that (i) the Software may not operate in combination with other software or hardware or in the manner IR or its consumers may select for use and (ii) Software may not operate without interruption or be error-free. 7.7 No Rights in Data. All files, input materials and output materials, ----------------- the media upon which they are located (including cards, tapes, discs and other storage facilities), and all Software (together with any Documentation, source codes, object codes, upgrades, revisions, modifications and any related materials) which are utilized by or developed for IR in connection with this Agreement will be the property of BBDC. 7.8 Notice of Claims; Removal of Products and Content. Notwithstanding ------------------------------------------------- Section 14.2.1, IR will immediately notify BBDC of any written or oral claim that any Software or Documentation used by IR in its web site or otherwise infringes on the rights of any third party. Immediately upon notice from BBDC, IR will discontinue the offering of any Product and the use of any Software and Documentation that BBDC determines may subject BBDC or IR to liability to any third party. Failure to notify BBDC in writing within three (3) business days of the receipt of an oral or written claim that any Software or Documentation used by IR in its web site or otherwise infringes on the rights of any third party will terminate and rescind all of BBDC's representations, warranties, and indemnification obligations with respect to the subject matter of the claim. 10 8. [Omitted] 9. TERM. Unless terminated earlier pursuant to Section 10, the term of this Agreement will be for the period years set forth on the cover page of this Agreement from the date of this Agreement and will be automatically extended for additional, successive one (1) year terms (collectively, the "Term") unless either party gives written notice to the other of its intention to not extend at least ninety (90) days prior to the end of the then current Term. 10. TERMINATION OF AGREEMENT. 10.1 Default. This Agreement may be terminated by IR by providing written ------- notice of termination to BBDC upon a default by BBDC under this Agreement. This Agreement may be terminated by BBDC by providing written notice of termination to IR upon a default by IR under this Agreement. For purposes of this provision, a default will be deemed to have occurred upon the happening of any of the following: 10.1.1 With respect to either party (A) filing an application by such party for, or consent to, appointment of a trustee, receiver, or custodian of its assets; (B) entry of an order for relief in proceedings under the United States Bankruptcy Code, as amended or superseded from time to time; (C) making a general assignment for the benefit of creditors; (D) entry of an order by any court of competent jurisdiction appointing a trustee, receiver, or custodian of its assets unless the proceedings and the person appointed are dismissed within ninety (90) days; or (E) failure generally to pay its debts as the debts become due within the meaning of Section 303(h)(1) as amended or superseded from time to time, of the United States Bankruptcy Code, as determined by a Bankruptcy Court, or in the event of a party's admission in writing of its inability to pay its debts as they become due. 10.1.2 A party's failure to pay any amount that is due to the other party under this Agreement or a consistent failure to make timely payments or shipments under this Agreement and such failure continues for ten (10) days after written notice from the other party; or 10.1.3 A party's failure to perform any other material obligation under this Agreement, and such failure continues for thirty (30) days after such party receives written notice of such breach from the non-breaching party; provided, however, if the breaching party has commenced to cure such breach within such thirty (30) days, but such cure is not completed within the thirty (30) days, such party will be afforded the amount of additional time reasonably necessary to complete its cure, provided it diligently pursues doing so until completion. 10.2 Adverse Regulatory Changes. In the event of a material adverse -------------------------- change in the laws of any jurisdiction so as to affect through increased regulations, liability, or otherwise, BBDC's fulfillment operations or the Internet sale of Products, then either party may terminate this Agreement upon thirty (30) days' written notice to the other without further obligation. 10.3 Licenses. If any required licenses, permits or registrations of BBDC -------- or IR are revoked or suspended so as to materially impair such party's ability to perform under this Agreement, BBDC or IR may terminate this Agreement upon thirty (30) days' written notice without further obligation. 10.4 Effect of Termination or Expiration. Upon termination or expiration ----------------------------------- of this Agreement for any reason, BBDC will be entitled to payment of any amounts owed to it by IR for Products ordered prior to termination or expiration and shipped to IR's consumers. The obligations of the parties described in Sections 4, 5, 6, 7 (except the license granted thereunder), 8, 11, 12, 13, 14, 15 and 16 and any provision the context of which shows that the parties intended the provision to survive will remain in effect notwithstanding the expiration or termination of this Agreement. Additionally, termination of this 11 Agreement will have no effect upon the obligation of the parties under the terms of any other agreements entered into between the parties, except as set forth otherwise in such other agreements. 11. CONFIDENTIALITY. 11.1 "Confidential Information". "Confidential Information" will mean any ------------------------- and all information disclosed in writing or orally by either party to the other party, which is either confidential or proprietary in nature. "Confidential Information" will not include: (i) information that is or will become generally available to the public through no fault of the receiving party; (ii) information that was known to the receiving party before that party received it under this Agreement and was free of any obligation of nondisclosure; or (iii) information that is disclosed in good faith to the receiving party by a third party lawfully in possession of such information and who is not under an obligation of nondisclosure with respect to such information. 11.2 Nondisclosure. During the Term and for ten (10) years thereafter, ------------- neither party will, without the prior written consent of the other party, disclose to any third party (unless such disclosures are required by law) or use for its own purposes (except as contemplated by this Agreement) this Agreement or any other Confidential Information concerning the other party's business, operations, or products that is obtained in the course of performing this Agreement. Notwithstanding the foregoing, the parties may issue a joint press release as promptly as practicable after the execution of this Agreement and may continue to communicate with employees, customers, suppliers, lenders, shareholders and others as may be legally required or appropriate and not inconsistent with the best interests of the other party or the prompt consummation of the activities contemplated by this Agreement. 11.3 Customer Lists. BBDC and IR will each retain ownership of its own -------------- customer lists. 12. NON-SOLICITATION. 12.1 Covenant Not to Solicit. Each party agrees that neither it nor its ----------------------- employees, agents, or representatives will, during the ("Non-Solicitation Period") without the other party's prior written consent, solicit for hire any person who is employed by the other party or any of its subsidiaries or affiliates 12.2 Damages. Because of the difficulty of measuring economic losses as a ------- result of the breach of any of the foregoing covenants, and because of the immediate and irreparable damage that would be caused for which the other party would have no other adequate remedy, each party agrees that, in the event of a breach by it of any of the covenants set forth in this Section, the other party or its subsidiary or affiliate may, at its option, in addition to obtaining any other remedy or relief available to them (including damages at law), enforce the provisions of this Section by injunction and other equitable relief. 12.3 Reasonable Restraint. Each party agrees that the covenants contained -------------------- in this Section impose a reasonable restraint in light of the other party's activities, business and future plans. 12.4 Severability; Reformation. The covenants in this Section are ------------------------- severable and separate, and the unenforcability of any specific covenant will not affect the provisions of any other covenant in this Section or in this Agreement. In the event any court of competent jurisdiction will determine that the scope, time or territorial restrictions set forth in this Section are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the provisions of this Section will thereby be reformed. 12.5 Independent Covenant. Each of the covenants in this Section will be -------------------- construed as a covenant independent of any other provision of this Agreement, and the existence of any claim or cause of action of one party against the other, or any of its subsidiaries or affiliates, whether predicated on this Agreement or otherwise, will not constitute a defense to the enforcement by such party or such subsidiaries or affiliates of such covenants. 12 12.6 Computation of the Non-Solicitation Period. The Non-Solicitation ------------------------------------------ Period will be computed by excluding from such computation any time during which either party is in violation of any provision of this Section and any time during which there is pending in any court of competent jurisdiction any action (including any appeal from any judgment) in which a party seeks to enforce the covenants contained in this Section or in which the other party contests the validity or enforceability of any such covenant or seeks to avoid the performance or enforcement of any such covenant. 12.7 Materiality. Each party acknowledges and agrees that the covenants ----------- set forth in this Section are a material and substantial part of this Agreement. 13. INSURANCE. During the Term and for two (2) years thereafter, IR will maintain at its own cost and expense the following insurance together with such other insurance as reasonably requested by BBDC in light of experience and changing risk exposure: (a) Commercial General Liability Insurance covering its premises, including bodily injury, property damage, broad form contractual liability, independent contractors and products liability/completed operations coverages, with limits of not less than [**] per occurrence and [**] aggregate or [**] single limit. (b) Workers' Compensation Insurance as mandated or allowed by all states in which IR's business is being performed, including at least [**] coverage for Employer's Liability. (c) All Risk Property Insurance in an amount adequate to cover the cost of replacement of all equipment, improvements, and betterments at IR locations in the event of loss or damage. (d) Errors and Omissions Insurance in the amount of [**], naming BBDC as an additional insured. All such policies will be written by a carrier or carriers rated "A" or above by Best, will contain a clause requiring the carrier to give BBDC at least thirty (30) days' prior written notice of any material change or cancellation of coverage for any reason, and simultaneously with IR's execution of this Agreement and annually thereafter, IR will deliver to BBDC original Certificates of Insurance evidencing coverage required by this Section. 14. INDEMNIFICATION. 14.1 Indemnification by IR. IR will indemnify, defend, and hold harmless --------------------- BBDC and its officers, directors, agents and affiliates from and against any and all claims, demands, actions, causes of action, losses, judgments, damages, costs and expenses (including, but not limited to, attorneys' fees, court costs, and costs of settlement) ("Claim") to the extent arising out of claims against BBDC for: (1) the death of, or bodily injury to, any person on account of the use of a Product that results from IR's sale of such Product; or (2) any breach by IR of any of its representations, warranties or covenants in this Agreement. 14.1.1 Notice by BBDC. Upon receipt of any notice of a Claim, BBDC -------------- will promptly notify IR in writing of any such Claim; provided, however, any failure to so notify IR will not relieve BBDC of any liability it may have to IR except to the extent such liability was caused by such failure. 14.1.2 Retention of Counsel. IR will retain counsel at its expense -------------------- to act as lead counsel in the defense of all Claims against BBDC. The Indemnified Party may retain counsel. BBDC may retain counsel of its own choice at BBDC's expense to the extent necessary to protect BBDC's interests and to act as co-counsel in the litigation or settlement of any Claim or threatened Claim. So long as IR does not enter into any settlement agreement or consent judgment that admits liability on the part of BBDC or that **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 13 fails to include an unconditional release of BBDC from all liability from all asserted or threatened Claims, IR will have the right to control the defense, settlement, and prosecution of any litigation. 14.2 Indemnification by BBDC. BBDC will indemnify, defend, and hold ----------------------- harmless IR and its officers and directors from and against any and all Claims to the extent arising out of claims against IR for: (1) the dishonest, fraudulent, negligent, willful, or criminal acts of BBDC or BBDC's employees, agents, or representatives acting alone or in collusion with others; or (2) any breach by BBDC of any of its representations, warranties or covenants in this Agreement. 14.2.1 Notice by IR. Upon receipt of any notice of a Claim, IR will ------------ promptly notify BBDC in writing of any such claim; provided, however, any failure to so notify BBDC will not relieve IR of any liability it may have to BBDC except to the extent such liability was caused by such failure or as provided in Section 7.8. 14.2.2 Retention of Counsel. BBDC will retain counsel at its expense -------------------- to act as lead counsel in the defense of all Claims against IR. IR may retain counsel of its own choice at IR's expense to the extent necessary to protect IR's interests and to act as co-counsel in the litigation or settlement of any Claim or threatened Claim. So long as BBDC does not enter into any settlement agreement or consent judgment that admits liability on the part of IR or that fails to include an unconditional release of IR from all liability from all asserted or threatened Claims, BBDC will have the right to control the defense, settlement, and prosecution of any litigation. 15. LIMIT ON LIABILITY. NEITHER PARTY WILL BE LIABLE FOR ANY CLAIM ARISING OUT OF THIS AGREEMENT FOR INDIRECT, CONSEQUENTIAL, SPECIAL, OR PUNITIVE DAMAGES, WHETHER OR NOT IT KNEW OR HAD REASON TO KNOW OF THE POSSIBILITY OF SUCH DAMAGES AND, EXCEPT FOR PAYMENT OF MONEY DUE UNDER THIS AGREEMENT AND EXCEPT AS PROVIDED IN SECTION 14.1 OR SECTION 14.2, NEITHER PARTY'S AGGREGATE LIABILITY TO THE OTHER UNDER THIS AGREEMENT FOR ANY AND ALL CLAIMS, WHETHER IN CONTRACT, TORT, OR OTHERWISE, WILL EXCEED $1,000,000. 16. INDEPENDENT CONTRACTOR. Each party is an independent contractor and is solely responsible for all taxes, withholdings, and other similar statutory obligations, including, but not limited to, workers' compensation insurance. None of a party's employees, agents, or associates are employees the other party and each party agrees to defend, indemnify and hold the other harmless from any and all claims made by any of its employees, agents, or associates, or by any entity or agency on account of an alleged failure to satisfy any such tax or withholding obligations. Neither party has authority to act on behalf of or to enter into any contract, incur any liability, or make any representation on behalf of the other. 17. MISCELLANEOUS. 17.1 Extraordinary Events. In the event BBDC's delivery or arranging for -------------------- delivery of Products under this Agreement is prevented, impaired, reduced or restricted by reason of force majeure, labor disputes, fire, acts of God, or any other similar or dissimilar cause beyond its control, including but not limited to the unavailability of such Products, transportation, shortage of materials or fuel, delay in delivery or failure to deliver by BBDC's suppliers, loss of facilities of distribution, the voluntary foregoing of the right to acquire or use any materials in order to accommodate or comply with the orders, requests, regulations, recommendation or instructions of any governmental authority (whether in furtherance of national defense or war activities or to meet any other emergency), or the compliance with any law, order, ruling, regulation, instruction or requirements of any governmental authority or any political subdivision or agency thereof, or for any other cause whether of the same or different character than specified in this Agreement, beyond the reasonable control of the affected party, BBDC, without liability or obligation, may 14 reduce or eliminate Products during the period of any such disability. In any such case, Products that BBDC is unable to supply will be eliminated from this contract by written notice describing the amounts eliminated and the estimated time period during which deliveries are to be suspended; and BBDC will be relieved of any liability with respect to such Products during the time BBDC may be unable to deliver such Products. 17.2 Severability. In the event that any provision in this Agreement is ------------ held to be invalid, unenforceable, void or illegal, in whole or in part, by any court of competent jurisdiction, it will be deemed severable from the remainder of this Agreement and will in no way affect, impair or invalidate any other provision in this Agreement. If such provision will be deemed invalid due to its scope or breadth, such provision will be deemed valid to the extent of the scope of breadth permitted by law. 17.3 Governing Law, Choice of Forum and Time for Bringing Action. The ----------------------------------------------------------- validity, construction and performance of this Agreement will be governed by and construed in accordance with the internal laws of the State of California without regard to its choice of laws provisions and, if applicable, the laws of the United States. In the event any legal action is necessary to enforce or interpret the terms of this Agreement, the parties agree that such action will be brought in Superior Court for the State of California, and the parties hereby submit to exclusive jurisdiction of such courts. Each party further agrees that personal jurisdiction over it may be effected by service of process by registered or certified mail, return receipt requested, and that when so made will be as if served upon it personally within the State of California. Any action for a breach of this Agreement must commence within two (2) year after the cause of action has accrued. 17.4 Entire Agreement. This Agreement and all exhibits and schedules and ---------------- related agreements incorporated by reference constitute the complete agreement between IR and BBDC with respect to the subject matter of this Agreement and replace and supersede all prior written and oral agreements or statements by and among the parties concerning the subject matter. No representation or warranty concerning the subject matter not contained in this Agreement will be binding on the parties or have any force or effect whatsoever. 17.5 Amendments. This Agreement may not be amended, modified or waived in ---------- any respect without further written agreement of both parties, signed by their respective authorized representatives. 17.6 Counterparts. This Agreement may be executed in one or more ------------ counterparts, which will together constitute but one and the same instrument. 17.7 Waivers. Neither party's failure to insist, in one or more ------- instances, upon the performance of any term of this Agreement will be construed as a waiver or relinquishment of its right to such performance or other performance of such term, and the other party's obligations will continue in full force. Either party's consent to any act by the other party on any one occasion will not be deemed a consent of the same act on any other occasion. 17.8 Time Is of the Essence. Time is of the essence in each provision of ---------------------- this Agreement. 17.9 Captions. The captions and heading in this Agreement are for -------- convenience only and will not affect in any way the meaning or interpretation of this Agreement. 17.10 Assignment. Neither party may assign any rights or delegate any ---------- duties under this Agreement without the prior written consent of the other party, which will not be unreasonably withheld or delayed, which consent will be based on the financial capability and business reputation of the proposed assignee, or in the case of IR, a proposed assignment to any affiliate of a major national pharmaceutical wholesale distributor that competes with BBDC. Notwithstanding the foregoing, IR acknowledges that BBDC has affiliates and subsidiaries and may assign performance of some or all of the terms of this Agreement to one or more such related entities. For purposes of this Section, any transfer, sale, merger or consolidation of IR, or a substantial portion of IR's assets, whether by contract or operation of law, or 15 any other transaction or series of related transactions transferring all or substantially all of IR's business, assets (including this Agreement), stock or control will be deemed an assignment and require such prior written consent by BBDC, but will not modify, supplement or terminate the rights or obligations of the parties under this Agreement. For purposes of the preceding sentence, "control" means, with respect to a corporation or limited liability company, the right to exercise, directly or indirectly, more than fifty percent (50%) of the voting rights attributable to the controlled corporation or limited liability company and, with respect to any individual, partnership, trust, other entity or association, the possession, directly or indirectly, of the power to direct or cause the direction of any management or policies of the controlled entity. Subject to the foregoing, the provisions of this Agreement will be binding upon and will inure to the benefit of the successors and assigns of the respective parties, including without limitation any partnerships, corporations, or other entities in which the parties may have a controlling interest or position. Except as expressly provided, this Section will not be construed as a consent by either party to an assignment of this Agreement or any interest in it by either party. 17.11 Further Assurances. Each party, at its own cost and expense, and at ------------------ the reasonable request of the other party, agrees to undertake all such further acts and to execute all such further documents as may be necessary and reasonably requested by either party to effectuate the performance of this Agreement in accordance with the parties' intentions. 17.12 Affiliate Companies. In order to better serve the needs of IR, ------------------- Products may, from time to time, be provided by an affiliate company of BBDC. IR hereby acknowledges this fact and expressly consents to this distribution arrangement. IR further agrees to be liable for all payments due under this Agreement to any such affiliate. 17.13 Interpretation. In the event of any claimed conflict, omission or -------------- ambiguity in this Agreement, no presumption or burden of proof or persuasion will be implied by virtue of the fact that this Agreement was prepared by or at the request of a particular party. This Agreement will be interpreted equally as to both parties and not against the party that drafted it. Whenever the context requires, the gender of all words will include the masculine, feminine and neuter, and the number of all words will include the singular and plural. The word "and" includes the word "or". The word "or" is disjunctive but not necessarily exclusive. 17.14 Parties in Interest. Nothing in this Agreement will confer any ------------------- rights on any third parties other than IR and BBDC and their respective successors and assigns, nor will any provision give any third person any right of subrogation or action over or against any party to this Agreement. 17.15 Information Reviewed. IR has received and reviewed all information -------------------- it considers necessary or appropriate for deciding whether to purchase Products from BBDC. IR has had an opportunity to ask questions and receive answers from BBDC regarding the terms of the purchase of the Products and has further had the opportunity to obtain all information which it deems necessary to evaluate the purchase of the Products and to verify the accuracy of information otherwise provided to IR by BBDC. 17.16 Reliance on Authority of Person Signing Agreement. Neither IR nor ------------------------------------------------- BBDC will be required to determine the authority of the individual signing this Agreement to make any commitment or undertaking on behalf of such entity or to determine any fact or circumstance bearing upon the existence of the authority of such individual. 17.17 Attorneys' Fees. In the event that any dispute between IR and BBDC --------------- should result in litigation, arbitration, or mediation the prevailing party in such dispute will be entitled to recover from the other party all reasonable fees, costs and expenses of enforcing any right of the prevailing party, including reasonable attorneys' fees and expenses, all of which will be deemed to have accrued upon the commencement of such action and will be paid whether or not such action is prosecuted to judgment. Any judgment or order entered in such action will contain a specific provision providing for the recovery of attorneys' fees and costs incurred in enforcing such judgment and an award of prejudgment interest from 16 the date of the breach at the maximum rate of interest allowed by law. "Attorneys' fees" include (1) post-judgment motions; (2) contempt proceedings; (3) garnishment, levy, and debtor and third party examinations; (4) discovery; and (5) bankruptcy litigation. "Prevailing party" means the party who is determined in the proceeding to have prevailed or who prevails by dismissal, default or otherwise. 17.18 Notices. All notices must be given in writing and be personally ------- delivered or delivered by facsimile or by certified or registered mail, return receipt requested, postage prepaid, addressed to the parties as set forth opposite their respective names below: IR: To the address set forth on the cover page of this Agreement. BBDC: Bergen Brunswig Drug Company 4000 Metropolitan Drive Orange, CA 92868 Attn: Vice President, eCommerce Sales & Marketing Fax: (714) 385-6826 with a copy to: Bergen Brunswig Corporation 4000 Metropolitan Drive Orange, CA 92868 Attn: Executive Vice President, Chief Legal Officer & Secretary Fax: (714) 978-1148 Items delivered personally will be deemed delivered on the date of actual delivery. Items sent electronically or by facsimile will be deemed delivered on the first business day after the date of transmission. Items sent by certified or registered mail will be deemed delivered three (3) business days after mailing. A party may change the foregoing information or notices by notifying the other party of such change in writing in accordance with the foregoing. [END OF TERMS AND CONDITIONS] 17 EXHIBIT 2 TO PRESCRIPTION PHARMACEUTICALS INTERNET FULFILLMENT SERVICES AGREEMENT PRESCRIPTION PHARMACEUTICALS ADDENDUM 1. PRODUCTS AND TERRITORY. 1.1 Products. Section 1.1 of Exhibit 1 is hereby deleted and superseded by Section 2 of the cover page of this Agreement. 1.2 Territory. Notwithstanding Section 1.3 of Exhibit 1, MM will provide fulfillment services for prescription Products shipped only to consumers located in a jurisdiction to which MM is authorized to dispense and deliver prescription Products (the "MM Territory"). The MM Territory as of the date this Agreement is signed is set forth in Schedule 1.3-A to Exhibit 1. 1.3 [**] 1.4 Medi-care/Medicaid Services. The parties acknowledge and agree that MM will not be required to dispense pursuant to any Medicare or Medicaid programs under this Agreement and IR may contract with other providers for such services. Should IR consider doing so, it will provide MM Notice pursuant to Section 1.5 of Exhibit 1, including either a copy of the proposed contract or a written summary of its relevant terms including pricing. If MM wishes to match such terms, it will notify IR within thirty (30) days of MM's receipt of the Notice and enter into an amendment to this Agreement with IR with respect to such services within ninety (90) days of its receipt of the Notice. Otherwise, IR may enter into an agreement immediately thereafter with a third party for such services on terms and conditions no less favorable to IR than those in the Notice. 1.5 In the event IR identifies new Products or obtains more favorable pricing on existing Products, MM will request that its distributor stock such Products, subject to the supplier of such Products complying with the distributor's standard procurement approval process, including meeting its standard requirements for suppliers. 2. SHIPPING AND LABELS. 2.1 Shipping. Notwithstanding Section 2.4 of Exhibit 1, MM will ship all Products to IR's consumers prepaid and will bill IR for such shipping charges, including any volume discount normally given to MM by IR's shipper. 2.2 Title to Prescription Products. The fourth (4/th/) sentence of Section 2.4 of Exhibit 1 is amended to read: "Title to, and risk of loss of, all Products for purposes of payment will pass from MM to IR upon MM's delivery of the Products to the shipper for delivery to IR's **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 18 consumer." 2.3 Labels. Notwithstanding Section 2.5 of Exhibit 1, MM and IR will jointly develop, at IR's cost, standard packaging labels and invoice forms bearing both MM's and IR's name, logo and telephone number, if permitted or required by applicable federal or state law, for MM's use in shipping the Products. The last two sentences of Section 2.5 are deleted. 3. PRICING; PAYMENT. 3.1 Pricing Protocol. [**] 3.2 Taxes. Notwithstanding Section 3.4 of Exhibit 1, IR will obtain and maintain a resale tax certificate in Nevada in addition to any other such certificates. 3.3 Timing of Payment. [**] 3.4 Reimbursement. To the extent required by third party payers or applicable law, reimbursement for Product will be directly to MM. 4. IR'S COVENANTS. 4.1 Web Site. Notwithstanding Section 4.1 of Exhibit 1, each screen applicable to dispensing prescription Products and accessible to consumers through IR's web site will clearly identify MM as the dispensing pharmacy. 4.2 Consumer Enrollment. Notwithstanding Section 4.3 of Exhibit 1, IR will not collect consumer prescriptions nor dispense any prescription Products. 4.3 Patient Confidentiality. Notwithstanding Section 4.4 of Exhibit 1, MM is obligated pursuant to Section 5.4 of Exhibit 1 to maintain and protect the confidentiality of all confidential patient information and records, including protected health care information, and pursuant to Section 14.1 of Exhibit 1, IR hereby indemnifies MM for any Claim arising from any unauthorized use of protected confidential patient information or its unauthorized re-disclosure to any person not bound by ethical and legal obligations to protect its confidentiality and use. "Protected health care information" is any information or data, whether oral or recorded in any form, that identifies or can be readily associated with an identifiable patient or other record subject and (i) relates to a patient's health care or (ii) is obtained in the course of a patient's health care from a health care provider, including MM, from the patient, from a member of the patient's family or an individual with whom the patient has a close personal relationship or from the patient's legal representative. The definition of "Confidential Information" under Section 11.1 of Exhibit 1 is hereby amended to include protected health care information and any protected confidential patient information under all applicable federal and state laws. 4.4 Adverse Event Reporting. Notwithstanding Section 4.9 of Exhibit 1, each party will report all adverse events relating to the Products pursuant to the requirements of the Food and Drug Administration. 4.5 Pharmacist Support. In connection with pharmacist support and customer service, IR will develop and maintain on its web site consumer accessible electronic information, **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 19 including frequently asked questions (FAQs) and other information that will minimize routine consumer inquires to MM's pharmacist support and customer service desk. 5. REPRESENTATIONS OF THE PARTIES. 5.1 Licenses. MM represents that it holds valid pharmacy licenses for each location from which it will operate during the Term and that these licenses permit it to dispense and deliver the Products to consumers with valid prescriptions in the MM Territory. 5.2 NCPDP Number. MM will utilize its identification number ("NCPDP Number") issued by the National Association of Boards of Pharmacy ("NABP") for adjudicating and filling prescription Products to IR's consumers. 6. SOFTWARE AND DATABASE LICENSE. Section 7 of Exhibit 1 is hereby deleted in its entirety. 7. NOTICES. Notwithstanding Section 17.19 of Exhibit 1, MM's address is: Medi-Mail, Inc., 871-C Grier Drive Las Vegas, Nevada 89119 Attn: Chairman & CEO Fax: (702) 361-2422 with a copy to: Bergen Brunswig Corporation 4000 Metropolitan Drive Orange, CA 92868 Attn: Executive Vice President, Chief Legal Officer & Secretary Fax: (714) 978-1148 20 EX-10.13 16 SERVICE MARK LICENSE AND ACCESS AGREEMENT EXHIBIT 10.13 Service Mark License and Access Agreement ----------------------------------------- This Service Mark License and Access Agreement ("Agreement") is made as of this 18/th/ day of August, 1999 ("Effective Date"), between more.com, Inc., a Delaware corporation ("Licensee") and Bergen Brunswig Drug Company, a California corporation ("Licensor"). 1. License to Service Marks. Licensor hereby grants to Licensee, during ------------------------ the term of the Internet Fulfillment Services Agreement dated July 1, 999 between the parties ("Fulfillment Agreement"), unless sooner terminated in accordance with this Agreement, a non-exclusive, revocable (as expressly set forth herein) license ("License") for the use of the Service Marks "Good Neighbor", "Good Neighbor Pharmacy" and "PlusCare", and their associated goodwill, which Licensor owns (collectively, "Licensed Marks") solely in connection with Licensee's business, subject to the terms and conditions contained in this Agreement on a royalty-free basis. Licensee acknowledges that Licensor is the owner of all proprietary rights in and to the Licensed Marks and that Licensee acquires no right, title or interest in and to the same whatsoever, other than the right to use the Licensed Marks in accordance with the terms of this Agreement. Licensee will immediately notify Licensor in writing of any infringement or limitation of the Licensed Marks that may come to Licensee's attention. 2. Quality Specifications. Since the activities of Licensee will reflect ---------------------- on the Licensed Marks, Licensee will operate its business with diligence and vigor, will maintain the highest possible ethics and will maintain its operations in a manner that will reflect the high standards and quality attributable to the Licensed Marks. Licensee will fully comply in all material respects with all laws, rules and regulations applicable to Licensee's business and the conduct thereof. Except as otherwise set forth in this Agreement, Licensee will use the Licensed Marks only in accordance with Licensor's reasonable specifications regarding the Licensed Marks, including without limitation, specifications concerning standards of quality, use, advertising and promotion, as such specifications may be modified from time to time in the sole discretion of Licensor but on reasonable prior notice to Licensee before Licensee is required to comply ("Quality Specifications"). If at any time services provided by Licensor fail to conform to the Quality Specifications, Licensor will so notify Licensee of such non-conformance. Upon such notification, Licensor will promptly cease the services provided by it which do not adhere to the Quality Specifications, until such time as the standards of quality contained in the applicable Quality Specifications have been met to the reasonable satisfaction of Licensor. 3. Conditions Applicable to Appearance of Licensed Marks. ----------------------------------------------------- (a) Use Specifications. Licensee will comply with conditions set ------------------ forth in any prior written notice provided to Licensee from time-to-time by Licensor with respect to the style, appearance and manner of use of the Licensed Marks ("Use Specifications"). Any use of the Licensed Marks not specifically provided for by such Use Specifications 1 will be adopted by Licensee only upon prior written approval of Licensor not to be unreasonably withheld or delayed. In addition, Licensor may request that notices reasonably acceptable to Licensor be used on or with Licensee's services and marketing materials (which marketing materials are subject to Licensor's prior written consent, which consent will not be unreasonably withheld) bearing the Licensed Marks to identify the licensed use under this Agreement. (b) Co-Branding. All future marketing activities by Licensee may, ----------- upon the express agreement of the parties, feature a co-branded service mark agreeable to the parties. Licensee will seek approval from Licensor, which approval may not be unreasonably withheld or delayed, prior to (i) launching any online or offline advertising or marketing campaign using the Licensed Marks, or (ii) posting any Good Neighbor Pharmacy related material on Licensee's web site, or other advertiser web sites. (c) Licensor's Approval. In addition, prior to any application of the ------------------- Licensed Marks to any of Licensee's related marketing materials (as permitted under this Agreement), Licensee will provide any samples of such marketing materials (including web site designs) to Licensor for final review and approval, such approval to be not unreasonably withheld or delayed. Marketing material which uses any of the Licensed Marks or which refers to Licensor or any parent or other affiliate of Licensor will conform to the Use Specifications, as amended from time to time on prior written notice to Licensee. All such Licensee-initiated marketing material is expressly subject to prepublication review and approval not to be unreasonably withheld or delayed with respect to, but not limited to, content, style, appearance, composition, timing, and media. One copy of all such marketing material will be provided to Licensor at least thirty (30) days prior to anticipated publication. The parties acknowledge and agree, however, that Licensee will not be required to seek the prior approval of Licensor in connection with the day-to-day operation of the Licensee web sites, and changes thereto, provided that the operations of the web sites at all times substantially comply with the then-current Use Specifications and any other relevant policies or designs pre-approved by Licensee pursuant to this Agreement. 4. Protection of Licensed Marks. ---------------------------- (a) Validity. Licensee admits the validity of, and agrees not to -------- challenge the Licensed Marks. Licensee also agrees that any and all rights that may be acquired by the use of the Licensed Marks by Licensee will inure to the sole benefit of Licensor. Licensee agrees to execute all papers reasonably requested by Licensor at Licensor's expense to effect the recording of Licensee as a registered user of the Licensed Marks. Licensee may not use any of the Licensed Marks or any part thereof as part of its corporate name nor use any name or mark confusingly similar to the Licensed Marks. (b) Confusing Marks. Licensee further agrees not to register in any --------------- country any name or mark resembling or confusingly similar to the Licensed Marks. If any application for registration is or has been filed in any country by Licensee which relates 2 to any name or mark which, in the sole opinion of Licensor, is confusingly similar, deceptive or misleading with respect to any of the Licensed Marks, Licensee will immediately abandon any such application or registration or, at Licensor's sole discretion, assign it to Licensor. Licensee will reimburse Licensor for all reasonable costs and expenses of any opposition, cancellation or related legal proceedings, including attorney's fees, instigated by Licensor or its authorized representative, in connection with any such registration or application. (c) Third Party Infringement. In the event that Licensee learns of ------------------------ any infringement or threatened infringement of the Licensed Marks or any passing-off or learns that any third party claims any Licensed Mark is liable to cause deception or confusion to the public, Licensee will promptly notify Licensor, giving particulars and providing necessary information and assistance to Licensor at Licensor's expense in the event that Licensor decides that proceedings should be commenced or defended. Any such proceedings will be at Licensor's expense and any recoveries will be Licensor's sole property. Nothing in this Agreement, however, will be deemed to require Licensor to enforce the Licensed Marks against others. (d) Compliance with Laws. In addition to Licensee's compliance with -------------------- all laws and regulations applicable to Licensee's performance of this Agreement, Licensee will comply in all material respects with all laws applicable to proper use and designation of trademarks and service marks in the countries in which Licensee uses the Licensed Marks. If Licensee becomes aware of any laws applicable to Licensed Marks that are inconsistent with this Agreement, Licensee will promptly notify Licensor of such inconsistency. Licensor may, at its option, either waive the performance of such inconsistent provisions or terminate the license and rights granted under this Agreement to the extent in conflict with such laws. 5. No Assignment or Sublicense. The benefit of the service mark licenses --------------------------- granted under this Agreement are personal to Licensee and Licensee may not, without the prior written consent of Licensor, assign the Licensed Marks, nor part with any of its rights or obligations under this Agreement, nor grant or purport to grant any sublicense in respect to the Licensed Marks. 6. Term and Termination of License. ------------------------------- (a) Term. Unless sooner terminated in accordance with the terms of ---- this Agreement or the Fulfillment Agreement, the service mark license granted under this Agreement will commence on the Effective Date and will continue in effect for the duration of the Fulfillment Agreement, including any extensions and renewals. Notwithstanding any provision of this Agreement to the contrary, this Agreement will immediately terminate upon termination or expiration of the Fulfillment Agreement. (b) Rights Upon Termination. Upon termination or expiration of the ----------------------- licenses and rights granted under this Agreement, by operation of law or otherwise, all rights (including the right to use the Licensed Marks), privileges and obligations arising under 3 this Agreement (except the obligations in Section 4) will cease to exist and Licensee will immediately discontinue completely all further use of the Licensed Marks. (c) Material Breach. In the event of a material breach of this --------------- Agreement by either party, the non-breaching party may terminate this Agreement upon thirty (30) days written notice to the breaching party and such termination will be effective on the thirty-first (31st) day after receipt of an express written notice of breach if (a) the breaching party does not correct such material breach within such thirty (30) day cure period, or (b) in the case of a material breach that is correctable but is not reasonably capable of being corrected within such thirty (30) day cure period, the breaching party does not take reasonably practicable steps to correct such breach and to prevent a recurrence. The following will be considered to be material breaches: 1. Licensee using any trademarks, services marks, trade or business names contrary to the provisions of this Agreement; or 2. Licensee offering services bearing any of the Licensed Marks in which such service fails in a material fashion to meet any of the standards set forth in the applicable Quality Specifications or Use Specifications; or 3. Licensee refusing or neglecting any request by Licensor for marketing materials, advertising copy, stationary or other materials as provided under this Agreement; or 4. Licensee using the Licensed Marks with services or on marketing materials or referencing Licensor or its parent or other affiliates, without conforming to Licensor's written instructions; or 5. Licensee assigning or purporting to assign any of the rights granted in this Agreement to others without Licensor's express prior written consent. 7. Certain Representations and Covenants. Licensor is the true and -------------------------------------- lawful owner of and has the right to use and license the Licensed Marks. Licensor has no knowledge of any third party claim to the effect that any aspect of the Licensed Marks infringes any other trademark, service mark or trade name. The Licensed Marks are registered in the U.S. Patent and Trademark Office and such registrations are valid, subsisting and have not been cancelled and are registered in the categories/classes shown in Exhibit A. 8. Networks Access. --------------- (a) Access. Licensor will provide Licensee with access to Licensor's ------ network of independently owned and operated Good Neighbor Pharmacies and "PlusCare" network and the covered lives in the PlusCare network to facilitate the ordering, adjudication, if applicable, and in-store pick up of prescription medicine by the Licensee's consumers ("GNP/PlusCare Access"). The parties will work together in 4 good faith to provide for GNP/PlusCare Access and to pursue the resolution of any logistical issues with respect to the integration with Licensee's web site and e-commerce services. 1. GNP & Pharmacy Access. Specifically, Licensor will work to --------------------- make available and create on an as-needed basis the ability for Licensee to accept and fulfill orders for prescription products through GNP and PlusCare pharmacies, with a consumer able to pick-up such an order within [**] or, if such service is available from the local pharmacy, to have it delivered locally. Licensor will be Licensee's exclusive pharmaceutical provider for such services and, in the event Licensee proposes a specific need for similar services from additional locations or from stores with different capabilities, Licensor will have thirty (30) days from receipt of such specific criteria to propose a plan to meet such need. If Licensor's proposed plan, including proposed timelines, does not reasonably meet Licensee's needs, Licensee may utilize alternate resources. In providing such services, the parties will strive for the broadest possible national coverage. 2. Managed Care Organization Access. The parties will work -------------------------------- diligently to develop a strategic business plan to expand beyond Licensor's current PlusCare network participation by managed care organizations ("MCO"), including insurers, third party payers, healthcare maintenance organizations (HMOs), pharmaceutical benefit managers (PBMs), third party administrators (TPAs), pharmaceutical service administrative organizations (PSAOs), employers, coalitions and others. The parties will designate specific resources to develop such strategic plan. The plan will identify specific geographic areas, demographic groups and types of MCOs to target, will delegate specific actions between the parties and will set goals and timelines. The parties will jointly implement the plan, including presentations, bid responses and proposals, and RFP responses and Licensor will be Licensee's exclusive provider for such implementation with MCOs. Licensee will coordinate all such interactions with Licensor and will not enter into any agreements with MCOs without Licensor's prior written consent. In the event Licensee identifies a need for new or additional services for an existing MCO or the need to establish a relationship with a new MCO, Licensor will have sixty (60) days from receipt of such specific criteria to propose a plan to meet such need. If Licensor's proposed plan, including proposed timelines, does not reasonably meet Licensee's needs, Licensee may utilize alternate resources. (b) Representations. Licensor's Good Neighbor Pharmacy Network has 4,000 independent pharmacies (more than 1,800 Level I and 2,500 Level II Stores) and Licensor's PlusCare Provider Network has approximately 75 million PBM covered **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 5 lives. Licensor will not grant GNP/PlusCare Access to certain of Licensee's competitors for a period ending August 17, 2000. Such competitors are Rx.com, Soma.com and Drugstore.com and, until September 30, 1999, to PlanetRx.com. 9. Notices. Any notices must be in writing and will be valid if sent by ------- registered or certified mail, postage prepaid, in any post office in the United States, or by confirmed facsimile, hand delivery or overnight courier, addressed as follows: If to Licensor: With a Copy to: - -------------- -------------- Bergen Brunswig Drug Company Bergen Brunswig Corporation 4000 Metropolitan Drive 4000 Metropolitan Drive Orange, CA 92868 Orange, CA 92868 Attn: E.V.P. Sales & Marketing Attn: E.V.P., Chief Legal Officer Facsimile: (714) 385-8879 & Secretary Facsimile: (714) 948-1148 If to Licensee: - -------------- more.com, Inc. 520 Third Street, Suite 245 San Francisco, California 94107 Attn: Brad Oberwager Facsimile: (415) ____________ All notices sent by confirmed facsimile will be deemed to be effective on the date of transmission. All notices sent by courier will be deemed to be effective on the date of receipt or refusal. In case either party changes its address to which notice is to be received, written notice of such change will be given without delay to the other party. Notice may be given by any authorized representative including counsel. 10. Section Headings. The headings as to the contents of particular ---------------- Sections are for convenience only and are in no way to be construed as part of this Agreement or as a limitation of the scope of the particular Sections to which they refer. 11. Entire Agreement. This Service Mark License and Access Agreement, ---------------- together with the Quality Specifications and Use Specifications, constitutes the entire agreement between the parties with respect to its subject matter and merges and supersedes all previous communications, warranties, representations, and agreements, oral or written, between the parties with respect to such subject matter. No amendment or modification of this Agreement will be binding on either party unless reduced to writing and duly executed by an authorized representative of both parties. Failure to enforce or any delay in enforcing any right under this Agreement by any party will not be construed as a waiver nor will it be deemed a waiver of any other right such party may otherwise have at law or in equity. 6 In Witness Whereof, this Agreement has been executed on behalf of each of the parties by their duly authorized representatives as of the Effective Date. Bergen Brunswig Drug Company By: /s/ Brent Martini ---------------------------------------------- more.com, Inc. By: /s/ Laureen De Buono ---------------------------------------------- 7 EX-10.14 17 ADVERTISING REPRESENTATIVE AGREEMENT Exhibit 10.14 ADVERTISING REPRESENTATIVE AGREEMENT This Advertising Representative Agreement ("Agreement") is made effective as of the 30/th/ day of September 1999 between more.com, Inc. ("more.com") and Bergen Brunswig Drug Company ("BBDC"). WHEREAS, more.com owns and operates an online drugstore ("more.com Site"); WHEREAS, BBDC is a leading distributor of health and beauty aids, prescription and non-prescription medicines; and WHEREAS, subject to the terms and conditions set forth in this Agreement, more.com wishes to appoint BBDC as its exclusive sales representative for the marketing and sales of certain advertising for placement on the more.com Site during the Term. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows: 1. Sales Representation. -------------------- a. more.com hereby appoints BBDC as its sole and exclusive (subject to Sections 1.d and 9.b below) agent for the purpose of marketing and selling of any and all product specific advertising and manufacturer promotional advertising ("Covered Advertising") on the more.com Site during the term of this Agreement (as defined in Section 9.a below, the "Term"). BBDC hereby accepts such appointment, and will use its best efforts to market and sell Covered Advertising during the Term. Covered Advertising will include, but not be limited to, banner ads, text links, graphics links, branded buttons, infomercials, manufacturer sponsored surveys, manufacturer sponsored trials, promotions, or other manufacturer advertising activities promoted in conjunction with more.com for products that are stocked and inventoried by BBDC. b. more.com will identify BBDC on rate cards and applicable promotional literature as more.com's advertising representative for the sale of Covered Advertising. c. more.com and BBDC will jointly create and mutually agree to a manufacturer advertising plan ("Advertising Plan") for Covered Advertising, including the amount of advertising space available for Covered Advertising and its price, duration and rotation schedules. The Parties will use commercially reasonable efforts to have the Advertising Plan completed and approved by both Parties prior to actual sales of Covered Advertising. The Advertising Plan will include a planned promotional calendar, including manufacturers, products, product categories, and special events. The Advertising Plan and promotional calendar will reflect the parties' agreed-upon strategic approach and will be revised and updated no less than annually. more.com and BBDC agree to identify individuals within their respective companies who will be responsible for implementation and maintenance of the Advertising Plan. d. For products not stocked and inventoried by BBDC that more.com would like to sell via the more.com Site, and potentially obtain advertising revenues for, BBDC 1 will have 30 days after receipt of a request from more.com that BBDC supply it such product, to begin to stock and inventory such product. In the event that BBDC refuses or is otherwise unable to stock and inventory any such products within the foregoing 30 day period, more.com will have the right to purchase and seek manufacturer advertising revenue for those products on its own with no obligation to BBDC. 2. Duties of BBDC -- General. At its expense, BBDC will: ------------------------- a. conduct all marketing and sales activities relating to the Covered Advertising; b. be responsible for the design, layout, and production of the advertisements (subject to joint approval by both more.com and BBDC); c. jointly with more.com manage the relationship with purchasers of Covered Advertising; d. for purchasers of Covered Advertising whose credit limits are exceeded, require prepayment to more.com of amounts due for Covered Advertising; and 3. Sales Price of Media Units. --------------------------- a. more.com and BBDC will mutually agree upon rates ("Published Rates") at which Covered Advertising will be sold. more.com will publish such rates in its rate card. The first such rate card will be published within ten (10) days after execution of this Agreement. The Published Rates will be inclusive of advertising agency commissions (that is, the Published Rates will be "gross" rates). more.com and BBDC may from time to time, mutually agree upon adjustments to the Published Rates. b. [**] c. No less than monthly, more.com will provide BBDC current advertisement performance measurements as reasonably required to demonstrate value to advertisers, including, as reasonably available, measures for use volume and loyalty (hit rates, unique visitors, repeat visitors, average length of stay, average sales per buyer, etc.), user demographics (visitors and buyers), usage levels by day/time segment (e.g. busy and off-peak hours) and affiliations and connectivity (including cooperative ventures and links to and from third party sites). d. Upon request, more.com will provide BBDC with marketing and promotional material ("Marketing Package") suitable for presentation to manufacturers and other potential advertisers. The Marketing Package will include a letter of agency and general information about more.com and the more.com Site, including types of available advertising, information about the Advertising Plan and promotional calendar, and general demographic information, usage levels and affiliations and connectivity information suitable for disclosure to potential advertisers on a non-confidential basis. **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 2 4. Acceptance of Orders. -------------------- a. For each new advertiser, BBDC will obtain and promptly forward to more.com a completed, signed "New Customer Information" form. b. more.com and BBDC will jointly evaluate each advertiser's creditworthiness. c. more.com reserves the right to determine, in the exercise of its reasonable discretion, not to accept a potential advertiser or advertisement. d. BBDC will sell Covered Advertising only pursuant to written Insertion Orders in the form approved by more.com, and only to advertisers jointly approved by more.com and BBDC. BBDC will not accept any advertiser's Insertion Order if such order is inconsistent with the Parties' credit determination for such advertiser, unless such advertiser prepays in full. more.com reserves the right, in its reasonable discretion, to reject any Insertion Order. e. BBDC will accept Insertion Orders only from advertisers whom BBDC believes in good faith to be legitimate businesses operating in compliance with applicable laws. f. BBDC will submit to more.com a monthly sales report on or before the fifth business day of the following month. BBDC will furnish to more.com copies of all signed Insertion Orders within 24 hours of BBDC's receipt thereof. g. BBDC will not, without more.com's prior approval, accept payments or other valuable consideration related to Covered Advertising from advertisers other than the payments to more.com specified in more.com's rate card or the applicable Insertion Order. BBDC will report to more.com all payments and other valuable consideration related to Covered Advertising received from advertisers, specifying the value of any such payments and consideration. In the event that such consideration (or the agreed upon value thereof) is not remitted to more.com, more.com will deduct from commissions otherwise owed BBDC hereunder [**] the value of any Covered Advertising provided in exchange for such consideration as more.com's Net Revenue (as defined below) in connection therewith. h. more.com will use its best efforts to make available sufficient advertising space to permit BBDC to perform its obligations under this Agreement, and to provide the technical capability for links from Covered Advertising to the applicable manufacturer's web site. 5. Production. ---------- a. BBDC will be responsible for the layout, design, and production of all advertising sold by BBDC or, at its election may delegate such responsibility to more.com, provided that BBDC will remain responsible for any out-of-pocket costs incurred by more.com in connection therewith. BBDC will use best efforts to comply with such schedules and guidelines as more.com may adopt from time to time with respect thereto. **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 3 b. BBDC will submit each advertisement to more.com for approval. Consistent with legal requirements for pharmaceuticals, foods and dietary supplements and other similar products, neither party will modify manufacturer- approved and provided text and layout in any manner so as to affect its compliance with legal and regulatory requirements without subsequent re-approval by the manufacturer. c. more.com and BBDC will jointly agree to guidelines for advertising content and content quality for Covered Advertising, such guidelines to be set forth in the Advertising Plan, and will jointly approve or disapprove the content and quality of all Covered Advertising before insertion in the more.com Site. d. more.com will provide to BBDC advertising schedules for each Insertion Order as soon as practicable after each such schedule is prepared. Within ten (10) days following completion of an Insertion Order and at the end of each month for advertising running more than one month, more.com will provide to the advertiser(with a copy to BBDC) an appropriate certificate of insertion (proof of performance) in a form mutually agreed upon by the Parties 6. Invoicing, Collections and Remittances; Records. ----------------------------------------------- a. more.com will be responsible for promptly invoicing advertisers with respect to the sale of Covered Advertising. b. BBDC will cooperate with more.com to facilitate the collection for more.com of payments for Covered Advertising. [**} c. The Parties will use diligent and reasonable commercial efforts to ensure that all payments resulting from sale of Covered Advertising are made to more.com on a timely basis. more.com reserves the right to take whatever collection activity it deems appropriate including the institution of suit to effect payment. d. The Parties will consult from time to time regarding aging of receivables and collection problems. BBDC will cooperate, at more.com's expense, in all respects with more.com in the collection of receivables. BBDC's commission, if any, will be paid from any such amounts collected by more.com and any such amounts, less out-of-pocket collection expenses, will be credited to any applicable Guaranteed Minimum (as set forth on EXHIBIT A attached hereto) owed by BBDC to more.com. e. Within 15 days after the last day of each calendar month during the Term, more.com will provide BBDC with information on an advertiser- by-advertiser, Insertion Order-by-Insertion Order basis, Net Revenue during the prior calendar month ("Monthly Report") and on each Wednesday will provide a similar report with respect to the prior week. In the event that the sum of (i) all Make-Up Payments (as defined below) previously paid by BBDC and (ii) aggregate Net Revenue from the date hereof, for any period set forth on Exhibit A attached hereto ("Prior Payments") is less than the Guaranteed Minimum set forth for such period on Exhibit A, the applicable Monthly Report will include an invoice for the difference **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 4 between the applicable Guaranteed Minimum and the Prior Payments ("Make-Up Payment"). BBDC will be entitled to use advertising on the more.com Site in an amount equal to any Make-Up Payments paid hereunder for its own benefit or the benefit of any of its affiliates or the benefit of its Good Neighbor Pharmacy network of independent stores. Make-Up Payments will be reduced to the extent payment for any Covered Advertising is uncollectable due to more.com's failure to comply with a valid Insertion Order. f. BBDC will remit any Make-Up Payments within [**] days after receipt of the applicable invoice. 7. Audit. Each party will have the right, upon reasonable notice and ----- during business hours, to audit the other party's books and records relating to the other party's duties and amounts due and payable hereunder. 8. Commissions. To the extent that the sum of aggregate Net Revenue ----------- and Make-Up Payments through July 31, 2000 [**] and with respect to the sale of all Covered Advertising after such date (excluding in each case sales of Covered Advertising by more.com pursuant to Section 1.d above), [**] of the sum or such Net Revenue and Make-Up Payments. Following the expiration or earlier termination of this Agreement, BBDC will be entitled to such commissions for any Covered Advertising sold during the Term as would have been payable had this Agreement not expired or been terminated. 9. Term and Termination. -------------------- a. Subject to Sections 1.d and 9.b hereof, BBDC will remain the exclusive sales representative for Covered Advertising for a period of ten years from the date hereof, at which time this Agreement will terminate unless prior to that time the parties have agreed in writing to extend the term of the Agreement. Notwithstanding the foregoing, the parties at any time during the Term may mutually agree to terminate BBDC's exclusivity hereunder. b. BBDC may elect, by written notice anytime prior to August 1, 2000, to terminate its exclusivity hereunder. In the event that BBDC elects at such time to not terminate its exclusivity, it shall within thirty (30) days after the end of the second year of this Agreement ("Year Two"), [**]. In the event that during any one year period after Year Two the aggregate Net Revenue for such year [**] Notwithstanding the foregoing, on or about February 1, 2001, the Parties shall meet to discuss in good faith the feasibility of retaining BBDC's exclusivity for the Term of this Agreement. c. Either party may terminate this Agreement upon written notice if the other party fails to cure a material breach of any obligation hereunder within 30 days after written notice specifying such breach. If, because of the nature of such breach, the breaching **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 5 party cannot effect a cure thereof within such 30 day period, it may have such additional time as will be reasonably necessary to do so, provided it immediately commences diligently to cure such breach upon notice thereof from the noticing party and continues thereafter to use its best efforts to do so. d. Upon the termination of this Agreement for any reason, each party will discontinue the use of any trademarks of the other party and any item containing such trademarks, such as signs, logos, stationery, or business cards, and shall return to its owner all materials otherwise identifying or relating to its business; cease representing itself in any fashion as a representative of the other party; and return all documents, records or other materials (including, without limitation, all copies thereof regardless of the storage media) which were provided in connection herewith. Upon request, each party will promptly provide the other with documentation relating to any agreements with advertisers or sales orders submitted by advertisers. e. Obligations that have accrued prior to the effective date of termination will survive termination. 10. Indemnity; Insurance. -------------------- a. more.com will defend, indemnify, and hold BBDC and its directors, officers, shareholders, employees, agents, and affiliates ("BBDC Indemnitees") harmless from and against any claims by third parties (including governmental authorities) and any losses, damages, settlements, fines, penalties, liabilities or expenses resulting therefrom (collectively, "Claims"), to the extent such Claims arise out of, relate to, or are based on the content of the more.com Site, or actions undertaken by BBDC pursuant to more.com's express instructions. b. BBDC will defend, indemnify, and hold more.com and its directors, officers, shareholders, employees, agents, and affiliates ("more.com Indemnitees") harmless from and against any Claims, to the extent such Claims arise out of, relate to, or are based on actions or omissions of BBDC taken in connection with or pursuant to this Agreement, except to the extent that such actions or omissions are based on express instructions given by more.com. c. more.com will obtain and maintain during the Term the insurance coverage described on EXHIBIT B attached hereto with carriers reasonably acceptable to BBDC and upon BBDC's request will provide BBDC evidence of such insurance in the form of certified copies of the applicable policies or an appropriate certificate of insurance in form reasonably acceptable to the parties. Each such policy will name BBDC as an additional insured and provide that BBDC is to be notified at least 30 days prior to any cancellation thereof. d. Under no circumstances will either party be liable to the other or to any third party for loss of profits, or incidental or consequential damages, sustained or incurred in any manner in connection with this Agreement, even if such party has been advised of the possibility of such damages. 6 11. Arbitration. ----------- a. For any dispute or controversy between the parties which arises out of or relates to this Agreement or the grounds for its termination, the parties agree to meet to try to resolve the dispute. Such meeting will be attended by individuals with decision-making authority to attempt in good faith, to negotiate a resolution of the dispute prior to pursuing other available remedies. If, within thirty days after the date set for such meeting, the parties have not succeeded in negotiating a resolution of the dispute, either party may request that such dispute be resolved through final and binding arbitration. Such arbitration will be conducted in English by three arbitrators familiar with the health care industry, in accordance with the then-current Rules of Conciliation and Arbitration of the American Arbitration Association. Such arbitrators will be selected by mutual agreement of the parties, or failing such agreement, each party will select one arbitrator and the two selected arbitrators will mutually agree upon the selection of a third arbitrator. This Agreement will be governed by and construed according to the laws of the State of California. The arbitrators will be bound to apply such California law, and where applicable, federal statutory law. The parties will be afforded a reasonable period of time to conduct discovery prior to the arbitration. A court reporter will be present at all arbitration proceedings in order to transcribe them and such transcription will be the official record of such proceedings for purposes of any judicial enforcement or review proceeding. The arbitrators' decision will specify the basis for any award and the types of damages awarded. The parties will bear the cost of such arbitration equally and the prevailing party in any such arbitration will be entitled to reasonable attorney's fees, in addition to any other award ordered by the arbitrators. The prevailing party in any judicial enforcement or review proceeding will also be entitled to reasonable attorney's fees and costs, in addition to any other award ordered by the court. If judicial enforcement or review is sought by either party, judgment may be entered in any court of competent jurisdiction. This Section will survive any expiration or termination of this Agreement and will continue to be enforceable in the event of the bankruptcy of a party. b. Notwithstanding the foregoing, a request by either party for preliminary or permanent injunctive relief, whether prohibitive or mandatory, or provisional relief such as writs of attachments or possession, shall not be subject to arbitration and may be adjudicated only before a court of competent jurisdiction. 12. Confidentiality. As used in this Section, "Confidential --------------- Information" means trade secrets, operating manuals, customer or client lists, business information, marketing programs, plans and strategies, financial information, memoranda, work papers, notes, reports and any sales information which either party ("disclosing party") makes available, or has previously made available, to the other ("receiving party") in connection with this Agreement, as well as this Agreement itself. Unless otherwise set forth in this Agreement, the receiving party: (i) will not disclose Confidential Information to any third party without first obtaining the express written permission of the disclosing party, (ii) will use Confidential Information only as is necessary to fulfill its obligations pursuant to this Agreement, and (iii) will limit such disclosure to any of its officers, employees or agents on a need-to-know basis for purposes of fulfilling its obligations under this Agreement. Notwithstanding anything to the contrary in this Section, Confidential Information will not include: (a) information that is approved for public release by the written authorization of the disclosing party; (b) information that was disclosed to the receiving party by a third party having legal right to make such disclosure; (c) information 7 that is or becomes in the public domain; (d) information that the receiving party can establish was independently developed without breaching this Agreement; (e) information that the receiving party is required to disclose pursuant to law, regulation, rule, act, or court order of any governmental authority or agency. 13. General. ------- a. Attorney's Fees. The prevailing party in any dispute over the --------------- performance or construction of this Agreement will be entitled to recover its reasonable attorney's fees and costs. b. Compliance with Laws. Each party shall comply with all laws, -------------------- rules and regulations, whether local, state, or federal, applicable to its activities hereunder, but only to the extent such laws, rules and regulations are applicable to such party. c. Relationship of the Parties. Except as expressly set forth in --------------------------- this Agreement, nothing contained in this Agreement will be construed to create an agency relationship or a joint venture or partnership between the Parties and neither party will have any right, power or authority to act on behalf of or bind the other party. d. Choice of Law. This Agreement will be construed under the ------------- laws of the State of California, as applied to contracts entered into and performed completely within California. e. Non-Solicitation. For the Term and for one year after the ---------------- termination of this Agreement, each party agrees not to directly or indirectly solicit employees of the other party. f. Waivers. The rights of the parties under this Agreement are ------- cumulative. The waiver by any party of any term, condition or breach hereof shall not constitute a waiver of any other such matter. g. Force Majeure. Neither party shall be liable for loss or ------------- damage or be deemed to be in breach of this Agreement if its failure to perform its obligations results from: (1) compliance with any law, ruling, order, regulation, requirement or instruction of any federal, state or municipal government or any department or agency thereof or any court of competent jurisdiction; (2) acts or omissions of the other party in violation of this Agreement; or (3) acts of God, fires, strikes, embargoes, war, insurrection, riot, and other causes beyond the reasonable control of the party. Any delay resulting from any said causes shall extend performance accordingly or excuse performance, in whole or in part, as may be reasonable. h. Assignability. Either party may assign this Agreement, ------------- without consent, upon 30 days' written notice to the other party, to a parent, or to a subsidiary. Either party may assign the Agreement to an affiliated company, or to an entity in connection with any merger, consolidation or reorganization with, or the sale of all of the party's assets to, such entity, so long as the assignee is financially secure. Except to the extent set forth above, neither party may assign this Agreement or any of its obligations hereunder without the other party's prior written 8 consent, which consent may not be unreasonably withheld, and any assignment without such consent shall be null and void. i. Survivability. All representations, warranties, covenants and ------------- obligations of either party set forth herein shall survive the expiration or termination of this Agreement and the performance by either party hereunder and shall continue in full force and effect notwithstanding such expiration or termination or performance until they are satisfied in full or by their nature expire. j. Captions, Interpretation. Section headings are for ------------------------ convenience of reference only, do not form a part of this Agreement and will not affect the meaning of this Agreement. Words used, regardless of the number and gender specifically used, will be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine, or neuter, as the context requires. Any reference to a "person" will include an individual, firm, corporation, partnership, trust, governmental authority or body, association, unincorporated organization or any other entity. The word "and" includes the word "or." The word "or" is disjunctive but not necessarily exclusive. k. Notices. All notices, requests, demands and other ------- communications hereunder shall be in writing and shall be deemed given upon receipt or three days after mailing, whichever is sooner, if personally delivered or mailed, certified mail return receipt requested, or sent by overnight carrier to the following addresses: If to more.com: more.com, Inc. 520 Third Street, Suite 245 San Francisco, CA 94107 Attn: Brad Oberwager Telephone: (415) 979-9597 Facsimile: (415) 979-9598 with a copy to Howard, Rice, et al 3 Embarcadero Center, 7th Floor San Francisco CA 94111 Attn: Ronald Star, Esq. If to BBDC: Bergen Brunswig Drug Company 4000 Metropolitan Drive Orange, California 92868 Attn: President Telephone: (714) 385-4000 Facsimile: (714) 385-8879 9 with a copy to: Bergen Brunswig Corporation 4000 Metropolitan Drive Orange, California 92868 Attn: E.V.P., Chief Legal Officer & Secretary Telephone: (714) 385-4000 Facsimile: (714) 978-1148 l. Entire Agreement. This Agreement represents the entire ---------------- agreement of the parties and expressly supersedes and replaces in full any prior agreements between the parties relating to the subject matter hereof. This Agreement may only be amended or superseded by written agreement executed by both parties. IN WITNESS WHEREOF, intending to be legally bound, the parties have executed this Agreement by their duly authorized representatives as of the date first above written. MORE.COM, INC. BERGEN BRUNSWIG DRUG COMPANY By: /s/ Laureen De Buono By: /s/ Brent Martini Its: CFO Its: President 10 EX-10.15 18 DATABASE LICENSE AND SUPPLY & PURCHASE AGREEMENT Exhibit 10.15 DATABASE LICENSE AND SUPPLY AND PURCHASE AGREEMENT THIS DATABASE LICENSE AND SUPPLY AND PURCHASE AGREEMENT, dated as of January 17, 2000, is made by and between More.com, a Delaware corporation ("More.com"), -------- and Lens Express, Inc., a Florida corporation ("Lens Express"). ------------ W I T N E S S E T H: - - - - - - - - - - WHEREAS, More.com, among other things, sells and provides information regarding medicines, face and body care products, nutritional supplements and related products on its site located at the URL http://www.more.com on the World Wide Web (the "More.com Site"); ------------- WHEREAS, Lens Express, among other things, sells contact lenses ("Contact ------- Lenses") on its site located at the URL http://www.lensexpress.com on the World - ------ Wide Web (the "Lens Express Site"), and has compiled an electronic ----------------- product/pricing database containing information pertaining to a variety of brands and types of Contact Lenses (the "Lens Express Database"); and --------------------- WHEREAS, More.com wishes to offer Contact Lenses for sale on the More.com Site, and Lens Express wishes to make available to More.com the Lens Express Database and certain order processing, fulfillment, shipping and customer service functions, such that that More.com users may search for and purchase Contact Lenses on and through the More.com Site, all in accordance with the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Grant of Rights. During the Term (as defined below), Lens Express --------------- hereby grants to More.com the worldwide, non-exclusive right and license to use all or any portion of the Lens Express Database on or in connection with the More.com Site, solely in accordance with the terms and conditions of this Agreement. Such right shall be limited to making the Lens Express Database available to users of the More.com Site ("More.com Users") as necessary to allow -------------- them to determine the availability of and to purchase Contact Lenses as contemplated hereunder, and to using the Lens Express Database, in whole or in part, in ways which effectuate the terms and conditions of this Agreement. The license granted hereunder includes a license under any and all intellectual property rights that Lens Express may presently have or may acquire in the future with respect to the Lens Express Database. 2. Roles and Responsibilities; Cooperation --------------------------------------- a. The parties agree that the intent of this Agreement is to make all Contact Lenses offered for sale on the Lens Express Database available to More.com Users on a continuous basis (subject to limited downtime as described in Section 9(a)(vii)) in a seamless manner which does not alter the look, feel or functionality of the More.com Site and to allow More.com Users who search the More.com Site for Contact Lenses to be provided results from the Lens Express Database. The More.com Site shall be the host site, and the participation of Lens Express shall be invisible to the More.com Users except to the extent determined by More.com. The customer experience of such More.com Users utilizing the Lens Express Database shall be branded as "More.com," including, without limitation, the more.com Contact Lens Department, the transaction shopping cart, the customer's credit card invoice, customer service, invoices and packaging. Notwithstanding the foregoing, More.com at any time may agree, in its sole discretion, to co-brand the customer experience of such More.com Users (e.g., through a banner stating "More.com powered by Lens ---- Express" or similar means), provided that More.com shall have no obligation to do so. b. Lens Express shall provide at no charge customized template pages for use by More.com and More.com Users with respect to inquiries and orders, order processing, order status, product descriptions and any other pages reasonably deemed necessary by More.com from the existing Lens Express Site. Lens Express shall be solely responsible for prescription verification and prescription file maintenance with respect to More.com Users purchasing Contact Lenses via the Lens Express Database. In addition, Lens Express shall provide and maintain the Lens Express Database and provide services with respect to fulfillment, shipping, customer service and other matters as set forth herein. c. More.com and Lens Express agree to work together in good faith, and to devote such resources as may reasonably be required, to implement the terms of this Agreement. The parties agree to exchange all necessary technological information (subject to appropriate restrictions on use and disclosure by the recipient) in order to carry out the intent of this Agreement. 3. Orders; Fulfillment and Shipping. -------------------------------- a. If a More.com User purchases Contact Lenses through the Lens Express Database (a "Contact Lens Order") through the More.com Site (each such ------------------ purchaser, a "Purchaser"), More.com shall, as promptly as is technically --------- feasible, [**], notify Lens Express of such Contact Lens Order. Following such notification, Lens Express shall, as promptly as is technically feasible, notify More.com if such Contact Lens Order is not available for purchase. If such Contact Lens Order is available for purchase, then Lens Express shall, as promptly as is technically feasible and commercially reasonable, cause such Contact Lens Order to be shipped, as directed by More.com, either: (i) directly to the Purchaser at the address specified by More.com in such notification; or (ii) to the More.com distribution center. More.com and Lens Express hereby agree to the standards for quality control, which will at a minimum dictate that Lens Express cannot fulfill with contracts that are labeled as samples or "not for resale" of all services and timeliness of order fulfillment set forth on Schedule 3(a), which is attached hereto and made a part hereof. - ------------- b. Lens Express shall be responsible for the shipment of, and shall cause to be shipped, each Contact Lens Order purchased by a Purchaser pursuant to the terms of this Agreement, regardless of whether or not such Contact Lens Order is filled by Lens Express from inventory or available to Lens Express from a third party. Lens Express shall provide shipping **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. of Contact Lens Orders by Priority Mail at no charge to More.com or the Purchaser. Upon request by a Purchaser, Lens Express shall provide overnight shipping by Federal Express at Lens Express' best negotiated rate with Federal Express. c. With respect to the supply of Contact Lenses for fulfillment of Contact Lens Orders, Lens Express shall treat More.com no less favorably than it treats any other third party. To the extent that Lens Express has any shipping backlog or is suffering any delays with respect to shipping Contact Lenses, Lens Express shall use its commercially reasonable efforts so that Contact Lens Orders to be shipped pursuant to this Agreement shall have shipping priority at least equal to other Lens Express Contact Lens shipments. d. Lens Express shall comply with all reasonable More.com invoicing requirements which do not materially increase Lens Express' handling costs. Fees to be charged by Lens Express as a result of More.com requirements which materially increase Lens Express' handling costs shall be mutually agreed on by the parties. Shipments of Contact Lens Orders directly to a Purchaser shall be shipped in Standard USPS priority mail packaging provided to Lens Express by the USPS. The package may include up to three (3) package inserts (not to exceed one ounce in weight), that will be provided by More.com at its cost, but will not contain any materials promoting or referencing Lens Express. e. Other than with respect to More.com invoicing requirements Lens Express may not, pursuant to this Agreement, use the More.com name, or any More.com logos, trade names or trademarks, without the prior written consent of More.com. During the Term, Lens Express hereby grants to More.com the worldwide, non-exclusive right and license to use, subject to the prior written consent of Lens Express, which consent shall not be unreasonably withheld, the Lens Express name and Lens Express logos and trademarks as provided by Lens Express to More.com for use on the More.com site. Other than as provided in this Section 3(e), More.com may not use the Lens Express name, or any Lens Express logos, trade names or trademarks, without the prior written consent of Lens Express. f. [**] Purchasers located in the United States shall, to the extent such orders are sourced by Lens Express within the United States, have their Contact Lens Orders picked, packed and ready to be shipped, by whichever of the shipping options offered by More.com chosen, at the docking station within 24 hours of the corresponding order confirmation and/or prescription verification whichever occurs later. [**] 4. Pricing and Payment Terms. ------------------------- a. More.com shall be responsible for the credit card billing and collections with respect to Contact Lens Orders. Each Purchaser shall pay More.com, in accordance with the pricing and payment terms set forth on the More.com Site, for each Contact Lens Order purchased by them. **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. b. [**] c. Lens Express shall invoice More.com [**], or at such other times as mutually agreed upon by the parties, for each shipped Contact Lens Order, including amounts, if any, to be reimbursed for shipping, and More.com shall pay such invoices [**] by More.com. Lens Express shall provide More.com with electronic files for billing and payment coordination. [**] d. [**] following the date that an Contact Lens Order was shipped by Lens Express pursuant to the terms of this Agreement, More.com may notify Lens Express that it shall be returning such Contact Lens Order to Lens Express. Upon such notification, Lens Express shall credit More.com's account in an amount equal to the price paid by More.com for such Contact Lens Order. More.com may wait a reasonable amount of time to physically return any returned Contact Lens Order to Lens Express so that it can ship returns back to Lens Express in bulk. More.com shall pay all shipping costs for returning such returned Contact Lenses to Lens Express. Additionally, any significant customer returns that are the result of a mispick on Lens Express's part will be credited, along with Lens Express covering the full cycle of shipping costs that such a return and reshipment necessitates. e. After the first year of the Term, the parties shall assess actual sales and cost data and shall commence good faith negotiations regarding pricing based on such actual data. If at such time the parties are unable to reach mutually agreeable terms regarding pricing, then this Agreement shall continue with its current pricing terms. f. [**] **Confidential treatment has been requested with respect to the information contained within the "[**]" markings. Such marked portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. 5. Customer Service; Reporting. --------------------------- a. All customer service calls from More.com Users and Purchasers shall go directly to More.com customer service agents. Such More.com customer service agents shall answer questions regarding navigation of the More.com Site and the pre-delivery status of Contact Lens Orders. Questions that refer to specific product information regarding Contact Lenses or that require the specific expertise of Lens Express with respect thereto shall be forwarded to Lens Express' customer service agents. Lens Express and More.com agree to jointly create customer service scripts and escalation criteria to ensure a high level of service while taking advantage of More.com's existing customer service capacity and making best efforts to use More.com's software at More.com's expense. b. No less than once per day, Lens Express shall provide reports, in form and substance and by means reasonably acceptable to More.com, with respect to the status of orders, shipment, delivery, and returns. 6. Maintaining and Updating the Lens Express Database. -------------------------------------------------- a. Lens Express shall have the sole responsibility for maintaining and updating the Lens Express Database. Lens Express shall update the Lens Express Database as promptly as is technically feasible and commercially reasonable. b. Contact Lens listings in the Lens Express Database shall include condition abbreviations and identity SKUs in all cases using ISBN, LoC or other identifiers, to be mutually agreed upon. In addition the Lens Express Database shall permit confirmation of availability of each Contact Lens Order. 7. Non-Exclusive Arrangement; Future Arrangements. ---------------------------------------------- a. The provision of services to More.com by Lens Express pursuant to the terms and conditions of this Agreement is non-exclusive. Lens Express may enter into similar arrangements with other parties. Pursuant to the binding LOI by and between More.com and Lens Express dated December 8, 1999 (made a part hereof by reference), More.com agrees to integrate back-end systems only with Lens Express in the contact space and More.com agrees that it will send all orders for contact lenses to Lens Express for fulfillment. Within the confines and limitations of the foregoing More.com may incorporate any other database (including any database developed by More.com or any of its affiliates) into the More.com Site for the sale of contact lenses. 8. Policies and Customer Information. All More.com Users, including --------------------------------- Purchasers, shall be deemed to be customers of More.com. Accordingly, all More.com rules, policies and operating procedures concerning customer orders, customer service and product sales shall apply to More.com Users and Purchasers. More.com may change its policies and operating procedures at any time. More.com shall determine the prices to be charged for products, including Contact Lenses, and/or other merchandise sold in accordance with its own pricing policies. Prices and availability may vary from time to time. More.com shall use commercially reasonable efforts to present accurate information, but More.com cannot guarantee the availability or price of any particular item. The parties hereto hereby agree that title to any information collected by More.com with respect to More.com Users and Purchasers, including the names, addresses, and e-mail addresses thereof, shall be owned by More.com, and More.com shall have the sole and exclusive right to send re-order reminders and other marketing materials to such More.com Users and Purchasers. More.com shall have no obligation to share such information with Lens Express; provided, however, that Lens Express shall have the right to receive such information about Purchasers as is needed to satisfactorily complete its duties hereunder, but provided further that Lens Express shall hold and use such information only as necessary to perform its obligations of this Agreement and will under no circumstances share this information with any third parties. 9. Representations and Warranties. ------------------------------ a. Lens Express hereby represents and warrants to More.com as follows: i. This Agreement has been duly and validly executed and delivered by Lens Express and constitutes the legal, valid and binding obligation of Lens Express, enforceable against Lens Express in accordance with its terms. ii. Lens Express is duly incorporated, validly existing and in good standing under the laws of the State of Florida, and has full corporate power and authority to execute, deliver and perform this Agreement. iii. The execution, delivery and performance by Lens Express of this Agreement and the consummation by it of the transactions contemplated hereby shall not, with or without the giving of notice, the lapse of time or both, conflict with or violate (A) any provision of law, rule or regulation to which Lens Express is subject, (B) any order, judgment or decree applicable to Lens Express or binding upon its assets or properties, (C) any provision of the by-laws or certificate of incorporation of Lens Express or (D) any agreement or other instrument applicable to Lens Express or binding upon its assets or properties. iv. To the best of its knowledge, no consent, approval or authorization of, or exemption by, or filing with, any governmental authority or any third party is required to be obtained or made by Lens Express in connection with the execution, delivery and performance of this Agreement or the taking by Lens Express of any other action contemplated hereby. v. There is no pending or, to the best knowledge of Lens Express, threatened claim, action or proceeding against Lens Express, or any affiliate thereof, with respect to the execution, delivery or consummation of this Agreement and, to the best knowledge of Lens Express, there is no basis for any such claim, action or proceeding. vi. It is the sole and exclusive owner of the Lens Express Database and/or has the right to license the Lens Express Database to More.com in accordance with, and in the manner contemplated by, the terms and conditions of this Agreement; the license granted by Lens Express to More.com hereby does not and shall not breach, conflict with or constitute a default under any agreement or other instrument applicable to Lens Express or binding upon its assets or properties; and the Lens Express Database does not and shall not infringe upon any rights, including any trademark, trade name, service mark, copyright or other personal or proprietary right, of any other person or entity. vii. It shall make the most current operating version of the Lens Express Database available to More.com in accordance with the terms and conditions of this Agreement on a continuous basis; provided, that the parties shall mutually agree upon limited scheduled downtime of the Lens Express Database for maintenance, which downtime shall be scheduled only during More.com's lowest usage times. viii. To the best of its knowledge, the information included in the Lens Express Database is accurate in all material respects. ix. There is no material contained in the Lens Express Database that is libelous or violative of the right of privacy or publicity of any person, firm, corporation or other entity, and the utilization of the Lens Express Database by More.com pursuant to and in accordance with this Agreement shall not violate the rights of any person, firm, corporation or other entity. x. To the best of its knowledge, the Lens Express Database does not contain any infection, viruses worms, Trojan horses or other code that manifests contaminating or destructive properties. xi. It is the sole and exclusive owner of the Lens Express name and the Lens Express logos and trademarks provided or to be provided by Lens Express to More.com for use on the More.com Site in accordance with the terms of Section 3(e) of this Agreement and/or has the right to license such name and logos and trademarks to More.com in accordance with, and in the manner contemplated by, the terms and conditions of this Agreement; such license granted by Lens Express to More.com does not and shall not breach, conflict with or constitute a default under any agreement or other instrument applicable to Lens Express or binding upon its assets or properties; and the use of the Lens Express name and such logos and trademarks by More.com as contemplated by Section 3(e) of this Agreement does not and shall not infringe upon any rights, including any trademark, trade name, service mark, copyright or other personal or proprietary right, of any other person or entity. b. More.com hereby represents and warrants to Lens Express as follows: i. This Agreement has been duly and validly executed and delivered by More.com and constitutes the legal, valid and binding obligation of More.com, enforceable against More.com in accordance with its terms. ii. More.com is duly organized, validly existing and in good standing under the laws of the State of Delaware, and has full power and authority to execute, deliver and perform this Agreement. iii. The execution, delivery and performance by More.com of this Agreement and the consummation by it of the transactions contemplated hereby shall not, with or without the giving of notice, the lapse of time or both, conflict with or violate (A) any provision of law, rule or regulation to which More.com is subject, (B) any order, judgment or decree applicable to More.com or binding upon its assets or properties, (C) any provision of the organizational documents of More.com or (D) any agreement or other instrument applicable to More.com or binding upon its assets or properties. iv. To the best of its knowledge, no consent, approval or authorization of, or exemption by, or filing with, any governmental authority or any third party is required to be obtained or made by More.com in connection with the execution, delivery and performance of this Agreement or the taking by More.com of any other action contemplated hereby. v. There is no pending or, to the best knowledge of More.com, threatened claim, action or proceeding against More.com, or any affiliate thereof, with respect to the execution, delivery or consummation of this Agreement and, to the best knowledge of More.com, there is no basis for any such claim, action or proceeding. vi. It is the sole and exclusive owner of all logos, trademarks and service marks provided or to be provided by More.com to Lens Express to facilitate the performance of Lens Express' obligations under this Agreement and/or has the right to license such name and logos and trademarks to license to Lens Express in accordance with, and in the manner contemplated by, the terms and conditions of this Agreement; and any such license does not and shall not breach, conflict with or constitute a default under any agreement or other instrument applicable to More.com or binding upon its assets or properties; and to the best of its knowledge, the use of any such logos, trademarks and service marks by Lens Express as contemplated by this Agreement does not and shall not infringe upon any rights, including any trademark, trade name, service mark, copyright or other personal or proprietary right, of any other person or entity. 10. Term; Termination. ----------------- a. The term of this Agreement (the "Term") shall commence on the ---- date hereof and shall continue through December __, 2002, unless earlier terminated as provided in clauses (b) and (c) below. b. Either party shall have the right to terminate this Agreement by delivery of written notice of termination to the other party hereto in the event such other party materially breaches any representation, warranty, covenant or agreement made by it hereunder or otherwise fails to perform any of its material obligations hereunder and such breach or failure is not cured within thirty (30) days after delivery of such notice; provided, however, that each party shall be entitled to terminate this Agreement effective upon delivery of notice in the event of a breach by the other party of the provisions of Sections 12 and 13 hereof. c. If any law prohibits online commerce such as that conducted by More.com, this Agreement shall automatically terminate. d. Except as otherwise provided in this Agreement, upon such effective date of termination, each party's rights and obligations hereunder shall terminate; provided, however, that the rights and obligations of the parties hereto under Sections 4d, 8, 9, 10, 12, 13, 14, 15 and 16 hereof shall survive such expiration and termination. 11. Audit Rights. Lens Express shall maintain true and correct books of ------------ account containing a record of all information necessary to calculate the price paid by More.com for Lens Express Contact Lenses and corresponding Lens Express published prices, for the term and for a period of three (3) years following the term. More.com or its independent outside auditors shall be entitled to review, at its cost, during Lens Express' regular business hours and upon not less than ten (10) business days prior notice, such books and records for the purpose of verifying the accuracy of such information and calculations. Any such review shall be made not more than twice in any twelve (12) month period. In the event that in the course of or as a result of any such review More.com or its agent discovers any discrepancy from information previously distributed to More.com, then, such discrepancy shall be remedied and, if such discrepancy resulted in overpayments by More.com during the relevant period in an amount exceeding 5% of the amount actually paid, Lens Express shall bear the cost of such audit. 12. Confidentiality. The existence and terms of this Agreement, and any --------------- other information pursuant to or in connection with this Agreement which would be deemed "Confidential Information" under the Confidentiality Agreement dated September 28, 1999 between More.com and Lens Express (the "NDA Agreement") shall ------------- be treated as Confidential Information under the NDA Agreement and shall, during the term of this Agreement and for the three (3) year period following the date of this Agreement, be governed by the confidentiality provisions of the NDA Agreement. Notwithstanding the foregoing, with respect to filing obligations under the securities laws, each party shall, to the extent that it is required to file this Agreement, file this Agreement in redacted form reasonably approved by the other party prior to such filing. 13. Publicity. --------- a. Notwithstanding the provisions of Section 12 hereof, promptly after the execution of this Agreement, More.com shall have the right, but not the obligation, to issue a press release describing the terms of the relationship between the parties that has been established by this Agreement; provided, that Lens Express shall have the right to review such document prior to release. b. Subject to Section 12 hereof and clause (a) above, neither party shall (i) create, publish, distribute or permit any written material which makes reference to the other party hereto without first submitting such material to the other party and receiving the prior written consent of such party, which consent shall not be unreasonably withheld or delayed, nor (ii) disclose to the public or any third party (other than such party's attorneys, accountants and prospective investors) the relationship between them or the transactions contemplated by this Agreement without receiving the prior written consent of the other party, which consent shall not be unreasonably withheld or delayed. In furtherance of, and in no way limiting the foregoing, the parties agree to refrain from using each other's names, trademarks or logos on any outside communications, including correspondence to dealers, press releases, advertisements, and marketing materials without the prior written consent of the other party. The parties shall work together to develop pre-approved "talking points" to facilitate consistent messages and responses to dealers and the press inquiring about the Lens Express-More.com relationship 14. Indemnification. --------------- a. Each party (an "Indemnifying Party") hereby agrees to indemnify ------------------ and hold harmless the other party and its subsidiaries and affiliates, and their respective directors, officers, employees, agents, shareholders, partners, members and other owners, against any and all claims, actions, demands, liabilities, losses, damages, judgments, settlements, costs and expenses (including reasonable attorneys' fees) (any or all of the foregoing hereinafter referred to as "Losses") insofar as such Losses (or actions in respect thereof) ------ arise out of or are based on any claim that, if true, would constitute a breach of any representation or warranty made by the Indemnifying Party. b. Lens Express hereby agrees to indemnify and hold harmless more.com and its subsidiaries and affiliates, and their respective directors, officers, employees, agents, shareholders, partners, members and other owners, from and against any and all Losses insofar as such Losses (or actions in respect thereof) arise out of or are related to any third party claim relating to Contact Lenses and any other products or services supplied by Lens Express, including, but not limited to, any claim (whether based on strict liability, in tort, negligence, breach of express or implied warranty or other legal theory) that personal injury, death or property damage was caused by a defect in design, material or manufacture of any such Contact Lenses, products or services. 15. Disclaimers. More.com makes no representation that the operation of ----------- the More.com Site shall be uninterrupted or error free, and More.com shall not be liable in any way for any damages relating to, or the consequences of, any such interruptions or errors. Lens Express makes no representations that the Lens Express Database shall uninterrupted or error free, and Lens Express shall not be liable in any way for any damages relating to, or the consequences of, any such interruptions or errors. 16. Miscellaneous. ------------- a. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to the conflict of law principles thereof. b. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes any and all prior agreement, written and oral, with respect thereto. No change, amendment or modification of any provision of this Agreement shall be valid unless set forth in a written instrument signed by both parties. c. The failure of either party to exercise any right or remedy provided for herein shall not be deemed a waiver of any right or remedy hereunder. d. Any and all notices and other communications to either party hereunder shall be in writing and deemed delivered (i) upon receipt if by hand, overnight courier or telecopy (provided that in the event of a telecopy, concurrently therewith a copy is mailed in accordance with clause (ii) hereof) and (ii) three days after mailing by first class, certified mail, postage prepaid, return receipt requested (1) if to Lens Express to 350 SW 12th Avenue, Deerfield Beach, Florida 33442, attention: Brian O'Neill, telecopier no.: 954- 246-2017, and (2) if to More.com to 520 Third Street, Suite 245, San Francisco, CA 94107, attention: Eric Budin, telecopier no.: 415-__________, or to such other address for a party as shall be specified by like notice. e. This Agreement does not constitute either party an agent, legal representative, joint venturer, partner or employee of the other for any purpose whatsoever and neither party is in any way authorized to make any contract, agreement, warranty or representation or to create any obligation, express or implied, on behalf of the other party hereto. f. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and together which shall constitute one and the same instrument. g. The section headings used herein are for the convenience of the parties only, are not substantive and shall not be used to interpret or construe any of the provisions contained herein. All references to the term "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation" h. This Agreement and the provisions hereof shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their successors and permitted assigns; provided, however, that neither party shall have the right to assign its rights or obligations hereunder to any other person or entity without the prior written consent of the other party; but further provided, that such consent shall not be required for a transfer of this Agreement pursuant to the sale of all or substantially all of such party's business. Notwithstanding the foregoing, this Agreement shall continue in full force and effect following a Change of Control (as defined below). For purposes of this Section, the term "Change of Control" with respect to either party means the occurrence of one or more of the following events: (i) after the date of this Agreement, any person or entity (other than any person or entity who is the beneficial owner of such party's voting securities as of the date of this Agreement) becomes a beneficial owner (as such term is defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended) directly or indirectly of securities representing 50% or more of the total number of voting securities of such party; or (ii) persons who constitute such party's board of directors prior to any transaction or series of transactions cease to constitute at least 50% of such party's board of directors as a result of such transaction or series of transactions; or (iii) any merger, consolidation, liquidation or sale of assets involving such party where an unaffiliated third party is the surviving entity of such transaction, or any combination of the foregoing. i. Each provision of this Agreement shall be considered severable and if, for any reason, any provision hereof is determined to be invalid and contrary to, or in conflict with, any existing or future law or regulation by any court or agency having valid jurisdiction, such provision shall be given the maximum permissible effect, and such invalidity or illegality shall not impair the operation or affect the remaining provisions of this Agreement; and the latter shall continue to be given full force and effect and bind the parties hereto and such invalid provisions shall be deemed not to be a part of this Agreement. j. Neither party shall be liable for failure to fulfill its obligations hereunder, or for delays in performance, due to causes beyond its reasonable control, including acts of God, acts or omissions of civil or military authority, fires, strikes, floods, epidemics, riots or acts of war. k. With respect to each new item or product category added to the Lens Express Database or offered for sale by Lens Express, the parties hereto agree that prior to such addition or offering they shall enter into good faith negotiations regarding the sale of such products or items on the More.com Site. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. LENS EXPRESS, INC. By: /s/ Brian O'Neill Name: Brian O'Neill Title:Executive Vice President MORE.COM By: /s/ Eric Budin Name: Eric Budin Title: Vice President of Corporate Development EX-23.2 19 CONSENT OF PRICEWATERHOUSECOOPERS EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 ("Registration Statement") of our report dated February 4, 2000, relating to the consolidated financial statements of more.com, Inc., and of our report dated January 27, 2000, relating to the financial statements of Comfort Living, Inc., both of which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. San Jose, California February 10, 2000 EX-27.1 20 FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR DEC-31-1998 DEC-31-1999 JAN-09-1998 JAN-01-1999 DEC-31-1998 DEC-31-1999 8,549 24,655 1,003 0 23 603 0 (12) 22 175 9,769 26,062 0 0 (129) (1,682) 11,541 40,161 1,172 8,486 225 1,376 13,481 58,064 10 10 3 5 (6,988) (27,780) 11,541 40,161 99 2,520 99 2,923 143 3,753 143 3,753 5,192 33,982 0 12 40 355 (5,169) (34,685) 0 0 (5,169) (34,685) 0 0 0 0 0 0 (5,169) (34,685) (5.90) (15.74) (5.90) (15.74)
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