-----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, FHDOUt0jaL3CINocHTptx4jBr7JA3xkDFz+jeFFErRS7+a9gUM9WfLsygRkQaHpe jlgVr0PNGmWgR3Yan3QQig== 0000891618-99-005609.txt : 19991210 0000891618-99-005609.hdr.sgml : 19991210 ACCESSION NUMBER: 0000891618-99-005609 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 39 FILED AS OF DATE: 19991209 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PETS COM INC CENTRAL INDEX KEY: 0001100683 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-92433 FILM NUMBER: 99771648 BUSINESS ADDRESS: STREET 1: 435 BRANNAN STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94107 BUSINESS PHONE: 4152229999 MAIL ADDRESS: STREET 1: 435 BRANNAN STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94107 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 1999 REGISTRATION NO. 333-XXXXX - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ PETS.COM, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 5999 95-4730753 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
435 BRANNAN STREET SUITE 100 SAN FRANCISCO, CA 94107 (415) 222-9999 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ JULIA L. WAINWRIGHT CHIEF EXECUTIVE OFFICER PETS.COM, INC. 435 BRANNAN STREET SUITE 100 SAN FRANCISCO, CA 94107 (415) 222-9999 (NAME, ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: JOHN V. BAUTISTA, ESQ. KEVIN P. KENNEDY, ESQ. FRANCES JOHNSTON, ESQ. SHEARMAN & STERLING JOHN DUGAN, ESQ. 1550 EL CAMINO REAL VENTURE LAW GROUP MENLO PARK, CA 94025 A PROFESSIONAL CORPORATION (650) 330-2200 2800 SAND HILL ROAD MENLO PARK, CA 94025 (650) 854-4488
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------ If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ______ If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ______ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ______ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AGGREGATE AMOUNT OF TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------- Common Stock, par value $0.001(2)........................ $100,000,000 $26,400 - ------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act. (2) The amount of shares registered also includes any shares initially ordered or sold outside the United States that are thereafter sold or resold in the United States. Offers and sales of shares outside the United States are being made pursuant to the exemption afforded by Rule 901 of Regulation S and this Registration Statement shall not be deemed effective with respect to such offers and sales. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PRELIMINARY 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 PRELIMINARY 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 DECEMBER 9, 1999 PROSPECTUS SHARES LOGO COMMON STOCK ------------------------ This is Pets.com's initial public offering of common stock. The U.S. underwriters are offering shares in the U.S. and Canada and the international managers are offering shares outside the U.S. and Canada. We expect the public offering price to be between $ and $ per share. After pricing this offering, we expect that the common stock will be quoted on the Nasdaq National Market under the symbol "IPET." INVESTING IN THE COMMON STOCK INVOLVES MATERIAL RISKS WHICH ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS. ------------------------
PER SHARE TOTAL --------- ----- Public offering price....................................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to Pets.com, Inc................. $ $
The U.S. underwriters may also purchase up to an additional shares from Pets.com at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. The international managers may similarly purchase up to an additional shares from Pets.com. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The shares of common stock will be ready for delivery in New York, New York on or about , 2000. ------------------------ MERRILL LYNCH & CO. BEAR, STEARNS & CO. INC. THOMAS WEISEL PARTNERS LLC WARBURG DILLON READ LLC ------------------------ The date of this prospectus is , 2000. 3 TABLE OF CONTENTS
PAGE ---- Summary..................................................... 1 Risk Factors................................................ 5 Forward-Looking Statements.................................. 18 Use of Proceeds............................................. 18 Dividend Policy............................................. 18 Capitalization.............................................. 19 Dilution.................................................... 20 Selected Financial Information.............................. 21 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 22 Business.................................................... 27 Management.................................................. 43 Related Party Transactions.................................. 55 Principal and Selling Stockholders.......................... 58 Description of Capital Stock................................ 60 Shares Eligible for Future Sale............................. 62 Underwriting................................................ 64 Legal Matters............................................... 68 Experts..................................................... 68 Additional Information...................................... 68 Index to 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 as of the date on the front cover of this prospectus only. Our business, financial condition, results of operation and prospects may have changed since that date. Pets.com(TM), the Pets.com logo, Because Pets Can't Drive(TM), Keep It Comin'(TM), More Products Than A Superstore Delivers(TM), People Helping Animals, Animals Helping People(TM), and Pets.commitment(TM) are trademarks of Pets.com and Pets.com has the right to use Pets.complete(TM). All other brand names or trademarks appearing in this prospectus are the property of their respective holders. Use or display by Pets.com of other parties' trademarks, trade dress or products is not intended to and does not imply a relationship with, or endorsement or sponsorship of, Pets.com by the trademark or trade dress owners. 4 PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and financial statements appearing elsewhere in this prospectus. PETS.COM, INC. We are a leading online retailer of pet products, integrating product sales with expert information on pets and their care. We are committed to serving pets and their owners with the best care possible through a broad product selection, expert information and superior service. We seek to address the entire pet products market, transcending the limited product selection of superstores, specialty stores and grocery stores. Our broad selection of approximately 12,000 SKUs is integrated with extensive pet-related information and resources designed to help consumers make informed purchasing decisions. We designed our Web store to provide our customers with a convenient, one-stop shopping experience that is organized to reflect how consumers think about shopping for their pets. Our Web store addresses the needs of many of the most popular pets, including dogs, cats, birds, fish, reptiles, ferrets, and other small pets. We provide quality customer service through our in-house distribution, fulfillment, customer service, and technology operations. Furthermore, we encourage participation in the pet community both through our Web store and through Pets.commitment, our charitable foundation that supports the role that pets and people play in each others' lives. The pet products industry in the United States is a large and growing market characterized by a loyal and emotion-driven customer base. According to the Pet Industry Joint Advisory Council, U.S. consumer spending on pet products and services grew at an annual rate of approximately 9% per year between 1993 and 1997, totaling approximately $23 billion at the end of 1997. Today, more than 60% of U.S. households own a pet and 40% of those households own more than one pet, according to a recent American Pet Products Manufacturers Association study. The pet products market has traditionally been served by a combination of traditional store-based retailers, including superstores, independent specialty stores and grocery stores. This market is highly fragmented, and generally requires consumers to expend considerable time and effort shopping for pet products in multiple stores to meet all their needs. We provide consumers with one-stop shopping for their pet care needs. We seek to attract and retain consumers by emphasizing the following key attributes: Extensive Product Selection. With only one distribution center at this time, our SKU count is currently equivalent to the number available at the largest pet superstores, and by the middle of 2000 we expect our SKU count will increase to approximately two times the SKUs available at these stores. Expert Information and Professional Resources. We provide consumers extensive pet and pet care information integrated throughout our Web store through our in-house staff of pet experts and strategic relationships. Superior Shopping Experience. We believe that we provide an intuitive, easy-to-use Web store, categorized and organized the way people think about shopping for their pets. We also offer our customers a highly streamlined checkout experience and direct delivery to their doors. Quality Customer Service. We have invested significant resources to create our own fulfillment, distribution, and both online and in-person help service functions to enable us to better control all aspects of the customers' shopping experience. Community. Visitors to our Web store can participate online in 60 different pet discussion forums, sign up for our online newsletter and get information on our Pets.commitment charitable foundation. Our objective is to become one of the world's leading retailers of pet products. Key elements of our strategy include: - Building enduring brand equity through an advertising strategy which includes our Pets.com sock puppet brand icon, relationships with select online companies, and support for national events and pet-related local market activities; - Offering the broadest possible pet product selection available to our customers at competitive prices; 1 5 - Establishing our private label brands for pet products marketed under the Pets.complete and Pets.com brand names; - Providing increasingly comprehensive and relevant content in conjunction with a range of consumer and veterinary care partners; - Delivering superior customer service and promoting repeat purchases through investments in people, technology and distribution facilities; - Continuing to maintain and expand our relationship with Amazon.com which is currently our largest stockholder; and - Expanding internationally in order to capitalize on the global market. OTHER INFORMATION Unless otherwise noted, this prospectus assumes: - the automatic conversion of our outstanding convertible preferred stock into common stock on a one-for-one basis upon the closing of this offering; - our reincorporation in Delaware and the filing of our amended and restated certificate of incorporation authorizing 150,000,000 shares of common stock and a class of 5,000,000 shares of undesignated preferred stock upon the closing of the offering; and - no exercise by the underwriters of their options to purchase additional shares of our common stock in the offering. Our net sales were $0.6 million for the period from February 1999 (inception) through September 30, 1999. Our net losses were $19.4 million for the same period. We were formed in February 1999 and reincorporated in Delaware in 2000. Our principal executive offices are located at 435 Brannan Street, Suite 100, San Francisco, California 94107. Our telephone number is (415) 222-9999. Our Web store address is www.pets.com. Information contained in our Web store does not constitute part of this prospectus. 2 6 THE OFFERINGS Shares offered by Pets.com U.S. offering.......................... shares International offering............... shares ----------------- Total........................ shares
Shares outstanding after the offering..................... shares Use of proceeds.............. We estimate that our net proceeds from this offering without exercise of the over-allotment options will be approximately $79.9 million. We intend to use these net proceeds for general corporate purposes, including expansion of our marketing and brand building efforts, expansion and building of distribution centers, and working capital. See "Use of Proceeds." 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 the common stock. Proposed Nasdaq National Market symbol................ "IPET" In addition, the information above excludes, as of December 9, 1999, 1,335,250 shares issuable upon exercise of options granted under our stock plans, and 2,500,000 shares available for grant under our stock plans. This number assumes that the underwriters' over-allotment option is not exercised. If the over-allotment options are exercised in full, we will issue and sell an additional shares. 3 7 SUMMARY FINANCIAL DATA (IN THOUSANDS) The following table sets forth a summary of our statement of operations data for the periods presented. The pro forma net loss per share for the period from February 17, 1999 (inception) through September 30, 1999 reflects the conversion of our convertible preferred stock upon completion of this offering.
PERIOD FROM FEBRUARY 17, 1999 (INCEPTION) QUARTER ENDED THROUGH QUARTER ENDED SEPTEMBER 30, SEPTEMBER 30, JUNE 30, 1999 1999 1999 ------------- ------------- ----------------- STATEMENT OF OPERATIONS DATA: Net sales........................................ $ 39 $ 568 $ 619 Gross margin..................................... (37) (1,198) (1,223) Total operating expenses......................... 3,584 15,231 18,832 ---------- ---------- ----------- Operating loss................................... (3,621) (16,429) (20,055) Net loss......................................... $ (3,498) $ (15,852) $ (19,355) ========== ========== =========== Basic and diluted net loss per share............. $ (1.93) $ (8.75) $ (10.84) Weighted average shares outstanding used to compute basic and diluted net loss per share... 1,811,837 1,811,837 1,786,156 Pro forma basic and diluted net loss per share... $ (1.24) Weighted average shares outstanding used to compute pro forma basic and diluted net loss per share...................................... 15,636,001
The following data sets forth a summary of our balance sheet data as of September 30, 1999 - On an actual basis; - On a pro forma basis to give effect to the automatic conversion of all of the outstanding shares of our convertible preferred stock into shares of common stock upon the closing of this offering; and - On a pro forma as adjusted basis to reflect the automatic conversion of all of the outstanding shares of our convertible preferred stock and our receipt of the estimated net proceeds from the sale of shares of common stock in this offering at an estimated price of $ per share.
SEPTEMBER 30, 1999 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- BALANCE SHEET DATA: Cash and cash equivalents................................... $36,231 $36,231 $116,101 Working capital............................................. 34,913 34,913 114,783 Total assets................................................ 48,399 48,399 128,269 Convertible preferred stock and related paid-in capital..... 60,382 -- -- Total stockholders' equity.................................. 42,584 42,584 122,454
4 8 RISK FACTORS You should carefully consider the following risks before making an investment in our company. You should also refer to the other information set forth in this prospectus, including the discussions set forth in "Special Note Regarding Forward-Looking Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as our financial statements and the related notes. Our business, financial condition, or results of operations could be harmed as a result of any of the following risks. In such case, the trading of our common stock could decline, and you could lose all or part of your investment. RISKS RELATED TO OUR BUSINESS WE ONLY BEGAN SELLING OUR PRODUCTS IN FEBRUARY 1999 AND WE OPERATE IN A NEW AND RAPIDLY EVOLVING MARKET, WHICH MAKES IT DIFFICULT FOR INVESTORS TO DETERMINE WHETHER WE WILL ACCOMPLISH OUR OBJECTIVES Because we were formed in February 1999 and we have yet to achieve meaningful revenues, we have a limited operating history on which investors and securities analysts can base an evaluation of our business and prospects. We have limited insight into trends that may emerge and affect our business. Accordingly, you must consider the risks and difficulties we face as an early stage company with limited operating history in a new and rapidly evolving market. We cannot be certain that our business strategy will be successful. CONSUMERS OF PET PRODUCTS MAY NOT CHOOSE TO SHOP IN OUR WEB STORE AND PURCHASE OUR PRODUCTS, WHICH WOULD REDUCE OUR REVENUES AND PREVENT US FROM BECOMING PROFITABLE We may not be able to attract a large number of potential customers who shop in traditional retail stores to shop in our Web store. Furthermore, we may incur significantly higher and more sustained advertising and promotional expenditures than we currently anticipate to attract online shoppers to our Web store and to convert those shoppers to purchasing customers. As a result, we may not be able to achieve profitability, and even if we are successful at attracting online customers, we expect it will take several years to build a critical mass of these customers. Specific factors that could prevent widespread customer acceptance of our online solution include: - Shipping charges, which do not apply to shopping at traditional retail stores; - Delivery time associated with Internet orders, as compared to the immediate receipt of products at a physical store; - Pricing that does not meet customer expectations of "finding the lowest price on the Internet;" - Customer concerns about buying products without first seeing them in person or physically handling them; - Lack of consumer awareness of our Web store; - Differentiating our Web store from those of our competitors; - Customer concerns about the security of online transactions and the privacy of their personal information; - Product damage from shipping, delayed shipments, or shipments of wrong or expired products, resulting in a failure to establish customers' trust in buying pet store items online; and - Difficulties in returning or exchanging items purchased in our Web store. WE HAVE A HISTORY OF LOSSES AND WE EXPECT SIGNIFICANT INCREASES IN OUR COSTS AND EXPENSES TO RESULT IN CONTINUING LOSSES FOR AT LEAST THE NEXT FOUR YEARS We incurred net losses of $15.9 million for the three-month period ended September 30, 1999 and cumulative losses of $19.4 million from our inception through September 30, 1999. We have not achieved profitability. We only began selling products in February 1999 and have yet to achieve meaningful revenue, and cannot be certain that we will obtain enough customer traffic or a high enough volume of purchases to 5 9 generate sufficient revenues and achieve profitability. We believe that we will continue to incur operating and net losses for at least the next four years, and possibly longer, and that the rate at which we will incur such losses will increase significantly from current levels. We intend to increase our costs and expenses substantially as we: - Increase our sales and marketing activities, such as increasing advertising expenses and entering into strategic marketing agreements with third parties; - Open additional distribution centers and expand our existing distribution center; - Provide our customers with shipping below our actual costs to attract customers; - Increase our general and administrative functions to support our growing operations; - Expand our customer support organization to better serve customer needs; and - Develop or license from third parties enhanced technologies and features to improve our Web store. Because we will spend these amounts before we receive any incremental revenues from these efforts, our losses will be greater than the losses we would incur if we developed our business more slowly. In addition, we may find that these efforts are more expensive than we currently anticipate or that these efforts may not result in proportionate increases in our revenues, which would further increase our losses. We may also engage in promotional efforts such as coupons or discounts that would reduce our revenues. WE MAY NOT SUCCEED IN ESTABLISHING THE PETS.COM BRAND, WHICH WOULD ADVERSELY AFFECT CUSTOMER ACCEPTANCE AND OUR REVENUES Due to the early stage and competitive nature of the online market for pet products, information and services, if we do not establish our brand quickly, we may lose the opportunity to build a critical mass of customers. Promoting and positioning our brand will depend largely on the success of our marketing efforts and our ability to provide consistent, high quality customer experiences. To promote our brand, we will incur substantial expense in our advertising efforts on television, radio, magazines and other forms of traditional media, along with advertising on Web sites that we believe our customers are likely to visit. We will also incur substantial expense in our efforts to enter into strategic alliances with, including making investments in, online and more traditional companies that we believe will promote our brand and drive customers to our Web store. To provide a high quality customer experience, we will also need to spend money to attract and train customer service personnel. We also will incur substantial expenses to develop content to help build our brand and attract customers to our Web store. If these brand promotion activities do not yield increased revenues, we will incur additional losses. Beginning in the first half of 2000, we intend to introduce a line of private label pet products. We may not achieve consumer acceptance of these products. Further, we may be forced to incur higher expenses in order to produce or market our private label product lines, which could negatively affect our financial condition or operating results. INCREASING OUR PRODUCT DISTRIBUTION CAPACITY IS AN IMPORTANT PART OF OUR BUSINESS STRATEGY AND WILL REQUIRE SIGNIFICANT INVESTMENTS IN CASH AND MANAGEMENT RESOURCES. IF WE DO NOT SUCCESSFULLY BUILD ADDITIONAL DISTRIBUTION CENTERS, WE WILL FACE DIFFICULTIES IN INCREASING OUR REVENUES AND WE MAY LOSE CUSTOMERS TO OUR COMPETITORS We currently have one distribution center in Union City, California which has a satellite operation in Hayward, California. We expect to begin operating a second distribution center in the first half of 2000, and a third distribution center within twenty-four months thereafter. Our success depends on our ability to build additional distribution centers to accommodate increases in customer demand, reduce our shipping costs, reduce shipping times to customers, provide for a large product selection and increase our gross margins. If we do not successfully build additional distribution centers in time to accommodate increases in customer demand, we may not be able to increase our revenues and we may lose customers to our competitors. Opening additional distribution centers will require significant capital investments in facilities and equipment, will require us to hire and train a significant number of new employees, and could divert 6 10 management attention from other issues. We expect to invest from $7 million to $9 million in facilities and equipment in connection with opening an additional distribution center during the first half of 2000. For additional information relating to the risks we may face in obtaining additional financing, see "We may need to raise additional funds and these funds may not be available to us when we need them. If we cannot raise additional funds when we need them, our business could fail." SINCE WE CURRENTLY OPERATE ONLY ONE DISTRIBUTION CENTER LOCATED IN THE SAN FRANCISCO BAY AREA, WE ARE SUSCEPTIBLE TO THE RISK OF DAMAGE TO OUR DISTRIBUTION CENTER Since we currently only operate one distribution center out of which we ship products to nearly all of our customers, we are susceptible to power and equipment failures, disruptions in our order fulfillment and delivery systems, and fires, floods and other disasters. Furthermore, since our distribution center is located in the San Francisco Bay Area, which is an earthquake-sensitive area, we are particularly susceptible to the risk of damage to, or total destruction of, our distribution center and the surrounding transportation infrastructure caused by earthquakes. We cannot assure you that we are adequately insured to cover the total amount of any losses caused by any of the above events. In addition, we are not insured against any losses due to interruptions in our business due to damage to or destruction of our distribution center caused by earthquakes or to major transportation infrastructure disruptions or other events that do not occur on our premises. WE HAVE ONLY BEEN SELLING PRODUCTS FOR TWO FULL QUARTERS. WE EXPECT OUR QUARTERLY FINANCIAL RESULTS TO FLUCTUATE AND OUR EARLY STAGE OF DEVELOPMENT LIMITS OUR ABILITY TO PREDICT REVENUES AND EXPENSES PRECISELY We have only been selling products for two full quarters and, as a result, we have insufficient financial data on which to forecast our revenues and operating expenses. In addition, we have insufficient results for investors and securities analysts to use in order to identify historical trends or even to make quarter to quarter comparisons of our operating results. To the extent our revenues and operating results fall below the expectations of investors and securities analysts, the trading price of our common stock may fall significantly. We expect that our revenues and operating results will vary significantly from quarter to quarter due to a number of factors, including: - Consumer traffic to our Web store may fluctuate depending on the effectiveness of our sales and marketing campaign, the timing and level of promotion support we receive from Amazon.com and the effectiveness of content on our Web store and other factors; - The level of repeat purchases by customers, average order size and mix of products sold may fluctuate as a result of the experience consumers have on our Web store, the availability of products we have for sale, seasonal factors and other factors; - Our revenues may decline as a result of promotional offers made by our competitors, the introduction of products or services offered by our competitors, or the introduction of new competitors into our market; - We may experience consumer dissatisfaction with our Web store as we add or change features, or as a result of technical difficulties on our Web store that do not permit a consumer to access our Web store or to complete a shopping session; - Our expenses will also fluctuate depending on the timing and nature of expansion of our distribution center; and our ability to achieve efficiencies and lower shipping costs as a result of this expansion; - Changes in government regulation of the Internet, particularly the imposition of sales tax for online transactions, may discourage online shopping and result in decreased revenues; and - We may incur costs related to potential acquisitions of technology or businesses. Our operating expenses are largely based on anticipated revenue trends and a high percentage of our expenses are fixed in the short term. As a result, a delay in generating or recognizing revenue for any reason could result in substantial additional operating losses. The volume and timing of orders of pet products on our Web store are difficult to predict because the online market for such products is in its infancy. Due to the limited operating history of our Web store, we do not have a material amount of 7 11 repeat business from regular customers. Because our Web store is designed to encourage repeat business and we do not yet have sufficient historical data on how successful this strategy will be, we cannot currently forecast revenue from regular customers or overall anticipated revenue trends. Furthermore, as a result of our limited operating history, it is difficult to predict the volatility associated with the nature and timing of special promotional offers, such as reducing the price on selected products, providing redeemable coupons to customers, or offering shipping below our actual costs, and our advertising efforts. For example, our revenues may decrease significantly after a promotional offer has expired or prior to an expected offer. In addition, our advertising expenses may be disproportionately higher than our anticipated revenues from these advertising efforts. WE WILL NEED TO RAISE ADDITIONAL FUNDS AND THESE FUNDS MAY NOT BE AVAILABLE TO US WHEN WE NEED THEM. IF WE CANNOT RAISE ADDITIONAL FUNDS WHEN WE NEED THEM, OUR BUSINESS COULD FAIL Based on our current projections, we will need to raise funds over time through the issuance of equity, equity-related or debt securities or through obtaining credit from financial institutions in addition to the funds we are raising in this offering. We cannot be certain that additional funds will be available to us on favorable terms when required, or at all. If this additional financing is not available to us we may need to dramatically change our business plan, sell or merge our business, or face bankruptcy. In addition, our issuance of equity or equity-related securities will dilute the ownership interest of existing stockholders and our issuance of debt securities could increase the risk or perceived risk of our company. Any of these actions could cause our stock price to fall. A PORTION OF OUR REVENUES MAY BE SEASONAL, WHICH COULD CAUSE OUR QUARTERLY FINANCIAL RESULTS TO FLUCTUATE. THE FACT THAT WE HAVE NOT YET GENERATED REVENUE FOR A FULL YEAR AND THE RAPID GROWTH IN OUR REVENUES SINCE OUR INCEPTION MAKE IT IMPOSSIBLE TO ASSESS THE IMPACT OF THESE FACTORS A portion of our revenues may be seasonal in nature, associated with the sale of gift products for pets during the holiday season, the sale of outdoor and activity-related pet products during the Spring season and the sale of flea and tick products for pets during the Summer season. In addition, consumer fads and other changes in consumer trends may cause shifts in purchasing patterns, resulting in significant fluctuations in our operating results from one quarter to the next. The fact that we have not yet generated revenue for a full year and the rapid growth in our revenues since our inception make it impossible to assess the impact of these factors. WE DEPEND ON OUR ADVERTISING AGREEMENT WITH AMAZON.COM TO ATTRACT CUSTOMERS TO OUR WEB STORE AND BUILD OUR BRAND. IN THE EVENT OUR ADVERTISING AGREEMENT WITH AMAZON.COM WERE TO TERMINATE, WE COULD FACE SIGNIFICANTLY HIGHER COSTS AND SIGNIFICANTLY MORE DIFFICULTY IN ATTRACTING CUSTOMERS We have entered into an advertising agreement with Amazon.com whereby Amazon.com provides us with online promotions mutually agreed upon, such as emails about Pets.com, and one or more links from different locations on its Web site to our Web store, consistent with Amazon.com's other marketing arrangements. We experienced increases in traffic to our Web store after the initiation of these promotions and have begun to derive traffic from the Amazon.com Web site. Although our current agreement with Amazon.com expires in October 2000, Amazon.com could terminate most of these online promotions at any time. We cannot be certain that our relationship with Amazon.com will be available to us in the future on acceptable commercial terms, if at all. If we are unable to maintain our relationship with Amazon.com or agree upon the terms and conditions of continuing the agreement beyond October 2000, our customer traffic could fall and our brand identity could be adversely impacted resulting in decreased revenues, and our marketing expenses could increase as we are forced to incur higher costs to attract customers. In addition, our relationship with Amazon.com is not exclusive. Amazon.com could partner with any of our competitors or offer competing products, information or services directly from its Web site. Furthermore, by virtue of the fact that we derive traffic directly from the Amazon.com Web site, any interruption in service of Amazon.com's Web site or the distribution of products to its customers could reduce the number of customers to our Web store and reduce our revenues. Because we depend on the brand awareness of Amazon.com to help build our brand, negative publicity about Amazon.com or a reduction of the effectiveness of its brand could also have a negative impact on our brand and reduce our revenues. 8 12 WE UTILIZE CONSULTING ADVICE AND SUPPORT FROM AMAZON.COM FOR OPERATIONAL AND STRATEGIC EXPERTISE. AMAZON.COM HAS NO CONTRACTUAL OBLIGATION TO PROVIDE THIS SUPPORT. IF AMAZON.COM DOES NOT CONTINUE TO PROVIDE THE ADVICE AND SUPPORT WE NEED, WE COULD INCUR HIGHER OPERATIONAL EXPENSES IN RUNNING OUR BUSINESS AND DIFFICULTIES IN EXECUTING ON OUR BUSINESS PLAN Since our inception, Amazon.com has provided us with free consulting services relating to the operation of our business. During this time, Amazon.com has also provided us with assistance in negotiating with vendors who also do business with Amazon.com. This assistance has allowed us to incur significantly lower operational expenses than we could otherwise have achieved at our early stage of development. Amazon.com has provided these services to us because of Amazon.com's significant equity stake in us. Amazon.com, however, is under no contractual obligation to continue to provide this advice and support. While Amazon.com will continue to own over % of our common stock after this offering, we cannot be certain that Amazon.com will continue to provide, or provide at all, the level of consulting advice and support that Amazon.com has provided to us in the past. If we are unable to maintain our relationship with Amazon.com, we would lose access to important operational and strategic expertise, which could harm our business. WE DEPEND ON OUR ABILITY TO BUILD AND MAINTAIN RELATIONSHIPS WITH OUR SUPPLIERS TO OBTAIN SUFFICIENT QUANTITIES OF QUALITY MERCHANDISE ON ACCEPTABLE COMMERCIAL TERMS. IF WE FAIL TO MAINTAIN OUR SUPPLIER RELATIONSHIPS, OUR REVENUES WILL DECLINE Our business strategy depends on providing a large selection of well-known and high-quality branded products which in turn depends on our ability to maintain relationships with a significant number of suppliers. We currently purchase our products from approximately 200 suppliers. Our contracts or arrangements with suppliers do not guarantee the availability of merchandise, establish guaranteed prices or provide for the continuation of particular pricing practices. Our current suppliers may not continue to sell products to us on current terms or at all, and we may not be able to establish new suppliers to ensure delivery of products in a timely manner or on terms acceptable to us. Furthermore, because many of the products offered on our Web store are well-known branded products, if suppliers of these products do not supply products to us, we may lose customers who are unwilling to substitute for other brands we carry. We are also dependent on suppliers for assuring the quality of products supplied to us. Because we ship products directly to our customers, if the quality of products supplied to us fall below our customers' expectations, we may lose customers. In addition, our supply contracts do not restrict our suppliers from selling products to our online competitors or to retailers other than online retailers, which could limit our ability to supply the quantity of products requested by our customers. We are also subject to the risks our suppliers face, including employee strikes and inclement weather. Our failure to deliver a large selection of high-quality and well-known branded products to our customers in a timely and accurate manner, and at acceptable prices, would harm our reputation, the Pets.com brand and our results of operations. WE FACE THE RISK OF SYSTEMS INTERRUPTIONS AND CAPACITY CONSTRAINTS ON OUR WEB SITE, POSSIBLY RESULTING IN ADVERSE PUBLICITY, REVENUE LOSSES AND EROSION OF CUSTOMER TRUST The satisfactory performance, reliability and availability of our Web store, transaction processing systems and network infrastructure are critical to our reputation and our ability to attract and retain customers and to maintain adequate customer service levels. Any future systems interruption that results in the unavailability of our Web store or reduced order fulfillment performance could result in negative publicity and reduce the volume of goods sold and the attractiveness of our Web store, which could negatively affect our revenues. For the nine months ended September 30, 1999, there were three periods of one to three hours and one period of thirteen hours during which users were able to access our site but unable to complete transactions. There was also one period of two hours during which our site was not accessible as a result of scheduled maintenance. Nevertheless, we may experience temporary system interruptions for a variety of reasons in the future, including power failures, software bugs and an overwhelming number of visitors trying to reach our Web store during sales or other promotions. We may not be able to correct a problem in a timely manner. Because we are dependent in part on outside consultants for the implementation of certain aspects of our system and because some of the reasons for a systems interruption may be outside of our control, we also may not be able to remedy the problem quickly or at all. 9 13 We opened our Web store for customers in February 1999 and to the extent that customer traffic grows substantially, we will need to expand the capacity of our systems to accommodate a larger number of visitors. Any inability to scale our systems may cause unanticipated system disruptions, slower response times, degradation in levels of customer service, impaired quality and speed of order fulfillment, or delays in reporting accurate financial information. We are not certain that we will be able to project the rate or timing of increases, if any, in the use of our Web store accurately or in a timely manner to permit us to effectively upgrade and expand our transaction-processing systems or to integrate smoothly any newly developed or purchased modules with our existing systems. WE HAVE GROWN VERY RAPIDLY. THIS GROWTH HAS PLACED, AND OUR ANTICIPATED FUTURE OPERATIONS WILL CONTINUE TO PLACE, A SIGNIFICANT STRAIN ON OUR MANAGEMENT SYSTEMS AND RESOURCES. WE WILL NOT BE ABLE TO IMPLEMENT OUR BUSINESS STRATEGY UNLESS WE ARE ABLE TO EFFECTIVELY MANAGE THIS STRAIN ON OUR SYSTEMS AND RESOURCES We have rapidly and significantly expanded our operations, and anticipate that we will continue to expand. From March 31, 1999 to September 30, 1999 to November 30, 1999 we grew from 4 to 123 to 260 employees, respectively. We currently have one distribution center, and expect to begin operating a second distribution center in the first half of 2000 and a third distribution center within twenty-four months thereafter. This growth has placed, and our anticipated future operations will continue to place, a significant strain on our management systems and resources. We will not be able to implement our business strategy unless we are able to effectively manage this strain on our systems and resources. We will not be able to increase revenues unless we continue to improve our transaction-processing, operational, financial and managerial controls, reporting systems and procedures, expand, train, supervise and manage our work force, and manage multiple relationships with third parties. WE ENTER INTO STRATEGIC RELATIONSHIPS TO HELP PROMOTE OUR WEB STORE. IF WE FAIL TO MAINTAIN OR ENHANCE THESE RELATIONSHIPS, OUR DEVELOPMENT COULD BE HINDERED We believe that our ability to attract customers, facilitate broad market acceptance of our products and the Pets.com brand, and enhance our sales and marketing capabilities depends on our ability to develop and maintain strategic relationships with Amazon.com, other pets-related Web sites and portals, and other Web sites that can drive customer traffic to our Web store. If we are unable to develop or maintain key relationships, we may have difficulty attracting and retaining customers. COMPETITION FROM BOTH TRADITIONAL AND ONLINE RETAILERS MAY RESULT IN PRICE REDUCTIONS AND DECREASED DEMAND FOR OUR PRODUCTS AND SERVICES We compete in a market that is new, rapidly evolving and highly competitive, and we expect competition to intensify in the future. Increased competition could result in price reductions, fewer customer orders, reduced gross margins and loss of market share. We currently or potentially compete with a variety of companies, many of which have significantly greater financial, technical, marketing and other resources. These competitors can be divided into several groups: online stores that specialize in pet products such as Petopia.com, Inc., PetsMart.com, Inc. and PetStore.com, Inc., online stores that offer pet products, superstore retailers of pet products such as Petco Animal Supplies, Inc. and PetsMart, Inc., specialty pet stores, mass market retailers such as Wal Mart Stores, Inc., Kmart Corporation and Target Stores, Inc., supermarkets, warehouse clubs such as Costco Companies, Inc., mail order suppliers of pet products, and pet supply departments at major department stores. Many of these companies, which include national, regional and local chains, have existed for a longer period, have greater financial resources, have established marketing relationships with leading manufacturers and advertisers, and have longer established brand recognition among customers. We believe we may face a significant competitive challenge from our competitors forming alliances with each other. For instance, Petopia, Inc. is owned in part by Petco Animal Supplies, Inc., and PetsMart.com, Inc. is owned in part by PetsMart, Inc. The combined resources of these alliances could pose a significant competitive challenge to Pets.com. These relationships may enable these online stores to achieve greater brand recognition, particularly in the case of PetsMart.com, Inc., by leveraging the better established brand awareness of their pet retail store partner. These relationships may also enable these online stores to negotiate better pricing and other terms from suppliers by aggregating their demand for 10 14 products and negotiating volume discounts. Our inability to partner with a major pet store chain could be a major competitive disadvantage to us. We also believe we may face significant competitive challenges from discount general merchandise stores, mass market retailers and other retailers that commence or expand their presence on the Internet to include pet products. Finally, we are aware of numerous other smaller entrepreneurial companies that are focusing significant resources on developing and marketing products, information and services that will compete directly with those offered at Pets.com. We believe that there may be a significant advantage in establishing a large customer base before our competitors do so. If we fail to attract and retain a large customer base and our competitors establish a more prominent market position relative to ours, this could inhibit our ability to grow. We believe the principal factors in our market include brand recognition, product selection, quality of Web store content, reliability and speed of order shipment, customer service, speed and accessibility of our Web store, personalized service, convenience and price. We will have little or no control over how successful our competitors are in addressing these factors. In addition, with little difficulty, our online competitors can duplicate many of the products, services and content offered on our site. EXPANSION OF OUR INTERNATIONAL OPERATIONS WILL REQUIRE MANAGEMENT ATTENTION AND RESOURCES AND MAY BE UNSUCCESSFUL WHICH COULD HARM OUR BUSINESS To date, we have conducted no international operations but we intend to make an investment in a UK-based company that intends to sell pet products online. We plan to build local versions of our Web store for foreign companies or expand our international operations through acquisitions or alliances with third parties. Our expansion plans will require management attention and resources and may be unsuccessful. We have no experience in selling our products to conform to local cultures, standards and policies. We may have to compete with local companies which understand the local market better than we do. In addition, to achieve satisfactory performance for consumers in international locations it will be necessary to locate physical facilities, such as server computers and distribution centers in the foreign market. We do not have experience establishing such facilities overseas. We may not be successful in expanding into any international markets or in generating revenues from foreign operations. In addition, different privacy, censorship and liability standards and regulations and different intellectual property laws in foreign countries may cause our business to be harmed. Furthermore, once we expand internationally we expect to incur net losses in developing foreign markets for the foreseeable future. OUR SYSTEMS AND OPERATIONS, AND THOSE OF OUR SUPPLIERS AND SHIPPERS, ARE VULNERABLE TO NATURAL DISASTERS AND OTHER UNEXPECTED PROBLEMS Substantially all of our computer and communications hardware is located at our leased facility in San Francisco, California and our systems infrastructure is hosted at an Exodus Communications, Inc. facility in Santa Clara, California. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, earthquakes and similar events. In addition, our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays, loss of data or the inability to accept and fulfill customer orders. We do not currently have fully redundant systems or a formal disaster recovery plan and do not carry sufficient business interruption insurance to compensate for losses that may occur. Our suppliers also face these risks. We also depend on the efficient operation of Internet connections from customers to our systems. These connections, in turn, depend on the efficient operation of Web browsers, Internet service providers and Internet backbone service providers, all of which have had periodic operational problems or experienced outages. Any system delays, failures or loss of data, whatever the cause, could reduce customer satisfaction with our applications and services and harm our sales. GOVERNMENTAL REGULATION OF OUR BUSINESS COULD REQUIRE SIGNIFICANT EXPENSES, AND FAILURE TO COMPLY WITH CERTAIN REGULATIONS COULD RESULT IN CIVIL AND CRIMINAL PENALTIES Our business is subject to federal, state and local regulations relating to the shipment of pet food, live animals and pet products, advice relating to animal care, and other matters. Regulations in this area often require subjective interpretation, and we cannot be certain that our attempts to comply with these regulations will be deemed sufficient by the appropriate regulatory agencies. Violations of any regulations 11 15 could result in various civil and criminal penalties, including suspension or revocation of our licenses or registrations, seizure of our inventory, or monetary fines, which could adversely effect our operations. WE NEED TO HIRE AND RETAIN A NUMBER OF ADDITIONAL TECHNOLOGY, CONTENT AND PRODUCT ORIENTED PERSONNEL WHO MIGHT BE DIFFICULT TO FIND We intend to continue to hire a significant number of additional personnel, including software engineers, editorial and customer support personnel, marketing personnel, and warehouse and operational personnel. Competition for these individuals is intense, and we may not be able to attract, assimilate or retain additional highly qualified personnel in the future. The failure to attract, integrate, motivate and retain additional such employees could seriously harm our business. WE RELY ON THE SERVICES OF OUR KEY PERSONNEL, WHOSE KNOWLEDGE OF OUR BUSINESS AND TECHNICAL EXPERTISE WOULD BE DIFFICULT TO REPLACE We rely upon the continued service and performance of a relatively small number of key technical and senior management personnel. Our future success depends on our retention of these key employees, such as Julie Wainwright, our Chief Executive Officer. None of our key technical or senior management personnel are bound by employment agreements, and as a result, any of these employees could leave with little or no prior notice. If we lose any of our key technical and senior management personnel, our business could be seriously harmed. We do not have "key person" life insurance policies covering any of our employees. MANY MEMBERS OF OUR MANAGEMENT TEAM ARE NEW TO THE COMPANY OR TO THE PET PRODUCTS AND SERVICES INDUSTRY OR ONLINE BUSINESSES, AND OUR BUSINESS COULD BE SERIOUSLY HARMED IF INTEGRATION OF OUR MANAGEMENT TEAM INTO OUR COMPANY IS NOT SUCCESSFUL We have recently experienced significant growth in our management team. Paul Manca, our Chief Financial Officer, joined us in September 1999 and Ralph Lewis, our Vice President of Distribution and Logistics, joined us in November 1999. In addition, many of the members of our senior management team do not have prior experience in the pet products and services industry or in online businesses or in publicly traded companies. Our business could be seriously harmed if integration of our management team into our company is not successful. We expect that it will take time for our new management team to integrate into our company and it is too early to predict whether this integration will be successful. WE CANNOT BE CERTAIN THAT WE WILL BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY, AND WE MAY BE FOUND TO INFRINGE PROPRIETARY RIGHTS OF OTHERS, WHICH COULD HARM OUR BUSINESS We rely on a combination of trademark, trade secret and copyright law and contractual restrictions to protect our intellectual property. These afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our sales formats or to obtain and use information that we regard as proprietary, such as the technology used to operate our Web store, our content and our trademarks. We have filed applications for the registration of Pets.com(TM), the Pets.com logo, Because Pets Can't Drive(TM), Keep It Comin'(TM), More Products Than a Superstore Delivers(TM), People Helping Animals, Animals Helping People(TM), and Pets.commitment(TM) in the U.S. and in some other countries, although we have not secured registration of our marks to date. We have been granted the right to use Pets.complete(TM) from a third party in exchange for economic consideration. We may be unable to secure these registrations. It is also possible that our competitors or others will adopt service names similar to ours, thereby impeding our ability to build brand identity and possibly leading to customer confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of the term Pets.com or our other trademark applications. Any claims or customer confusion related to our trademarks, or our failure to obtain any trademark registration, would negatively affect our business. Litigation or proceedings before the U.S. Patent and Trademark Office may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets and domain names and to determine the validity and scope of the proprietary rights of others. Any litigation or adverse priority proceeding could result in substantial costs and diversion of resources and could seriously harm our business and operating 12 16 results. Finally, we intend to sell our products internationally, and the laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Third parties may also claim infringement by us with respect to past, current or future technologies. We expect that participants in our markets will be increasingly subject to infringement claims as the number of services and competitors in our industry segment grows. Any claim, whether meritorious or not, could be time-consuming, result in costly litigation, cause service upgrade delays or require us to enter into royalty or licensing agreements. These royalty or licensing agreements might not be available on terms acceptable to us or at all. WE MAY NOT BE ABLE TO PROTECT OUR DOMAIN NAMES IN ALL COUNTRIES OR AGAINST ALL INFRINGERS, WHICH COULD DECREASE THE VALUE OF OUR BRAND NAME AND PROPRIETARY RIGHTS We currently hold the Internet domain name "pets.com," as well as various other related names. Domain names generally are regulated by Internet regulatory bodies. The regulation of domain names in the United States and in foreign countries is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may not be able to acquire or maintain the domain names in all of the countries in which we conduct business which utilize the term "pets" or "pets.com." We are aware that other entities have already registered domain names utilizing the term "pets" or "pets.com." If we are unable to purchase these names from these entities on commercially reasonable terms or in the event we were to otherwise lose the ability to use a domain name in a particular country, we would be forced to incur significant additional expenses to market our products within that country, including the development of a new brand and the creation of new promotional materials and packaging. WE ARE SUBJECT TO PRODUCT LIABILITY CLAIMS AND MAY FACE LIABILITY FOR CONTENT ON OUR WEB STORE, ANY OF WHICH COULD HARM OUR FINANCIAL CONDITION AND LIQUIDITY Because we sell consumer products we may be subject to product liability claims resulting from injuries to persons and animals caused by the products we sell. We maintain limited product liability insurance. To the extent these claims are not covered by or are in excess of our product liability insurance, a successful product liability claim could harm our financial condition and liquidity. In addition, because we post product information and other content on our Web store and permit our customers to place content on our bulletin board systems and in other areas of our Web store, we face potential liability for negligence, copyright, patent, trademark, defamation, indecency and other claims based on the nature and content of the materials that we post or permit our customers to post. Such claims have been brought, and sometimes successfully pressed, against Internet content distributors. In addition, we do not and cannot practically screen all of the content generated by our users and placed on our Web store. Although we maintain general liability insurance of $3 million, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could harm our financial condition and liquidity. OUR OPERATIONS MAY BE DISRUPTED IF WE OR OUR PRODUCT SUPPLIERS OR OTHER VENDORS EXPERIENCE SYSTEMS FAILURE OR DATA CORRUPTION FROM THE YEAR 2000 ISSUE Any failure of our material systems, our product suppliers or others vendors' material systems or the Internet to be year 2000 compliant would have material adverse consequences for us. Such consequences would include difficulties in operating our Web store effectively, taking product orders, making product deliveries or conducting other fundamental parts of our business. We may be unable to detect or assess the effect of any failure well into the year 2000 and beyond. We are currently assessing the year 2000 readiness of the software, computer technology and other services that we use which may not be year 2000 compliant. We do not intend to develop a contingency plan to address situations that may result if our vendors or we experience material difficulties after January 1, 2000 as a result of the year 2000 problem. We also depend on the year 2000 compliance of the computer systems and financial services used by consumers. A significant disruption in the ability of consumers to reliably access the Internet or portions of it or to use their credit cards would have an adverse effect on demand for our products and services. See 13 17 "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000" for a further description of the issues we face with regard to the year 2000. AMAZON.COM, OUR OTHER EXISTING STOCKHOLDERS, AND OUR OFFICERS AND DIRECTORS, WILL STILL CONTROL THE MAJORITY OF OUR COMMON STOCK AFTER THIS OFFERING, WHICH COULD DISCOURAGE AN ACQUISITION OF US OR MAKE REMOVAL OF INCUMBENT MANAGEMENT MORE DIFFICULT After this offering, Amazon.com will beneficially own approximately % of our outstanding common stock, % if the underwriters' over-allotment option is exercised in full, and Randy Tinsley, Amazon.com's Vice President, Corporate Development, is a member of our Board of Directors. Therefore, Amazon.com will be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. Amazon.com's substantial equity stake in us could also make us a much less attractive acquisition candidate to potential acquirors, because Amazon.com would be able to block the acquisition by acting in concert with only a small number of other stockholders. In addition, Amazon would have sufficient votes to prevent the tax-free treatment of an acquisition. In addition, executive officers, directors and entities affiliated with them, including Amazon.com, will, in the aggregate, beneficially own approximately % of our outstanding common stock following the completion of this offering, % if the underwriters' over-allotment option is exercised in full. These stockholders, if acting together, would be able to decide all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. See "Principal Stockholders" for a description of Amazon.com's stock ownership relative to other stockholders, "Executive Officers and Directors" for background on Randy Tinsley, and "Related Party Transactions" for a description of our agreements with Amazon.com. RISKS RELATED TO INTERNET COMMERCE WE DEPEND ON CONTINUED USE OF THE INTERNET, AND IF THE USE OF THE INTERNET DOES NOT DEVELOP AS WE ANTICIPATE, OUR SALES MAY NOT GROW Our future revenues and profits, if any, substantially depend upon the widespread acceptance and use of the Internet as an effective medium of business and communication by our target customers. Rapid growth in the use of and interest in the Internet has occurred only recently. As a result, acceptance and use may not continue to develop at historical rates, and a sufficiently broad base of consumers may not adopt, and continue to use, the Internet and other online services as a medium of commerce. In addition, the Internet may not be accepted as a viable long-term commercial marketplace for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and performance improvements. Our success will depend, in large part, upon third parties maintaining the Internet infrastructure to provide a reliable network backbone with the speed, data capacity, security and hardware necessary for reliable Internet access and services. OUR SUCCESS DEPENDS ON THE WILLINGNESS OF CONSUMERS TO PURCHASE PET PRODUCTS OVER THE INTERNET INSTEAD OF THROUGH TRADITIONAL RETAILERS. CONSUMERS MAY NOT BE WILLING TO DO THIS The online market for pet products, information and services is in its infancy. The market is significantly less developed than the online market for books, auctions, music, software and numerous other consumer products. If this market does not gain widespread acceptance, our business may fail. Demand and market acceptance for recently introduced services and products on the Internet are subject to a high level of uncertainty, and there are few proven services and products. Our success will depend on our ability to engage consumers who have historically purchased pet products through traditional retailers. In order for us to be successful, many of these consumers must be willing to utilize new ways of buying pet products. In addition, a substantial proportion of the consumers who use our Web store may be using our service because it is new and different rather than because they believe it is a desirable way to purchase pet products. Such consumers may use our service only once or twice and then return to more familiar means of purchasing these products. 14 18 OUR SALES COULD BE NEGATIVELY AFFECTED IF WE ARE REQUIRED TO CHARGE TAXES ON PURCHASES We do not collect sales or other similar taxes in respect of goods sold by Pets.com, except from purchasers located in California. However, one or more states or the federal government may seek to impose sales tax collection obligations on out-of-state companies, such as Pets.com, which engage in or facilitate online commerce, and a number of proposals have been made at the state and local level that would impose additional taxes on the sale of goods and services through the Internet. In 1998, the U.S. federal government enacted legislation prohibiting states or other local authorities from imposing new taxes on Internet commerce for a three-year period, ending on October 1, 2001. This tax moratorium does not prohibit states or the Internal Revenue Service from collecting taxes on our income, if any, or from collecting taxes that are due under existing tax rules. A successful assertion by one or more states or any foreign country that we should collect sales or other taxes on the exchange of merchandise on our Web store could harm our business. In addition, a number of trade groups and government entities have publicly stated their objections to this tax moratorium and have argued for its repeal. The Federal Advisory Commission on Electronic Commerce is in the process of evaluating these issues. It is expected to make its recommendation to Congress in April 2000. There can be no assurance that future laws will not impose taxes or other regulations on Internet commerce, or that such three-year moratorium will not be repealed, or that it will be renewed when it expires, any of which events could substantially impair the growth of electronic commerce. We intend to open distribution centers from time to time in other states and, regardless of the outcome of this federal tax moratorium, may be required to collect sales or other similar taxes in respects of goods sold by Pets.com into these states. A successful assertion by one or more states or the federal government that we should collect further sales or other taxes on the sales of products through Pets.com could negatively affect our revenues and business. WE RELY ON THIRD-PARTY CARRIERS FOR PRODUCT SHIPMENTS TO US AND OUR CUSTOMERS, AND COULD LOSE CUSTOMERS IF THESE CARRIERS DO NOT ADEQUATELY SERVE OUR NEEDS We rely upon third-party carriers for product shipments, including shipments to and from our distribution facility. We are therefore subject to the risks, including employee strikes and inclement weather, associated with such carriers' ability to provide delivery services to meet our shipping needs. In addition, failure to deliver products to our customers in a timely manner would damage our reputation and brand. BECAUSE WE ARE UNABLE TO OBTAIN SIGNATURES FROM OUR CUSTOMERS WHEN WE PROCESS ORDERS ONLINE, WE ARE EXPOSED TO RISKS ASSOCIATED WITH CREDIT CARD FRAUD A failure to adequately control fraudulent credit card transactions would harm our net sales and results of operations because we do not carry insurance against this risk. Under current credit card practices, we are liable for fraudulent credit card transactions because we do not obtain a cardholder's signature. To date, we have experienced almost no losses from credit card fraud, but we face the risk of significant losses from this fraud as our sales increase. Our failure to adequately control fraudulent credit card transactions could reduce our collections and harm our business. OUR BUSINESS COULD BE HARMED IF WE FAIL TO PREVENT ONLINE COMMERCE SECURITY BREACHES. WE MAY NEED TO EXPEND SIGNIFICANT RESOURCES TO PROTECT AGAINST SECURITY BREACHES OR TO ADDRESS PROBLEMS CAUSED BY BREACHES A significant barrier to online commerce and communications is the secure transmission of confidential information over public networks, and our failure to prevent security breaches could harm our business. Currently, a significant number of our users authorize us to bill their credit card accounts directly for all products sold by us. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication technology to effect secure transmission of confidential information, including customer credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography, or other developments may result in a compromise or breach of the technology used by us to protect customer transaction data. Any such compromise of our security could harm our reputation and expose us to a risk of loss or litigation and possible liability and, therefore, harm our business. In addition, a party who is able to circumvent our security measures could misappropriate 15 19 proprietary information or cause interruptions in our operations. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Security breaches could damage our reputation. Our insurance policies carry low coverage limits, which may not be adequate to reimburse us for losses caused by security breaches. IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR SERVICES COULD BECOME OBSOLETE AND OUR BUSINESS WOULD BE SERIOUSLY HARMED As the Internet and online commerce industry evolve, we must license leading technologies useful in our business, enhance our existing services, develop new services and technology that address the increasingly sophisticated and varied needs of our prospective customers and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. We may not be able to successfully implement new technologies or adapt our Web store, proprietary technology and transaction-processing systems to customer requirements or emerging industry standards. If we are unable to do so, it could adversely impact our ability to build the Pets.com brand and attract and retain customers. GOVERNMENTAL REGULATION OF THE INTERNET AND DATA TRANSMISSION OVER THE INTERNET MAY NEGATIVELY AFFECT OUR CUSTOMERS AND RESULT IN A DECREASE IN DEMAND FOR OUR PRODUCTS, WHICH WOULD CAUSE A DECLINE IN OUR SALES Laws and regulations directly applicable to communications or commerce over the Internet are becoming more prevalent. The most recent session of the U.S. Congress resulted in Internet laws regarding children's privacy, copyrights, taxation and the transmission of sexually explicit material. The European Union recently enacted its own privacy regulations. The law of the Internet, however, remains largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws such as those governing privacy, libel and taxation apply to Web stores such as ours. The delays that these governmental processes entail may cause order cancellations or postponements of product purchases by our customers, which would seriously harm our business. The rapid growth and development of the market for online commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business online. The adoption or modification of laws or regulations relating to the Internet business could result in a decrease in demand for our products, which would cause a decline in our revenues. RISKS RELATED TO THIS OFFERING OUR STOCK PRICE WILL FLUCTUATE AFTER THIS OFFERING, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS Although the initial public offering price will be determined based on several factors, the market price for our common stock will vary from the initial offering price after trading commences. This could result in substantial losses for investors. The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control. These factors include: - Quarterly variations in operating results; - Changes in financial estimates by securities analysts; - Announcements by us or our competitors, of new product and service offerings, significant contracts, acquisitions or strategic relationships; - Publicity about our company, our products and services, our competitors, or e-commerce in general; - Additions or departures of key personnel; - Any future sales of our common stock or other securities; and - Stock market price and volume fluctuations of publicly-traded companies in general and Internet-related companies in particular, especially Amazon.com. The trading prices of Internet-related companies and e-commerce companies, including Amazon.com, have been especially volatile and many are at or near historical highs. Investors may be unable to resell 16 20 their shares of our common stock at or above the offering price. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert management's attention and resources, which could seriously harm our business and operating results. A TOTAL OF 26,068,921 SHARES, OR %, OF OUR TOTAL OUTSTANDING SHARES AFTER THE OFFERING ARE RESTRICTED FROM IMMEDIATE RESALE, BUT MAY BE SOLD INTO THE MARKET IN THE NEAR FUTURE. THIS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL Our current stockholders hold a substantial number of shares, which they will be able to sell in the public market in the near future. Sales of a substantial number of shares of our common stock could cause our stock price to fall. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional stock. After this offering, we will have outstanding shares of common stock. This includes shares that we are selling in the offering, which may be resold immediately in the public market. The remaining 26,068,921 shares will become eligible for resale in the public market as shown in the table below.
NUMBER OF SHARES/PERCENT OUTSTANDING AFTER THE OFFERING DATE OF AVAILABILITY FOR RESALE INTO PUBLIC MARKET - ------------------ ------------------------------------------------------------ / % 180 days after the date of the final prospectus due to agreements these stockholders have with us and the underwriters. However, the underwriters can waive this restriction without prior notice and allow these stockholders to sell their shares at any time. / % At various times between 180 days after the date of the final prospectus and November 5, 2000 shares will be eligible for sale pursuant to Rule 144. / % At various times between November 5, 2000 and December 8, 2000, shares will be eligible for sale pursuant to Rule 144. / % At various times after December 8, 1999, shares will be eligible for sale pursuant to Rule 144.
NEW STOCKHOLDERS WILL INCUR SUBSTANTIAL DILUTION OF APPROXIMATELY $ PER SHARE AS A RESULT OF THIS OFFERING The initial public offering price is expected to be substantially higher than the book value per share of our outstanding common stock. As a result, investors purchasing common stock in this offering will incur immediate substantial dilution of approximately $ per share. In addition, we have issued options to acquire common stock at prices significantly below the initial public offering price. To the extent such outstanding options are ultimately exercised, there will be further dilution to investors in this offering. See "Dilution" for a more detailed description of how new stockholders will incur dilution. 17 21 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as may, will, should, expect, plan, intend, anticipate, believe, estimate, predict, potential or continue, the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined in the Risk Factors section above. These factors may cause our actual results to differ materially from any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. USE OF PROCEEDS Our net proceeds from the sale of the shares of common stock we are offering hereby are estimated to be $79.9 million, or $92.0 million if the underwriters' option to purchase additional shares is exercised in full, based on an initial offering price of $ per share and after deducting the underwriting discounts and commissions and estimated offering expenses. The principal purposes of this offering are to fund our operating losses, increase our working capital, fund our capital expenditures, create a public market for our common stock, and facilitate our future access to the public capital markets. We currently expect to use the net proceeds of this offering primarily for working capital and general corporate purposes, including marketing and brand building efforts, capital expenditures associated with the expansion and building of distribution centers, and technology and system upgrades. We are in the process of building a second distribution center which will require capital investments in facilities and equipment of $7 million to $9 million. We have not yet determined the actual expected expenditures and thus cannot estimate the amounts to be used for each of these purposes. The amounts and timing of these expenditures will vary depending on a number of factors, including the amount of cash generated by our operations, competitive and technological developments and the rate of growth, if any, of our business. In addition, we may use a portion of the net proceeds for further development of our product lines through acquisitions of products, technologies and businesses. Accordingly, although we have no present commitments or agreements with respect to any such acquisitions, management will have significant discretion in applying the net proceeds of this offering. Pending such uses, we will invest the net proceeds in short-term, investment grade, interest-bearing securities. DIVIDEND POLICY We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. 18 22 CAPITALIZATION The following table sets forth our capitalization as of September 30, 1999. Our capitalization is presented: - On an actual basis; - On a pro forma basis to give effect to the automatic conversion of all of the outstanding shares of our convertible preferred stock into shares of common stock upon the closing of this offering; and - On a pro forma as adjusted basis to reflect the automatic conversion of all of the outstanding shares of our convertible preferred stock and our receipt of the estimated net proceeds from the sale of shares of common stock in this offering at an estimated price of $ per share.
SEPTEMBER 30, 1999 -------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- ----------- ----------- (IN THOUSANDS) Stockholders' equity: Preferred stock, $0.001 par value, no shares authorized, issued or outstanding, actual and pro forma; 5,000,000 shares authorized, no shares issued or outstanding, pro forma as adjusted........................................... $ -- $ -- $ -- Convertible Preferred Stock, $0.001 par value; Series A -- 7,227,328 shares authorized; 7,227,328 shares issued and outstanding actual; none authorized, issued or outstanding, pro forma and pro forma as adjusted.................................... 7 -- -- Series B -- 6,900,000 shares authorized; 6,622,517 shares issued and outstanding actual; none authorized, issued or outstanding, pro forma and pro forma as adjusted.................................... 7 -- -- Common Stock $0.001 par value; 30,000,000 shares authorized, actual and pro forma; 5,098,746 shares issued and outstanding, actual; 18,948,591 shares issued and outstanding, pro forma; 150,000,000 shares authorized, shares issued and outstanding, pro forma as adjusted............................................... 5 19 Additional paid-in capital.................................. 73,671 73,671 Accumulated deficit......................................... (19,355) (19,355) (19,355) Stock-based compensation.................................... (11,751) (11,751) (11,751) -------- -------- -------- Total stockholders' equity.............................. 42,584 42,584 122,454 -------- -------- -------- Total capitalization............................... $ 42,584 $ 42,584 $122,454 ======== ======== ========
In addition to the shares of common stock to be outstanding after the offering, we may issue additional shares of common stock under the following plans and arrangements: - 1,335,250 shares issuable upon exercise of options outstanding at a weighted average exercise price of $1.48 per share as of December 9, 1999; and - a total of 2,500,000 shares available for future issuance under our various stock plans at December 9, 1999, excluding the annual increases in the number of shares authorized under each of our plans beginning January 1, 2001. See "Management -- Stock Plans" for a description of how these annual increases are determined. This information also excludes 1,073,750 shares issuable upon exercise of options granted from October 1, 1999 to December 9, 1999. Please read this capitalization table together with the sections of this prospectus entitled "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the financial statements and related notes beginning on page F-1. 19 23 DILUTION Our pro forma net tangible book value as of September 30, 1999 was approximately $42.6 million or $2.25 per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of common stock outstanding, after giving effect to the automatic conversion of our convertible preferred stock. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma net tangible book value per share of common stock immediately after the completion of this offering. After giving effect to the sale of the shares of common stock offered by Pets.com at an assumed initial public offering price of $ per share, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of September 30, 1999 would have been approximately $122.5 million or $ per share of common stock. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors of common stock. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $ Pro forma net tangible book value per share as of September 30, 1999..................................... $2.25 Increase per share attributable to new investors.......... ----- Pro forma net tangible book value per share after this offering.................................................. -------- Dilution per share to new investors......................... $ ========
The following table summarizes on a pro forma basis after giving effect to the offering at an initial public offering price of $ per share, as of September 30, 1999, the differences between the existing stockholders and new investors with respect to the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid.
SHARES PURCHASED TOTAL CONSIDERATION --------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ----------- ------- ----------- ------- ------------- Existing stockholders................... 18,948,591 % $60,800,000 % $3.21 New investors........................... ----------- ----- ----------- ------ Totals................................ 100.0% $ 100.0% =========== ===== =========== ======
The foregoing discussions and tables are based upon the number of shares actually issued and outstanding as of September 30, 1999 and assume no exercise of options outstanding as of September 30, 1999. As of that date there were 901,000 shares issuable upon exercise of options outstanding at a weighted average exercise price of $0.67 per share. Assuming the exercise in full of all outstanding options, our pro forma as adjusted net tangible book value at September 30, 1999 would be $ per share, representing an immediate increase in net tangible book value of $ per share to our existing stockholders, and an immediate decrease in the net tangible book value per share of $ to the new investors. 20 24 SELECTED FINANCIAL AND OPERATING DATA The selected financial and operating data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", our financial statements and the notes thereto and the other information contained in this prospectus. The selected balance sheet data as of September 30, 1999 and the selected statement of operations data for the period from February 17, 1999 (inception) to September 30, 1999 have been derived from our audited financial statements appearing elsewhere in this prospectus. The selected balance sheet data as of June 30, 1999 and the statement of operations data for the quarters ended June 30, 1999 and September 30, 1999 have been derived from our unaudited financial statements not included in this prospectus. We prepared the unaudited financial statements on substantially the same basis as the audited financial statements and, in our opinion, they include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our financial condition as of June 30, 1999 and our results of operations for the quarters ended June 30, 1999 and September 30, 1999. The historical results presented below are not necessarily indicative of future results. The calculation of pro forma net loss per share gives effect to the automatic conversion of all of the outstanding shares of our convertible preferred stock into shares of common stock upon the completion of this offering. SELECTED FINANCIAL DATA
PERIOD FROM FEBRUARY 17, 1999 QUARTER ENDED (INCEPTION) TO QUARTER ENDED SEPTEMBER 30, SEPTEMBER 30, JUNE 30, 1999 1999 1999 ------------- ------------- --------------------- STATEMENTS OF OPERATIONS: Net sales......................................... $ 39 $ 568 $ 619 Cost of goods sold................................ (76) (1,766) (1,842) --------- --------- ----------- Gross margin.................................... (37) (1,198) (1,223) Operating expenses: Marketing and sales.......................... 1,122 10,693 11,815 Product development.......................... 1,624 2,194 3,835 General and administrative................... 838 1,205 2,043 Amortization of stock-based compensation..... -- 1,139 1,139 --------- --------- ----------- Total operating expenses................... 3,584 15,231 18,832 --------- --------- ----------- Operating loss.................................. (3,621) (16,429) (20,055) Interest income, net............................ 123 577 700 --------- --------- ----------- Net loss........................................ $ (3,498) $ (15,852) $ (19,355) ========= ========= =========== Basic and diluted net loss per share.............. $ (1.93) $ (8.75) $ (10.84) Weighted average shares outstanding used to compute basic and diluted net loss per share.... 1,811,837 1,811,837 1,786,156 Pro forma basic and diluted net loss per share.... $ (1.24) Weighted average shares outstanding used to compute pro forma basic and diluted net loss per share........................................... 15,636,001
JUNE 30, SEPTEMBER 30, 1999 1999 -------- ------------- BALANCE SHEET DATA: Cash and cash equivalents................................... $55,355 $36,231 Working capital........................................... 54,301 34,913 Total assets.............................................. 58,487 48,399 Convertible preferred stock and related paid-in capital... 60,382 60,382 Total stockholders' equity................................ $60,449 $42,584
21 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and the related Notes contained elsewhere in this prospectus. OVERVIEW Pets.com is a leading online retailer of pet products, integrating product sales with expert information and professional resources. Our broad selection of approximately 12,000 SKUs transcends the limited product selection of superstores, specialty stores and grocery stores. We were formed in February 1999. The assets related to the Web store, including the Pets.com domain name, were sold to Pets.com, Inc. from a third party concurrent with our first round of venture capital investment. The Company had a small amount of revenue during the second quarter of 1999 from a limited number of products available on our Web store. From inception through the launch of the second version of our Web store in July 1999, our operations were concentrated on the development of our Web store, the opening of a distribution center in San Francisco and establishing supplier and vendor relationships. Since July 1999, we have continued these operating activities and have also focused on building sales momentum, expanding our product offerings, building vendor relationships, promoting our brand name, improving the efficiency of our order fulfillment processes and improving our customer service operations. We derive substantially all of our revenues from the online sale of pet products. We do not currently sell live animals such as fish or reptiles, but we may do so in the future. Virtually all of our orders are fulfilled from our distribution center and either billed to the customer's credit card or payment is received via check. Generally, we collect cash from credit cards in two to five days from the date ordered. If the pay-by-check method is selected, the order is shipped once the customer's check is deposited and funds are available. If a customer is not satisfied with a particular product or service we provide within 30 days of the date of purchase, we generally refund all or a portion of the sale. To date, our refunds have averaged less than 1% of net sales. We have incurred net losses of $19.4 million from inception to September 30, 1999. We believe that we will continue to incur net losses for at least the next four years, and possibly longer, and that the rate at which we will incur such losses will increase significantly from current levels. We anticipate our losses will increase because we expect to incur additional costs and expenses related to brand development, marketing, and other promotional activities, distribution, customer service, content development, technology and infrastructure development and other capital expenditures. Because we only began selling products in February 1999 and have yet to achieve meaningful revenues, we have a limited operating history on which to base an evaluation of our business and prospectus. You must consider our prospects in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets such as online commerce. These risks include, but are not limited to, an evolving and unpredictable business model and management of growth. To address these risks, we must, among other things, maintain and expand our customer base, implement and successfully execute our business and marketing strategy, continue to develop and upgrade our technology and systems that we use to process customers' orders and payments, improve our Web store, provide superior customer service, respond to competitive developments and attract, retain and motivate qualified personnel. We cannot assure you that we will be successful in addressing such risks, and our failure to do so could have a material adverse effect on our business, prospects, financial condition and results of operations. Net Sales. Net sales consist of product sales and charges to customers for outbound shipping and handling and are net of allowances for product returns, promotional discounts and coupons. We recognize product and shipping revenues when the related product is shipped. In the future, the level of our sales will depend on a number of factors including, but not limited to, the frequency of our customers' 22 26 purchases, the quantity and mix of products, pricing of products and shipping, sales promotions and discounts, seasonality and customer returns. Cost of Sales and Gross Margin. Cost of sales consists primarily of the costs of products sold to customers and outbound and inbound shipping costs. We expect cost of sales to increase in absolute dollars to the extent that our sales volume increases. We may in the future expand or increase the coupons and discounts we offer to our customers and may otherwise alter our pricing structures and policies. These changes may negatively affect our gross margin. Our gross margin will fluctuate based on a number of factors, including, but not limited to the cost of our products, our product and shipping pricing strategy, product mix, our distribution centers and inventory control. Marketing and Sales Expenses. Marketing and sales expenses consist primarily of advertising and promotional expenditures, supplies, payroll and related expenses for personnel engaged in marketing, merchandising and business development. We intend to continue to pursue an aggressive branding and marketing campaign and, therefore, expect marketing and sales expenses to increase significantly in absolute dollars. Marketing and sales expenses may also vary considerably as a percentage of net revenues from quarter to quarter, depending on the timing of our advertising campaigns. Product Development Expenses. Product development expenses consist primarily of payroll and related expenses for our Web store development, systems personnel, consultants, content and other Web store costs. Over the next several months, we plan to continue to work on a significant number of development projects that will result in increased product development expenses. We believe that continued investment in product development is critical to attaining our strategic objectives and, as a result, we expect product development expenses to increase significantly in absolute dollars, but to fluctuate as a percentage of net revenue from quarter to quarter. General and Administrative Expenses. General and administrative expenses consist of payroll and related expenses for development, design, production, finance, human resources, executive and administrative personnel, corporate facility expenses, professional services expenses, travel and other general corporate expenses. We expect general and administrative expenses to increase in absolute dollars as we expand our staff and incur additional costs related to the anticipated growth of our business and being a public company, but to fluctuate as a percentage of net revenue from quarter to quarter. Amortization of Stock-Based Compensation. We recorded total stock-based compensation of $12.9 million for the period from inception on February 17, 1999 to September 30, 1999 in connection with stock options granted and restricted stock issued during such periods. In the case of stock options granted, the stock-based compensation amounts represent the difference between the exercise price of stock option grants and the deemed fair value of our common stock at the time of such grants. In the case of restricted stock, the stock-based compensation represents the difference between the purchase price of the restricted stock and the deemed fair value of our common stock on the date of purchase. Such amounts are amortized as an expense over the vesting periods of the applicable agreements, resulting in amortization of stock-based compensation totaling $1.1 million for the period from inception on February 17, 1999 to September 30, 1999. The amortization expense relates to options awarded to employees in all operating expense categories. Stock-based compensation for stock options and restricted stock issued through September 30, 1999 that will be subsequently recognized as expense for each of the next four years is estimated to be as follows:
YEAR AMOUNT ---- -------------- (IN THOUSANDS) 1999 (quarter ended December 31, 1999).................. $ 803 2000.................................................... $ 3,210 2001.................................................... $ 3,210 2002.................................................... $ 3,210 2003.................................................... $ 1,318
23 27 The amount of stock compensation expense to be recorded in future periods could decrease if options for which accrued but unvested compensation has been recorded are forfeited. Income Taxes. There was no provision or benefit for income taxes for any period since inception due to our operating losses. As of September 30, 1999, we had $17.8 million of net operating loss carryforwards for federal income tax purposes, which expire beginning in 2019. We have not recognized any benefit from the future use of loss carryforwards for these periods or for any other period since inception because of uncertainty surrounding their realization. The amount of net operating losses that we can utilize may be limited under tax regulations in circumstances including a cumulative stock ownership change of more than 50% over a three year period. It is possible that such a change may have already occurred or could occur as a result of this offering. See Note 4 of Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS We have not provided year-to-year comparative quarterly results because we only commenced operations in February 1999. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our operations primarily through private sales of preferred stock, which, through September 30, 1999, yielded net cash proceeds of $60.0 million. Net cash used in operating activities was $16.6 million from inception on February 17, 1999 to September 30, 1999. Net cash used in operating activities for this period primarily consisted of net losses, increases in inventories and other working capital purposes. Net cash used in investing activities was $7.6 million from inception on February 17, 1999 to September 30, 1999. Net cash used in investing activities primarily consisted of leasehold improvements and purchases of equipment and systems, including computer equipment and fixtures and furniture. Net cash provided by financing activities was $60.4 million from inception on February 17, 1999 to September 30, 1999. Net cash provided by financing activities during each of those periods primarily consisted of cash proceeds from the issuances of preferred stock. In April 1999 we issued 7,227,328 shares of Series A preferred stock in exchange for an aggregate purchase price of $10.0 million. In June 1999 we issued 6,622,517 shares of Series B preferred stock in exchange for an aggregate purchase price of $50.0 million. As of September 30, 1999 we had $36.2 million of cash and cash equivalents. As of that date, our principal commitments consisted of obligations outstanding under operating leases aggregating approximately $1.4 million through September 30, 2000. In November 1999 we invested $2 million for an equity position in PetPlace.com, Inc. and are committed to invest an additional $1.5 million no later than February 2000. Although we have no material commitments for capital expenditures, we anticipate a increase in our capital expenditures and lease commitments consistent with anticipated growth in operations, infrastructure and personnel. In the first half of 2000, we intend to add a second distribution center to ensure greater control over the distribution process and to ensure adequate supplies of products to our customers. The second distribution center is in the final planning stages and will require capital investments in facilities and equipment of $7 million to $9 million. For 2000, we anticipate our total capital expenditures will be at least $15 million, which will include substantial expenditures toward technology and systems upgrades to support the distribution centers and increases in business volume. In November and December 1999, we issued 6,523,181 shares of Series B preferred stock in exchange for an aggregate purchase price of $49.3 million. We currently anticipate that the net proceeds of this offering, together with our available funds, will be sufficient to meet our anticipated needs for working capital and capital expenditures through at least the next 12 months. We may need to raise additional funds prior to the expiration of such period if, for example, we pursue business or technology acquisitions or experience operating losses that exceed our current expectations. If we raise additional funds through the issuance of equity, equity-related or debt 24 28 securities, such securities may have rights, preferences or privileges senior to those of the rights of our common stock and our stockholders may experience additional dilution. We cannot be certain that additional financing will be available to us on acceptable terms when required, or at all. YEAR 2000 Many existing computer programs use only two digits to identify a year. These programs were designed and developed without addressing the impact of the upcoming change in the century. If not corrected, many computer software applications could fail or create erroneous results by, at or beyond the year 2000. We use software, computer technology and other services internally developed and provided by third-party vendors that may fail due to the year 2000 phenomenon, and we may be unable to detect or assess the effect of any failure until well into the year 2000 and beyond. For example, we are dependent on the financial institutions involved in processing our customers' credit card payments for Internet services and a third party that hosts our servers. We are also dependent on telecommunications vendors to help maintain our network, suppliers to supply products to us and the United Parcel Service and other third-party carriers to deliver our products to customers. Since inception, we have internally developed a significant portion of the systems for the operation of our Web site. These systems include the software used to provide our Web site's search, customer interaction, and transaction-processing and distribution functions, as well as monitoring and back-up capabilities. Based upon our assessment to date, we believe that our internally developed proprietary software is year 2000 compliant. In an ongoing effort we have assessed the year 2000 readiness of our third-party supplied software, computer technology and other services, which include software for use in our accounting, database and security systems. As we have purchased software and hardware during 1999, we have sought assurances from each vendor that their software, computer technology and other services are year 2000 compliant. We have expensed amounts incurred in connection with year 2000 assessment since our inception through September 30, 1999. Such amounts have been under $50,000 in total. The failure of our software and computer systems or those of our third-party suppliers to be year 2000 compliant could have a material adverse effect on us. The year 2000 readiness of the general infrastructure necessary to support our operations is difficult to assess. For example, we depend on the integrity and stability of the Internet to provide our services. We also depend on the year 2000 compliance of the computer systems and financial services used by consumers. Thus, the infrastructure necessary to support our operations consists of a network of computers and telecommunications systems located throughout the world and operated by numerous unrelated entities and individuals, none of which has the ability to control or manage the potential year 2000 issues that may impact the entire infrastructure. Our ability to assess the reliability of this infrastructure is limited and relies solely on generally available news reports, surveys and comparable industry data. Based on these sources, we believe most entities and individuals that rely significantly on the Internet are reviewing and attempting to remediate issues relating to year 2000 compliance, but it is not possible to predict whether these efforts will be successful in reducing or eliminating the potential negative impact of year 2000 issues. A significant disruption in the ability of consumers to reliably access the Internet or portions of it or to use their credit cards would have an adverse effect on demand for our products and services. We believe the year 2000 compliance issue should not have a material impact on our operations and we have not developed a contingency plan. Specific factors which might cause the year 2000 issue to have a material adverse effect on our business include the availability and cost of trained personnel and the ability to recruit and retain them, as well as the ability to locate all system coding requiring correction. Base upon information available at this time, we believe that the cost of modifications, replacements and related testing will not have a material impact on our liquidity or results of operations. 25 29 We believe that our most reasonably likely worst case scenario related to year 2000 could include: - disruption of our customers' ability to access our Web store; - disruption of our ability to take orders from customers; - disruption of our suppliers' ability to provide products to us; - disruption of our ability to fulfill customers' orders; and - disruption of third-party carriers to ship products to our customers. 26 30 BUSINESS OVERVIEW We are a leading online retailer of pet products, integrating product sales with expert information on pets and their care. We are committed to serving pets and their owners with the best care possible through a broad product selection, expert information and superior service. We seek to address the entire pet products market, transcending the limited product selection of superstores, specialty stores and grocery stores. Our broad selection of approximately 12,000 SKUs is integrated with extensive pet-related information and resources designed to help consumers make informed purchasing decisions. For example, we provide information to help pet owners manage the life stages of their pet as well as topical articles that address their pet care needs. We designed our Web store to provide our customers with a convenient, one-stop shopping experience that is organized to reflect how consumers think about shopping for their pets. Our Web store addresses the needs of many of the most popular pets, including dogs, cats, birds, fish, reptiles, ferrets, and other small pets. We provide quality customer service through our in-house distribution, fulfillment, customer service, and technology operations. Furthermore, we encourage participation in the pet community both through our Web store and through Pets.commitment, our charitable foundation that supports the role that pets and people play in each others' lives. INDUSTRY BACKGROUND THE GROWTH OF THE INTERNET AND ELECTRONIC COMMERCE The Internet has become an increasingly significant medium for communication, information exchange, and commerce. International Data Corporation estimates that there will be approximately 196 million online users worldwide at the end of 1999 and that this number will grow to approximately 399 million users by the end of 2002. Forrester Research estimates that online purchases made by consumers in the United States will grow from $20 billion in 1999 to $184 billion by 2004, representing a compound annual growth rate of 56%, and estimates that the total number of U.S. online consumers will grow from approximately 17 million in 1999 to 49 million in 2004, representing a compound annual growth rate of nearly 24%. We believe this increased usage is due to a number of factors, including a large installed base of personal computers, advances in the speed of personal computers and modems, easier and cheaper access to the Internet, improvements in network security, infrastructure and bandwidth, a broader range of online offerings, and growing consumer awareness of the benefits of online shopping. THE PET PRODUCTS RETAIL INDUSTRY The pet products industry is a large and growing market characterized by a loyal and emotion-driven customer base whose needs we believe are not adequately satisfied by traditional retail stores. According to the Pet Industry Joint Advisory Council, U.S. consumer spending on pet products and services grew at an annual rate of approximately 9% per year between 1993 and 1997 totaling approximately $23 billion at the end of 1997. Pets have become an increasingly important part of U.S. households, numbering over 235 million at the end of 1998, based on a survey conducted by Sloan Trends & Solutions, Inc. Today, more than 60% of U.S. households own a pet and 40% of those households own more than one, according to a recent American Pet Products Manufacturers Association study. In addition, according to Sloan Trends & Solutions, Inc., U.S. households spent on average $350 on their pets in 1998. Pet owners generally exhibit strong emotional connections to their animals. For example, according to Sloan Trends & Solutions, Inc., over 80% of pet owners consider their pets to be members of the family and 67% buy their pets holiday gifts. In addition, over 80% of pet owners surveyed by the American Animal Hospital Association stated that in an emergency they would likely risk their life for their pet. Because of this strong human-animal bond, we believe pet owners, like parents, represent an attractive base of consumers who seek a wide variety of products and information for their pets which promote their pets' health, well being and happiness. 27 31 Store-based pet supply retailers have traditionally served the pet product market in the United States. These include superstore retailers such as Petco Animal Supplies, Inc. and PetsMart, Inc., grocery store retailers such as Kroger Company and Safeway, Inc., mass market retailers such as Wal Mart Stores, Inc. and Kmart Corporation, and smaller, independent specialty pet products stores. While in the aggregate these channels provide consumers with a wide selection of pet related products, we believe traditional store-based retailers for pet products have the following limitations: Lack of One-Stop Shopping. The pet products retail market is fragmented, generally requiring consumers to shop at multiple outlets to find everything they need for their pets. For example, superstore retailers, grocery stores and mass market retailers tend to carry a deep selection of well known brand name pet products from leading vendors, but have fewer specialty products. Specialty pet stores instead tend to carry a broader selection of specialty products from smaller vendors, but usually have a limited selection of the more well known brand name products. On a combined basis, specialty pet stores control the largest percentage of sales in the U.S. pet product retail market, having 20% of U.S. sales based on data published by the Pet Industry Joint Advisory Council in 1998. This lack of one-stop shopping also applies to other online retailers who have chosen to duplicate the traditional retail model in terms of selection and are offering a subset of a superstore product mix. Limited Geographic Coverage. The few pet retailers who do tend to offer a broader selection of products either operate on a regional basis or only in metropolitan areas. This leaves a significant percentage of the U.S. population without easy access to all of the products they need for their pets. Opening additional stores would require substantial investments in real estate and inventory, as well as in trained personnel, for these chain stores. The high cost of opening and maintaining additional stores further limits the ability of retailers to serve geographic areas that are not densely populated. Inconvenience of Store Design and Layout. We believe consumers value the opportunity to select items from a broad range of pet products that best fit their needs. However, the constraints of retail shelf space and store layouts limit traditional retailers' ability to meet many customers' needs, often dictating a limited product selection that appeals to the broadest number of consumers. Products are typically displayed by brand, category or packaging to maximize stocking efficiencies, especially for bulk products such as dog food, and to promote fast selling products. Further, because of large investments in inventory required to keep stores fully stocked, traditional pet retailers often have limited flexibility to adapt their merchandising strategies to meet changing consumer demand. Limited, Inconsistent Information. Consumers buying pet products often seek information and expert advice to assist them in making purchase decisions. However, many traditional store-based retailers do not provide consumers with easy access to useful product information or readily available on-site experts who can provide assistance. In addition, even where on-site support is available, the quality of information and expertise may be inconsistent due to the challenges of hiring, training and maintaining knowledgeable sales staff. This limits the level of customer service available to consumers. As a result of these factors, we believe that consumers typically find the pet product shopping experience to be both inconvenient and unpleasant. Shopping for pet products in retail stores can involve making trips to multiple stores, extended searching for desired products, waiting in line to make a purchase and carrying home heavy bags of pet food, litter or other bulk products. THE PETS.COM SOLUTION We are a leading online retailer of pet products integrating product sales with expert information on pets and their care. Our mission is to serve pets and their owners with the best care possible through broad product selection, expert information and superior service. We seek to address the entire pet products market, transcending the limited product selection of superstores, specialty stores and grocery stores. Our Web store tightly integrates broad product selection with highly relevant content, providing consumers with the pet-related information they need to make informed purchase decisions. Additionally, we provide information to help pet owners manage the life stages of their pet coupled with topical articles that address 28 32 their pet care needs. We believe that our Web store provides customers with a superior one-stop shopping experience, with direct delivery to their doors. We are distinguished in the online pet retail industry because of our in-house control over key aspects of our business. Our online design and editorial team is responsible for the consumer shopping experience, creation and delivery of pet information, and general usability of our Web store. Our technology group is responsible for the development and maintenance of our Web store and back-end transaction processing and fulfillment. Our merchandising team has more than 90 years of combined buying and merchandising experience and deep product knowledge which enables them to build and maintain close relationships with manufacturers and build our private label business. Our in-house distribution and fulfillment operation enables full control over the product supply process from product mix to customer shipments. Our customer service department manages the communication with customers. We believe our in-house control of these functions is an important strength that enhances our competitive position in the pet products industry. We attract and retain consumers by emphasizing the following key attributes: Extensive Product Selection Enables One-Stop-Shopping. We provide consumers with one-stop-shopping for their pet care needs, with direct delivery to their doors. Our broad selection addresses nearly the entire pet products market, transcending the limited product selection of superstores, specialty stores and grocery stores. We cater to the needs and interests of consumers who own dogs, cats, fish, birds, ferrets, reptiles, and other small pets. With only one distribution center, our SKU count is currently equivalent to the number of SKUs available at the largest pet superstores, and by the middle of 2000 is projected to increase to roughly two times the SKUs available at these stores. Our online business model enables us to aggregate a diverse product selection that is not generally found in single retail outlets, respond more quickly to new product introductions than traditional retailers, and dynamically change our mix on a national basis to meet consumer needs and interests. Expert Information and Professional Resources. Because of the emotional attachment consumers have toward their pets, they value extensive information from experts to give them confidence that they are giving their pets the best care possible. We offer this information to consumers in several different ways: - Editorials. Our in-house staff of pet experts, veterinarians, an animal behavior specialist, and a pet attorney provide consumers with advice on a wide variety of animal topics. We offer an "Ask the Vet" column hosted by one of our veterinarians, in which answers are given to customer questions. In addition, multiple articles are posted weekly spanning seasonal topics, current events, health, nutrition, and behavior, among others. - Periodicals. Our offline print publication, Pets.com, The Magazine For Pets and Their Humans, is designed to further establish Pets.com in the lives of consumers and their pets, and to introduce pet owners to the products and expert information available in our Web store. Our team contributes high quality, original content spanning lifestyle, health, behavioral, and product information. The first issue of the magazine was published in November 1999, and had a distribution of more than one million copies. We intend to publish this magazine on a bi-monthly basis. - Professional Resources. Consumers can use our search tool to find a wide range of professional pet resources near where they live. These resources include veterinarians, hospitals and emergency care centers, kennels and boarding facilities, hotels accepting pets, and pet sitters, among others. - Veterinary Relationships. We provide consumers with a comprehensive array of veterinary information through two exclusive strategic relationships. We have an exclusive strategic relationship with PetPlace.com which intends to launch a comprehensive, online educational library through its Web site in the first quarter of 2000 for pet owners and veterinarians covering pet illness and wellness. PetPlace.com will provide our customers with extensive resources through links to their Web site to help them increase the quality of healthcare for their pets. We also have a strategic alliance with the American Veterinary Medical Foundation which enables us to provide 29 33 information about our products in their healthcare information video sent out bi-monthly to approximately 17,000 veterinarians, who can make this information available to consumers. Superior Shopping Experience. We believe that we provide an intuitive, easy-to-use Web store, offering extensive product selection across the most popular pet types, supported by tightly integrated, relevant editorial and searchable resource information. We categorize and organize our products to reflect how consumers shop for their pets, allowing them to browse by pet type, category, product line and individual product. Our product presentation is supported by numerous high resolution photographs of products available for sale in our Web store. We offer search capabilities across all products and editorial content. Further convenience advantages of our Web store include: - Continuous replenishment of food and litter through "Keep It Comin' " which allows customers to schedule ongoing deliveries of products; - A gift center, allowing consumers to match gifts to pet lifestyles and personalities; and - Advanced personalization features, including the use of wish lists and address books. Quality Customer Service. The typical online shopping experience begins with the search for products that meet specific needs, includes the online ordering process, and extends through product delivery and post-purchase support. We believe that the ability to accurately fulfill orders, ship products quickly to a customer's door, or efficiently handle customer inquiries is as important to customer satisfaction as product selection. We have invested significant resources to create our own fulfillment, distribution, and customer service functions rather than outsourcing these functions to a third party. The decision to build this operation in-house provides us with the ability to carry differentiated products, buy direct from manufacturers and improve product margins, reduce shipping and handling costs and provide customer satisfaction through better service. Community. We encourage community participation both through our Web store and offline community efforts. Online consumers can participate in 60 different discussion groups covering various topics of interest across a range of pet types, and sign up to receive our online newsletter which is sent to consumers every two to three weeks. We offer specific forums for dogs, cats, fish, birds, reptiles, ferrets, horses, and small pets. Our online newsletter provides timely information, highlighting current articles and new products that are available at our Web store, and describes upcoming pet events. More than 200,000 consumers either receive our online newsletter or participate in our discussion groups each month. At the community level, we encourage participation through Pets.commitment, our charitable foundation that supports the role that pets and people play in each other's lives. Pets.commitment provides direct financial support and encourages volunteerism across animal shelters, animal therapy and service dog programs, and pet care and wellness organizations. Our intent is to contribute more than $1 million to these organizations by the end of 2000. BUSINESS STRATEGY Our objective is to become one of the world's leading retailers of pet products. To achieve this objective, we intend to be the one-stop shop for pet products and the definitive source for pet information. Key elements of our business strategy include: Build Enduring Brand Equity. We have marketed our Web store to consumers through a wide range of advertising and promotional activities. We intend to continue to leverage our offline and online marketing strategies to maximize customer awareness, attract consumers most likely to make online purchases, and enhance our brand recognition as follows: - Advertising. We use television, radio, outdoor, and online advertising to build brand equity and create awareness. At the center of this campaign is our Pets.com sock puppet brand icon who we believe has already made an emotional connection with consumers. Media campaigns featuring this puppet communicate our key benefits of convenience, selection, and delivery. 30 34 - Online Marketing Relationships. We leverage our relationships with select online content providers and portals such as Blue Mountain Arts and Buena Vista Internet Group (Disney.com and Family.com) to attract consumers most likely to make online purchases. - National Events and Local Marketing. We use national sponsorships and local market efforts to build brand awareness and expand our customer base. This includes participation in national events such as the 1999 Macy's Thanksgiving Day Parade and promotion of "Take Your Dog To Work Day." Local market activities such as SPCA events, dog walks, and adoption fairs reach pet owners in a pet-related context. Offer Broadest Product Mix. We provide consumers with one-stop shopping for their pet care needs, with direct delivery to their doors. Our broad selection addresses nearly the entire pet products market, encompassing the selection of a superstore, specialty store and grocery store. We plan to grow from a SKU count of approximately 12,000 by year-end to more than 20,000 SKUs during 2000. We will continue to purchase products directly from manufacturers in order to optimize our product selection, enable a highly flexible product mix in response to new or fast moving items, strengthen our vendor relationships, customize promotions to specific consumer demographics and purchase patterns, easily test new items, and substantively improve our margins. We are currently working to broaden and diversify our product selection. For example, we will begin offering product in other pet-themed categories such as human apparel, calendars, picture frames and other home accessories by the first quarter of 2000. We also plan to introduce live fish during the first half of 2000 and equine-related products thereafter. Establish Our Private Label Brands. We plan to introduce a full line of high quality, private label dog and cat food and cat litter in the first half of 2000, marketed under the Pets.complete brand name targeted to the premium buyer. Our private label business should provide further margin enhancement, continued growth of our brand, and enhanced consumer loyalty and repeat purchases. We intend to expand this product line in the second half of 2000 under the Pets.com brand name to include apparel, bowls, rawhide, chews, toys, and a range of other accessories. These private label products will only be available at our Web store and will further distinguish our product selection. Provide Comprehensive and Relevant Content. We intend to be the definitive source of pet information. Our content is designed to address the broadest possible collection of pet types and a wide array of topics. We will increasingly deliver pet-related information in a variety of online and offline media forms, and in conjunction with a range of consumer and veterinary care partners. We will continue to encourage growing participation in a range of community forums, events, and newsletters. Deliver Superior Customer Service and Promote Repeat Purchases. We intend to continue to deliver a superior online shopping experience that encourages repeat purchases, beginning with the initial order and continuing through product delivery and post-purchase support. To accomplish this, we intend to build features which allow greater personalization and targeting of our Web store to existing customers, and will continue to invest in people, technology and distribution facilities which will allow us to continuously improve our customer service. This in-house competency enables us to distinguish our product selection from traditional and online retailers, realize better economics through greater margin control and reduced handling and shipping costs, and allows for better communication with customers. Continue to Maintain and Expand our Relationship with Amazon.com. Amazon.com is currently our largest stockholder and is represented on our board of directors. Although Amazon.com has no contractual obligation to provide us with consulting advice or engage in joint marketing activities, as a result of this equity ownership in our business Amazon.com has historically provided us with a number of services that have enabled us to benefit from its extensive online retailing experience. We have been able to consult with our Amazon.com counterparts across a range of operational and strategic initiatives. We have engaged in a number of joint marketing activities including joint e-mails. In the future, we intend to work to maintain and expand this relationship to grow our business. Expand Internationally. We intend to expand our business internationally in order to better serve pet owners and capitalize on a global market. We intend to complete the first step in this global expansion by 31 35 taking an equity stake in Petspark.com, Ltd. a UK based online pet retailer that intends to offer pet owners a full range of pet-related services including a broad selection of pet products, expert information from veterinarians and animal behaviorists, and an online community of pet owners. In addition, Petspark.com, Ltd. will have the right to use our name in its marketing in the UK. THE PETS.COM EXPERIENCE We offer consumers instant online access to a wide array of products, expert information and professional resources. We believe that we provide a convenient, easy-to-use Web store, offering extensive product selection across the most popular pet types, supported by integrated, relevant editorial and searchable resource information. From our home page, consumers can access the shopping area, read pet care articles in "Today's Features," search our store for products or content, view the "Pet of the Day," access our professional resources, or participate in one of the community discussion groups. Our Web store is optimized for fast loading at a range of connection speeds. Key components of the Pets.com experience include: Shopping at Pets.com. Our broad product selection offers products for many of the most popular pet types. We categorize and organize our products the way people shop for their pets, and support a highly visual shopping experience. Customers can shop at our online store as follows: - Pet Type. Our product offering spans a wide selection of products for dogs, cats, fish, birds, reptiles, ferrets, and small pets like hamsters, rabbits, and guinea pigs. Our home page allows consumers to select pet type to help them narrow the choices that follow. - Category. We provide consumers with the ability to browse categories based on the key attributes of that particular product category. For example, consumers shopping for dog food can browse by type of food, such as dry or canned, by the specific dog food brand, or by stage of their dog's life, such as puppy, adult or senior. These attributes differ by category and have been customized in our Web store to match these shopping patterns. This non-duplicative navigational approach helps eliminate the problem of consumers becoming overwhelmed as they browse hundreds of items within a category to find the product that they need. - Product Line. We enable consumers to browse as many as a dozen product lines from a single Web page. This browsing approach closely maps the physical retail experience and highly visual nature of shopping for pet products. In this category, a pet owner might know the color of the package or the picture on the front of the box, and then recall more specific information such as the brand name when they see the package. - Individual Product. Our product pages feature large, high quality photos of each item, and allow customers to select flavor, color, size and quantity from a single Web page. This eliminates the need for consumers to navigate through multiple Web pages to specify the attributes of a particular item that they want to purchase. In addition, as consumers make their specific product selection, this same Web page displays product availability in real time. - Checkout. We offer consumers a highly streamlined checkout experience requiring a minimal number of steps, only asking them for the information that is necessary to complete the transaction. The checkout area offers several convenient features such as the ability to create a personalized address book and then choose a specific address from the list by selecting it from a pull down menu. In addition, we recently opened a gift center, which allows consumers to match gifts to pet lifestyles and personalities. For example, consumers can find gifts for "the urban pet," "the dog who has everything," or "the cat in vogue." This new area also features seasonal baskets, offering consumers gift ideas tailored to particular holidays and seasons of the year. Overall, the gift center capitalizes on our belief that consumers consider their pets to be members of the family, providing consumers with a fun, creative way to shop for their pets. 32 36 Editorial and Resource Information. We provide our customers with expert information and professional resources, tightly coupled with our product selection in order to support informed purchase decisions. The information supports various pet lifestyles from urban to rural, and the full spectrum of stages from the young pet to the aging pet. The timely, topical, relevant nature of this editorial information reinforces the emotional connection that pet owners have with their animals, which we believe will help build loyalty to Pets.com as consumers return to the store to read the latest news and information. We offer the following editorial and resource information to our customers: - Online Articles. Our current editorial staff of in-house and freelance experts contributes 15-20 new articles per week which are posted in our Web store, spanning all pet types and a wide range of topical areas. Our experts include writers with extensive pet experience, veterinarians, an animal behaviorist, and a pet attorney. All articles contain a brief synopsis of the author's credentials in order to help consumers understand the area of expertise and qualifications of each of our writers. Our content includes product-specific information, basic pet information covering topics such as healthcare, nutrition, and behavior, and information based on seasonal topics and current events. We supplement the breadth and depth of our original content with licensed content on topics such as breed profiles and basic pet care information. Where relevant, our stories contain product references and merchandising links to support decision-making. - Resources. Consumers can use the search tool on our Web store to find a wide range of pet resources specific to the area in which they live. This resources include veterinarians, hospitals and emergency care clinics, kennels and boarding facilities, hotels that accept pets, and pet sitters, among others. - Pets.com, The Magazine For Pets and Their Humans. We are currently the only online pet retailer publishing a print magazine, which is designed to broaden awareness of Pets.com, drive purchase of products sold through our Web store, and increase current customer loyalty. Many pet owners will be introduced to our store through this magazine, which was published for the first time in November 1999, and distributed to approximately 760,000 qualified pet owning households and nearly 300,000 copies to veterinary offices, shelters, and pet sitter organizations. We also distribute the magazine through our in-box product shipments to customers. We intend to publish new issues of the magazine bi-monthly. MERCHANDISING AND PRODUCT SELECTION Merchandising. We have assembled an in-house merchandising team with pet industry expertise spanning product design, buying, import sourcing, and retail experience. This expertise gives us several key advantages. We use our category knowledge to source a broad assortment of products that encompasses the selection of a superstore, specialty store and grocery store. We leverage our vendor relationships to buy direct and realize better pricing, rapidly bring new products to market, capitalize on promotional opportunities, and easily test new items on a national basis. We currently offer a majority of the well known brands in the pet industry such as Science Diet, IAMS, Pedigree and Eukanuba, and other well-known brands such as Alpo, FreshStep, Friskies and Hartz. We also offer our premium private label brand that includes Pets.complete food and litter and Pets.com supplies and accessories. Over time, we anticipate that 10-20% of our revenues will come from our private label products. 33 37 Product Offering. Our product offering provides customers with a breadth and depth of selection across the most popular pet types and product categories as follows:
DOGS CATS FISH BIRDS ---- ---- ---- ----- Apparel Beds Aeration & Bubblers Books & Videos Beds Books Aquarium & Kits Cage Accessories Behavior Bowls Books & Videos Food Modification Cages & Accessories Bowls Hand Feeding Bones Calendars Breeding Supplies Healthcare & Remedies Books Carriers Cleaning Equipment Nesting Supplies Bowls & Supplies Catnip & Cat Grass Decor Toys Calendars Collars Filtration Treats Carriers Doors & Barriers Food & Accessories Wild Bird & Wildlife Chews Feeders & Waterers Health Care FERRETS Collars Flea & Pest Control Heaters Apparel Containment Food Lighting Food & Treats Doors & Barriers Furniture Live Plan Supplies Grooming Ears, Hooves, Etc. Grooming Nets Habitats Feeders & Waterers Harnesses Pond Hammocks & Beds Flea & Pest Control Health Care & Remedies Saltwater Supplies Health Care Food Holiday Thermometers Leashes Food Containers I.D. Tags & Belts Valves & Tubing Litter Grooming Leashes Water Test Kits Litter Pans Hair Lifters & Rollers Litter Water Treatments Toys Harnesses Litter Box Supplies REPTILES SMALL PETS Health Care & Remedies Litter Boxes Books & Videos Bedding Holiday New Kitten Bowls & Waterers Books & Videos Houses & Accessories Repellents Decor Cage Accessories I.D. Tags Scratchers Food & Treats Cage Kits Leashes Stain & Odor Habitats Carriers New Puppy Toys Health Care Collars & Leashes Outdoor Clean-Up Training Heating Exercise Rawhide Treats Humidifiers Feeding Supplies Repellents Vitamins & Supplements Leashes Food Safety & First Aid Lighting Grooming Stain Odor Substrate Habitats Tie-Outs Thermometers Health Care Toys Miscellaneous Training Treats & Chews Treats & Biscuits Videos & CDs Vitamins & Supplements
Product Sourcing. As of November 30, 1999, we purchased our products from a network of approximately 200 manufacturers. For the period from inception through September 30, 1999, approximately 80% of our total sales were from this network of manufacturers. In addition, we anticipate adding well over 100 new direct relationships in the first half of 2000 as we expand our product selection. VETERINARY CARE AND SERVICES The American Pet Products Manufacturers Association cites that seven out of ten dog and cat owners rely on veterinarians when they need information about their pet. Given this high degree of reliance on veterinary expertise, we provide consumers with access to extensive veterinary care information. In parallel, we reach veterinarians with the most up-to-date research and information in order to help them better serve pet owners. We accomplish these objectives in several ways: by providing a wide variety of articles written by veterinarians; by allowing consumers to participate in our "Ask the Vet" column; and, by entering into relationships with accredited veterinary care organizations that provide consumers with in-depth information on pet illness and wellness, and that offer veterinarians access to the most current research and information on pet healthcare. A description of our strategic veterinary care relationships follows. 34 38 PetPlace.com, Inc. We have made an equity investment in PetPlace.com and entered into a three year exclusive marketing agreement which includes mutual revenue sharing and new customer bounties which are paid for every new customer referred from one site to another. PetPlace.com intends to launch an online comprehensive, interactive, educational library through its Web site in the first quarter of 2000 for pet owners and veterinarians covering illness and wellness. Consumers will be able to search for relevant information on the site before they visit their veterinarian and after the pet's illness is diagnosed. Consumers will also be able to create a personal history of their pet, which might include recommendations on food, grooming, worms, or flea control. PetPlace.com is distinguished by its exclusive relationship with Angell Memorial Animal Hospital, one of the leading veterinary specialty hospitals, whose specialists provide content for this site and online consultations for consumers. We intend to provide our customers with in-depth veterinary care information, generate highly qualified customer leads, encourage repeat visits to our Web store, and build our brand. Our Web store is fully integrated with PetPlace.com in a number of ways: PetPlace.com consumers will be able to navigate directly from PetPlace.com articles to relevant products for purchase at our Web store; consumers who ask our veterinarians questions will be able to receive answers to the highly specialized healthcare issues from PetPlace.com; and consumers will be able to have direct access to extensive veterinary resources available on PetPlace.com. American Veterinary Medical Foundation. The American Veterinary Medical Foundation is a renowned professional association of over 60,000 veterinarians. Our strategic relationship with the American Veterinary Medical Foundation is a three year exclusive marketing agreement that we believe provides us with enhanced credibility. We have agreed to provide financial support in an amount of approximately $500,000 to the American Veterinary Medical Foundation for key activities such as "ClientLink," a video sent out by American Veterinary Medical Foundation every two months to 17,000 veterinarians that provides up-to-date news and pet healthcare information. In return for this support, our Web store will receive bi-monthly coverage of products, services, and key initiatives, such as the launch of PetPlace.com in "ClientLink" beginning in January 2000, and we will have the right to use the American Veterinary Medical Foundation logo on our home page. MARKETING AND PROMOTIONS Our marketing strategy is designed to attract customers most likely to shop online, convert browsers to buyers, meet or exceed customer expectations, drive loyalty and repeat purchases, build enduring brand equity, and reinforce the human-animal bond. In order to implement this strategy, we execute an integrated marketing campaign that includes the following: - Advertising. Our advertising is designed to build brand equity, create awareness, and generate initial purchase of products sold through our Web store. The campaign features the Pets.com sock puppet, who we believe has become popular with many consumers, and is a strategic icon of our brand. In this advertising, our sock puppet is a roving advocate for the brand, and has a playful, enthusiastic, funny, and caring personality. In our ads, he endears himself to both animals and their owners as he strives to make sure they get the products that they need. We use a mix of broadcast media including national network television, local radio in the top markets with online shoppers, outdoor advertising, online banners, text links, and e-mail newsletters. - Amazon.com Joint Marketing. We have implemented joint marketing programs with Amazon.com. To date, this includes joint e-mails. In addition, links to our Web page rotate on Amazon.com's home page and on other book category pages, consistent with their other marketing arrangements. In all of these marketing programs, Amazon.com receives a referral fee for delivering new customers to our Web store. - National Events and Local Marketing. Our national sponsorships are designed to build brand awareness and expand our customer base. A balloon float of our Pets.com sock puppet was featured in the 1999 Macy's Thanksgiving Day Parade, and was viewed on television by approximately 52 million people. We own the trademark to "Take Your Dog to Work Day," and will be launching 35 39 a national publicity campaign in 2000 which includes a video news release and a "Do It Yourself Kit" that helps companies structure their own event. We are the presenting sponsor of "Dog Day Afternoon," an outdoor festival for dogs and their owners organized by Design Industries Foundation Fighting AIDS. Our local marketing activities are designed to deliver the Pets.com message in a pet-related context at the community level. This includes local market efforts such as SPCA events and dog fashion shows, and grassroots activities including dog walks and adoption fairs in high Internet penetration markets. - Strategic Online Marketing Relationships. We have identified a select group of online companies who we believe attract buyers more likely to shop for pet products online. We are the exclusive online pet retailer for Blue Mountain Arts, and have created special "pet holiday cards" that are offered to consumers at Bluemountain.com. Our advertising relationship with Buena Vista Internet Group (Disney.com and Family.com) allows us to be the exclusive online pet retailer for the animal channel on Disney.com and Family.com. We are the exclusive online pet retailer for PlanetOut. These agreements expire in September 2000, April 2000 and August 2000, respectively. We have also entered a non-exclusive relationship with AOL on their Shopping Channel. In addition, we have an exclusive relationship with Pet Sitters International, Inc. until December 2002, under which we list their approximately 3,000 pet sitters in the resources area of our Web store in exchange for sales commissions. Furthermore, our Associates Program, based on Be Free's associate program technology, encourages other Web sites to link to our store and earn sales commissions. Associates can earn referral fees on all Pets.com purchases made from the links on their site, and earn a bounty for each new customer. - Promotions. We selectively utilize promotional offers to further our brand building efforts. This includes promotions such as on-site merchandising of product discounts and pet-themed specials, the "Keep It Comin' " food subscription program, trial offers at local events such as organized dog walks, and coupon offers in our online newsletter and in Pets.com, The Magazine for Pets and Their Humans. - Philanthropic Marketing. Our philanthropic marketing effort is designed to deepen our relationship with pet owners and expand our customer base. Pets.commitment is our charitable foundation, which provides direct financial support and encourages volunteerism across animal shelters, animal therapy and service dog programs, and pet care and wellness organizations. Our intent is to contribute more than $1 million to these organizations by the end of 2000. We contribute to organizations where "people help animals," such as SPCAs and humane organizations across the country including Best Friends Animal Sanctuary in Utah. We also contribute to organizations where "animals help people," including Design Industries Foundation Fighting Aids, Canine Assistants, and The North American Disabled Riders Association. - Public Relations. We utilize public relations to drive coverage across a wide array of high profile outlets, spanning television, radio, magazines, and newspapers. FULFILLMENT AND DISTRIBUTION We have built an in-house fulfillment and distribution operation which is used to manage the entire supply chain beginning with placement of the customer's order, and continuing through order processing, fulfillment, and shipment of product to the customer. In addition, we can improve our economics through lower shipping and handling costs, and a higher margin product mix availability. We currently fulfill all customer orders from our new 143,232 square foot distribution center in Union City, California and a 84,000 square foot satellite facility in Hayward, California. We currently receive goods from our suppliers at the distribution center into an automated system which assigns bin and storage locations. The inventory system is linked to the Web store which automatically updates product availability. A team of individuals using the same automated system picks products to fill orders which are then packed on location and loaded onto UPS, United States Postal Service or other shipping trucks for 36 40 distribution to consumers in all 50 states. We are committed to shipping a high volume of accurate orders, efficiently and effectively. We believe our expertise in fulfillment and distribution, developed as the result of our experience with the original Union City distribution center, enables us to expand rapidly to our second distribution center. By adding regional distribution centers, we can significantly increase our SKU count, improve ship time to customers, and reduce shipping costs. We are in the process of establishing a second distribution center in Greenwood, Indiana. This 292,500 square foot warehouse is scheduled to open in the first half of 2000, and is intended to mirror the SKUs carried in the Union City distribution center. We believe that two distribution centers can likely support our growth into 2001 based on anticipated levels of demand for our products. CUSTOMER SERVICE We believe that a high level of customer service and support is critical to retaining and expanding our customer base. Our in-house customer service team is available via phone from 6 a.m. to 8 p.m. Pacific time, Monday to Friday, and can also be reached by e-mail or fax. We currently have 90 full-time employees in customer service as of November 30, 1999. This team is central to our ability to deliver a superior customer experience and strives to make a personal connection with each consumer. We view Amazon.com's customer service performance to be the standard in the industry and we seek to emulate their customer service approach. We seek to exceed customer expectations. We provide proactive customer service which includes e-mail order confirmation, e-mail ship confirmation with tracking numbers, notifying customers of out-of-stock situations, and for those orders, updating customers on order status on a frequent basis. We increase staff to handle peak periods and train customer service representatives across departments to help them better understand the business. We are dedicated to customer satisfaction. One of the ways that we deliver on this commitment is through our product, customer service, privacy, and security guarantees. Our product guarantee offers consumers a 30-day refund if their shipment is not satisfactory. Our customer service guarantee commits to a one business day response time for all inquiries. Our privacy guarantee commits that Pets.com will not sell, trade or rent personal information to other companies, and communicates that this information is used exclusively to process orders and to provide a more personalized shopping experience. Our security guarantee ensures protection of personal information and compensation to consumers for the amount of their liability, up to $50, in the unlikely event of unauthorized interception and use of their credit card. TECHNOLOGY AND NETWORK OPERATIONS We have implemented a broad array of services and systems for site management, searching, customer interaction, transaction processing, and fulfillment. We designed our system for scalability, reliability, and performance, using a set of software applications for: - Displaying merchandise in a logical, customer-friendly way; - Accepting and verifying orders; - Processing credit card orders; - Organizing, placing, and managing customer orders; - Notifying and updating customers of order status; - Managing shipment of products; and - Managing community forums and the communication of pet and pet care information. These services and systems use a combination of our own proprietary technologies and commercially available, licensed technologies. We selected BroadVision as our e-commerce platform, and have a non-exclusive license to use their commerce application, which has been customized by our internal engineers for the Pets.com shopping experience. This robust commerce application is integrated with our Quality Software Systems, Inc. warehouse management system, enabling a fully automated order fulfillment 37 41 process. We realize many benefits from the integration of these front-end and back-end systems, including the ability to track customer orders through the entire supply chain in real-time, make rapid changes to processes such as a change in shipping policy, or efficiently expand our infrastructure to support the addition of a new distribution center. It is our policy that our vendors meet the requirement of providing technical support 24 hours a day, 7 days a week, 365 days a year. Our Sun Microsystems, Inc. servers are Unix-based, and our software platform and architecture is integrated with an Oracle Corporation database system. Our Internet servers use Verisign, Inc. digital certificates to help conduct secure communications and transactions. Our production system is co-located at Exodus Communications, Inc. in Santa Clara, California, and provides 24-hour engineering and monitoring support. We anticipate adding an additional co-location facility in the eastern United States in stages over the course of 2000 for redundancy and performance purposes. We address the goals of scalability, reliability and performance in a number of ways. We have replicated key components of our production system in-house in order to perform load testing that enables us to simulate our Web store and better support peak shopping periods. We aim to have fast download times and make use of caching and load balancing at the Web server and application level for optimal performance. We are implementing vertical hardware partitioning in early 2000, enabling us to do significant work on the Web store without having to take it down for maintenance. We elected to build an in-house development and operations team augmented by outside consultants to enable faster response to changing market conditions. We only outsource development work that is considered to be non-strategic. Our in-house development team builds out new features, focusing on the software and functionality that is unique to our business. Our in-house operations team ensures that our Web store is up and running 24 hours a day, seven days a week. We incurred $3.8 million in product development expenses in the period from inception to September 30, 1999. We anticipate that we will continue to devote significant resources to product development in the future as we add new features and functionality to our Web store. Long term, we believe our in-house capability will allow us to manage strategic initiatives such as the creation of a data warehouse enabling our merchandising team to better understand our customers, and then use this information to modify our product mix and enhance our margins. COMPETITION The online commerce market is new, rapidly evolving and intensely competitive. We expect competition to intensify in the future. In particular, the pet products, information and services market is intensely competitive and are also highly fragmented, with no clear dominant leader in any of our market segments. Our competitors can be divided into several groups: online stores that specialize in pet products, such as Petopia.com, Inc., which is owned in part by Petco Animal Supplies, Inc., PetsMart.com, Inc., which is owned in part by PetsMart, Inc., and Petstore.com, Inc.; superstore retailers of pet products such as Petco Animal Supplies, Inc., and PetsMart, Inc.; specialty pet stores; mass market retailers such as Wal Mart Stores, Inc., Kmart Corporation and Target Stores, Inc.; supermarkets; warehouse clubs such as Costco Companies, Inc.; mail order suppliers of pet products; and pet supply departments at major department stores. Each of these competitors operates within one or more of the pet products, information and services segments. We believe that the following are principal competitive factors in our market: - brand recognition; - product selection; - quality of Web store content; - reliability and speed of order shipment; - streamlined shopping experience; 38 42 - customer service; - speed and accessibility of Web store; - personalized service; - convenience; and - price. Many of our current and potential traditional store-based and online competitors have longer operating histories, larger customer or user bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. Many of these current and potential competitors can devote substantially more resources to Web site and systems development than we can. In addition, larger, more well-established and financed entities may acquire, invest in or form joint ventures with online competitors or pet supply retailers as the use of the Internet and other online services increases. 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 store-based retailers also enable customers to see and feel products in a manner that is not possible over the Internet. Some of our competitors such as Petco Animal Supplies, Inc. and PetsMart, Inc. have significantly greater experience than we do in selling pet supplies and pet care products. RELATIONSHIP WITH AMAZON.COM We have a strategic relationship with Amazon.com whereby Amazon.com has provided free consulting services relating to the operation of our business and has promoted our Web store. Amazon.com is our largest stockholder and has invested a total of approximately $57.8 million to date in Pets.com. Randy Tinsley, Amazon.com's Vice President of Corporate Development, is a member of our Board of Directors. See "Executive Officers and Directors", "Related Party Transactions" and "Principal Stockholders" for a further discussion of Amazon.com's equity ownership of us. As part of our relationship, in April 1999 we entered into an advertising agreement with Amazon.com whereby Amazon.com provides us with online promotions mutually agreed upon, such as e-mails about Pets.com, and one or more links from different locations on its Web site to our Web store, consistent with Amazon.com's other marketing agreements. Under our agreement, the content, placement, timing, and even the extent of most of these online promotions are determined at Amazon.com's discretion and can be terminated by Amazon.com at any time. Under the agreement, we are obligated to maintain a link on our home page to Amazon.com's Web site, and pay Amazon.com a referral fee for each new customer referred from Amazon.com's Web site, reduced by new customers we refer from our Web store to Amazon.com. Unless terminated earlier for breach by the non-breach party, the agreement will expire in October 2000. In addition to this formal agreement, Amazon.com has provided free consulting advice to our management team upon request regarding brand building efforts, Web store design, product merchandising, fulfillment and distribution, and a variety of other operational and strategic issues that are important to our business. The existence of this relationship with Amazon.com, Amazon.com's stockholder position in Pets.com and our advertising agreement with Amazon.com, has also enabled us to attract the attention of potential corporate partners and to enter into alliances with corporate partners on favorable terms. While our relationship with Amazon.com has received significant media attention, Amazon.com is not obligated to provide any of this advice and support. 39 43 OTHER STRATEGIC RELATIONSHIPS We continually seek to form strategic relationships to increase our access to online customers, build brand recognition, and expand our online presence. Because of our relationship with Amazon.com, we believe that we can execute fewer, more focused, and less costly ventures to accomplish our objectives over the long-term. In addition to our relationship with Amazon.com, we have established the following relationships: General Internet Portal Sites. These companies provide an aggregated audience of Internet users to whom we market our products and services. These marketing activities drive new customers to our Web site and extend our brand. These companies are America Online, Inc., Lycos, Inc., Buena Vista Internet Group (Disney.com and Family.com), Xoom.com, Inc., PlanetOut Corporation and Snap! L.L.C. Pet Related Internet Sites. To ensure the strength of our brand among pet owners we have established exclusive relationships with Petplace.com, Inc. and Pet Sitters International, Inc., whose pet oriented Internet sites attract large audiences of pet owners. In addition, through our relationship with Be Free, our Associates Program encourages other Web sites to link to our store and earn sales commissions. Content Providers. To ensure that our site attracts and retains a large audience of pet product consumers we have established relationships with various content providers relevant to pet owners of all types. These content providers are Blue Mountain Arts, Dawbert Press, Inc. and IDG Books Worldwide, Inc. Pets.com Sponsorships. Our relationships with these organizations not only increases our brand awareness, but also increases the goodwill associated with our brand among pet owners and the general population. These organizations are American Veterinary Medical Foundation, Best Friends Animal Sanctuary, Design Industries Foundation Fighting AIDS and NADRA Productions. International Relationships. We plan to make an equity investment in Petspark.com, a UK-based online pet retailer that intends to offer pet owners a full range of pet-related services. This relationship will include consultation, marketing support, and use of the Pets.com name. This agreement should allow us to expand our business internationally in order to better serve pet owners and capitalize on the global market. INTELLECTUAL PROPERTY We regard the protection of our copyrights, service marks, trademarks, trade dress and trade secrets as critical to our future success and rely on a combination of copyright, trademark, service mark and trade secret laws and contractual restrictions to establish and protect our proprietary rights in products and services. We have entered into confidentiality and invention assignment agreements with our employees and contractors, and nondisclosure agreements with our suppliers and strategic partners to limit access to and disclosure of our proprietary information. We cannot be certain that these contractual arrangements or the other steps taken by us to protect our intellectual property will prevent misappropriation of our technology. We have licensed in the past, and expect that we may license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. While we attempt to ensure that the quality of the Pets.com products brand is maintained by such licensees, we cannot assure that such licensees will not take actions that might hurt the value of our proprietary rights or reputation. We also rely on technologies that we license from third parties, such as BroadVision, Inc., Oracle Corporation, Netscape Communications Corporation (AOL), Quality Software Systems, Inc., Sun Microsystems, and Compaq Computer Corporation, the suppliers of key e-commerce software, database technology, operating system software, and specific hardware components for our service. We cannot be certain that these third-party technology licenses will continue to be available to us on commercially reasonable terms. The loss of such technology could require us to obtain substitute technology of lower quality or performance standards or at greater cost, which could harm our business. We have filed applications for the registration of Pets.com(TM), the Pets.com logo, Because Pets Can't Drive(TM), Keep It Comin'(TM), More Products Than a Superstore Delivers(TM), People Helping Animals, Animals Helping People(TM), and Pets.commitment(TM) in the U.S. and in some other countries, although we 40 44 have not secured registration of any of our marks to date. We have been granted the right to use Pets.complete(TM) from a third party. We may be unable to secure these registered marks. It is also possible that our competitors or others will use marks similar to ours, which could impede our ability to build brand identity and lead to customer confusion. In addition, there could be potential trademark or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of the term "Pets.com." Any claims or customer confusion related to our trademark, or our failure to obtain trademark registration, would negatively affect our business. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the U.S., and effective copyright, trademark and trade secret protection may not be available in such jurisdictions. Our efforts to protect our intellectual property rights may not prevent misappropriation of our content. Our failure or inability to protect our proprietary rights could substantially harm our business. GOVERNMENT REGULATION We are not currently subject to direct federal, state or local regulation other than regulations applicable to businesses generally or directly applicable to retailing or electronic commerce. However, as the Internet becomes increasingly popular, it is possible that a number of laws and regulations may be adopted with respect to the Internet. These laws may cover issues such as user privacy, freedom of expression, pricing, content and quality of products and services, taxation, advertising, intellectual property rights and information security. Furthermore, the growth of electronic commerce may prompt calls for more stringent consumer protection laws. Several states have proposed legislation to limit the uses of personal user information gathered online or require online services to establish privacy policies. The Federal Trade Commission has also initiated action against at least one online service regarding the manner in which personal information is collected from users and provided to third parties and has proposed regulations restricting the collection and use of information from minors online. We do not currently provide individual personal information regarding our users to third parties and we currently do not identify registered users by age. However, the adoption of additional privacy or consumer protection laws could create uncertainty in Web usage and reduce the demand for our products and services or require us to redesign our web site. We are not certain how our business may be affected by the application of existing laws governing issues such as property ownership, copyrights, encryption and other intellectual property issues, taxation, libel, obscenity, qualification to do business and export or import matters. The vast majority of these laws were adopted prior to the advent of the Internet. As a result, they do not contemplate or address the unique issues of the Internet and related technologies. Changes in laws intended to address these issues could create uncertainty in the Internet marketplace. This uncertainty could reduce demand for our services or increase the cost of doing business as a result of litigation costs or increased service delivery costs. In addition to regulations applicable to businesses generally, we are regulated by federal, state or local governmental agencies with respect to the shipment of pet food, live animals and pet products, advice relating to animal care, and other matters. We currently seek to rely upon our suppliers to meet the various regulatory and other legal requirements applicable to products and services supplied by them to us. However, we are unable to verify that they have in the past, or will in the future, always do so, or that their actions are adequate or sufficient to satisfy all governmental requirements that may be applicable to these sales. We would be fined or exposed to civil or criminal liability, and we could receive potential negative publicity, if these requirements have not been fully met by our suppliers or by us directly. LEGAL PROCEEDINGS From time to time, we may be involved in litigation relating to claims arising out of our ordinary course of business. On September 21, 1999 Biolink L.L.C. dba ERI International sued us in Los Angeles County Superior Court for breach of contract, anticipatory breach of contract, breach of the implied covenant of good faith and fair dealing, and fraud arising out of a contract entered into for the shipment of live animals, including fish and reptiles. ERI International has stated four causes of action, three seeking 41 45 damages each in an amount in excess of $2,000,000 and one seeking damages in an amount in excess of $500,000. We have answered and asserted affirmative defenses to their complaint. No trial date has been set and discovery has not yet commenced. We believe we have meritorious defenses against these claims and intend to vigorously defend against them. EMPLOYEES As of November 30, 1999, we had 260 employees. None of our employees is represented by a labor union. We have not experienced any work stoppages and consider our employee relations to be good. FACILITIES Our principal executive offices are located in San Francisco, California, where we lease approximately 17,000 square feet under a lease and sublease that expire in June 2002, with an option to extend until 2004. We believe that our current executive office space is adequate to meet our needs through the end of March 2000, at which time we plan to relocate to new executive offices in San Francisco, California, where we have arranged to lease approximately 40,410 square feet under a lease that expires no earlier than April 2010. For our Northern California distribution center and satellite facility, we lease approximately 143,232 square feet in Union City, California under a sublease that expires in August 2004 and 84,000 square feet in Hayward, California under a lease that expires in November 2004. In addition, we lease approximately 15,000 square feet in San Francisco, California for additional warehouse and distribution purposes under a lease that continues on a month-to-month basis after December 31, 1999. For our second distribution center, we have entered into a lease for approximately 292,500 square feet in Greenwood, Indiana, that expires in December 2005. 42 46 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Our executive officers and directors and their ages as of December 31, 1999 are as follows:
NAME AGE POSITION ---- --- -------- Julia L. Wainwright....................... 42 Chairman of the Board of Directors and Chief Executive Officer Christopher E. Deyo....................... 40 President Paul G. Manca............................. 41 Chief Financial Officer John R. Benjamin.......................... 49 Vice President of Merchandising John M. Hollon............................ 44 Vice President of Editorial John A. Hommeyer.......................... 33 Vice President of Marketing Diane R. Hourany.......................... 45 Vice President of Customer Service Sue Ann Latterman, V.M.D.................. 42 Vice President of Strategic Alliances Ralph E. Lewis............................ 53 Vice President of Distribution and Logistics Paul W. Melmon............................ 38 Vice President of Engineering Kathryn C. Ringewald...................... 39 Vice President of Human Resources John B. Balousek(1)....................... 54 Director Matthew T. Cowan.......................... 27 Director John R. Hummer(2)......................... 51 Director Randolph J. Tinsley(1)(2)................. 39 Director
- --------------- (1) Member of Audit Committee (2) Member of Compensation Committee Julia L. Wainwright has served as our Chief Executive Officer and one of our directors since March 1999 and Chairman of the Board since December 1999. From March 1998 to February 1999, she served as Chief Executive Officer of Reel.com, Inc. From May 1997 to February 1998, Ms. Wainwright was independently researching e-commerce opportunities. From December 1996 to April 1997, she served as Chief Executive Officer of Berkeley Systems, Incorporated, as President from August 1995 to November 1996 and as Vice President of Sales and Marketing from January 1995 to August 1995. From June 1994 to December 1994, she served as Vice President of Marketing of Mindscape, Inc. From October 1993 to June 1994, she was a partner in Corporate Development Partners, a private venture capital firm. From August 1991 to October 1993, she served as Vice President of International for Spinnaker Software, Inc. From October 1988 to August 1991, she worked for Power Up Software Corporation in several positions, finishing as Vice President of International. From January 1982 to October 1988, she served in various management positions at Software Publishing, Inc. and from January 1980 to December 1982, she worked in brand management at The Clorox Company. Ms. Wainwright holds a B.S. from Purdue University. Christopher E. Deyo has served as our President since April 1999. From July 1998 to March 1999, he served as President of Reel.com, Inc. He served as General Manager of Berkeley Systems, Incorporated from March 1997 to June 1998 and as Vice President of Marketing from September 1996 to February 1997. From May 1995 to August 1996, Mr. Deyo served as Vice President of Marketing of Microprose, Inc. From January 1995 to April 1995, Mr. Deyo was independently researching technology opportunities. From September 1987 to December 1994, he worked for Kransco Group Companies in several positions, finishing as Vice President of Marketing. Mr. Deyo co-founded Video Edge, Inc. where he served in various capacities from May 1986 to August 1987. From August 1983 to April 1986, he worked in brand management at The Procter & Gamble Company. Mr. Deyo holds a B.S. and an M.B.A. from Syracuse University. Paul G. Manca has served as our Chief Financial Officer since September 1999. From May 1995 to September 1999, he served as Chief Financial Officer of CellNet Data Systems, Inc. From February 1987 43 47 to May 1995, he worked for BZW/Barclays, an investment bank, finishing as Managing Director and Group Head of the Communications Group within Corporate Finance. Mr. Manca holds a B.A. from the University of California at Berkeley and an M.B.A. from Golden Gate University. John R. Benjamin has served as our Vice President of Merchandising since May 1999. From September 1990 to April 1999, Mr. Benjamin worked for Petco Animal Supplies, Inc. in several positions, finishing as Director of Imports and Global Sourcing. From December 1989 to August 1990, he served as the National Sales Manager for Suunto, USA and from September 1984 to December 1989, he worked as a buyer for Oshman's Sporting Goods, Inc. From September 1971 to July 1984, Mr. Benjamin worked for Fedco Membership Department Stores, Inc., in several positions finishing as a store manager. John M. Hollon has served as our Vice President of Editorial since April 1999 and as Editor and Publisher of Pets.com, The Magazine for Pets and Their Humans since September 1999. From November 1996 to April 1999, he served as Group Editorial Director of Fancy Publications, Inc. Mr. Hollon also worked as a newspaper editor for 19 years, most recently with Gannett Co., Inc., as Editor of The Great Falls Tribune in Montana and as Executive Editor of The Honolulu Advertiser in Hawaii. Mr. Hollon holds a B.A. from California State University at Long Beach. John A. Hommeyer, Jr. has served as our Vice President of Marketing since May 1999. From August 1988 to April 1999, he worked at The Procter & Gamble Company in several U.S. and international positions, finishing as Marketing Director of Global Baby Care. Mr. Hommeyer holds an A.B. from Dartmouth College. Diane R. Hourany has served as our Vice President of Customer Service since December 1999 and as Vice President of Operations from April 1999 to November 1999. From June 1998 to April 1999, Ms. Hourany served as Vice President of Operations of Reel.com, Inc. From February 1994 to May 1998, she served as General Manager of Catalog Fulfillment for Bullock & Jones, a subsidiary of Saks Fifth Avenue, Inc. and from September 1987 to January 1994, Ms. Hourany served as Manager of Telemarketing & Customer Services of Power Up Software Corporation. Ms. Hourany holds an A.A. from Diablo Valley College. Sue Ann Latterman, V.M.D. has served as our Vice President of Strategic Alliances since November 1999 and as Vice President of Business Development from May 1999 to October 1999. From August 1998 to April 1999, she served as Chief Operating Officer of CrossCart, Inc. From March 1996 to July 1998, Dr. Latterman worked as a consultant to the medical device industry and from October 1994 to March 1996, she served as Vice President of Clinical Affairs of Percusurge, Inc. From July 1993 to September 1994, she worked as an associate at Mohr Davidow Ventures, a private venture capital firm, and from January 1993 to June 1993, as a consultant to the biotechnology industry. From November 1990 to December 1992, she served as Manager of Market Research of Hybritech Incorporated. From July 1989 to August 1990, Dr. Latterman attended business school and from May 1985 to June 1989, she practiced veterinary medicine in Pittsburgh, Pennsylvania and Ringoes, New Jersey. Dr. Latterman holds a B.A. and V.M.D. from the University of Pennsylvania and an M.B.A. from the University of Pittsburgh. Ralph E. Lewis has served as our Vice President of Distribution and Logistics since November 1999. From January 1998 to October 1999, he served as Vice President of Operations for Office Depot, Inc. From June 1995 to December 1997, he served as Vice President and General Manager of Softworld Services, Inc. and from June 1992 to May 1995, as General Manager of Neodata Services, Inc. From January 1992 to May 1992, Mr. Lewis served as a consultant to Egghead Discount Software, Inc. From August 1986 to May 1992, Mr. Lewis served as Vice President of Distribution for Egghead Discount Software, Inc., from June 1981 to July 1986, as Divisional Vice President of Operations for Pay 'N Save Corporation and from April 1977 to May 1981, as Operations Manager of Distribution for Save On Drugs, Inc. Mr. Lewis holds a B.S. from the University of Dayton. Paul W. Melmon has served as our Vice President of Engineering since April 1999. From August 1998 to April 1999, he served as an Entrepreneur in Residence at Sutter Hill Ventures, L.L.C., a private venture capital firm. From November 1996 to July 1998, Mr. Melmon served as Vice President of 44 48 Engineering of Wallop Software, Inc. and from July 1994 to October 1996, as Director of Engineering of Scopus Technology, Inc. From October 1989 to July 1994, he held various technical positions at Sybase, Inc. and from November 1984 to October 1989, he served as a member of the technical staff at Hewlett- Packard Company. Mr. Melmon holds a B.S. from the University of California at Davis. Kathryn C. Ringewald has served as our Vice President of Human Resources since April 1999. From June 1997 to April 1999, she served as Director of Human Resources of Form Factor, Inc. From August 1996 to May 1997, she served as Director of Human Resources of Berkeley Systems, Incorporated and from June 1995 to August 1996, as Vice President of Human Resources of Crystal Dynamics, Inc. From February 1994 to May 1995, Ms. Ringewald worked as a Director of Talent for Lucas Arts Entertainment Company and from October 1992 to February 1994, as a human resources consultant to various industries. From January 1990 to October 1992, she worked as a Human Resources Manager for Symantec Corporation and from June 1985 to January 1990, she served in various capacities at Apple Computer, Inc. Ms. Ringewald holds a B.A. from Dominican College. John B. Balousek has served as one of our directors since October 1999. Mr. Balousek, a founder of PhotoAlley, Inc., served as its Executive Vice President from July 1998 to March 1999. He served as Chairman and Chief Executive Officer of True North Technologies, Inc. from March 1996 to June 1996. From March 1979 to March 1996, Mr. Balousek worked for Foote, Cone & Belding Communications, Inc. and served as its President and Chief Operating Officer from February 1991 to March 1996. He served as a director of Foote, Cone & Belding from May 1989 to May 1994, and then served as a director of True North Communications, Inc., a newly-created holding company of Foote, Cone & Belding, from June 1994 to February 1997. Mr. Balousek is also a director of Micron Electronics, Inc., Geoworks Corporation, FreeShop.com, Inc., Transilluminant Corporation, Worldwide Magnifi, Inc., and EDBH, Inc. He holds a B.A. from Creighton University and an M.S. from Northwestern University. Matthew T. Cowan has served as one of our directors since June 1999. Mr. Cowan has been a general partner of Bowman Capital Management, L.L.C., a private venture capital firm, since October 1998. From July 1994 until September 1998, he served as a Director of Corporate Business Development for Intel Corporation. Mr. Cowan is also a director of Support.com, Inc., ELetter Incorporated and sixdegrees, Inc. He holds a B.A. from Tufts University. John R. Hummer has served as one of our directors since April 1999. Mr. Hummer is a general partner of Hummer Winblad Venture Partners, a private venture capital firm, which he co-founded in September 1989. From 1980 until 1989 he served as partner of Glenwood Management, a private venture capital firm. Mr. Hummer is also a director of Extensity, Inc., Industrywide Mortgage Exchange, Inc., The National Transportation Exchange, Inc., Mambo.com, and Netcontext, Inc. He holds a B.A. from Princeton University and an M.B.A. from Stanford University. Randolph J. Tinsley has served as one of our directors since April 1999. Mr. Tinsley has served as Vice President of Corporate Development of Amazon.com, Inc. since April 1999 and as Director of Corporate Development from January 1998 to March 1999. He also served as Treasurer from January 1998 to November 1999. He served as Assistant Treasurer of Mergers and Acquisitions of Intel Corporation from August 1994 to January 1998 and as Senior Attorney from December 1992 to August 1994. From May 1989 to December 1992, he was an associate with Fenwick & West LLP and from June 1987 to May 1989, he was an associate with Orrick, Herrington & Sutcliffe LLP. Mr. Tinsley serves on the Board of Advisors of Spinnaker Crossover Fund, L.P. He holds a B.A. from the University of California at Berkeley and a J.D. from the University of Santa Clara. BOARD COMPOSITION Our bylaws currently provide for a board of directors consisting of five directors. Each director is elected for a period of one year at our annual meeting of stockholders and serves until the next annual meeting or until his or her successor is duly elected and qualified. The executive officers serve at the discretion of the board of directors. There are no family relationships among any of our directors or executive officers. 45 49 BOARD COMPENSATION Except for reimbursement for reasonable travel expenses relating to attendance at board and committee meetings and the grant of stock options, directors are not compensated for their services as directors. Our directors are eligible to participate in our 1999 Stock Plan and, upon the closing of this offering, directors who are employees of Pets.com will also be eligible to participate in our 2000 Employee Stock Purchase Plan. Julia Wainwright is the only director who is currently an employee. We have issued and sold to Ms. Wainwright 1,157,023 shares of common stock under our 1999 Stock Plan at a price of $0.01 per share. Ms. Wainwright's shares are subject to our right of repurchase at the original purchase price in the event that Ms. Wainwright's employment with Pets.com terminates. Our repurchase right lapses with respect to 25% of the shares purchased by Ms. Wainwright on March 10, 2000 and with respect to 1/48th of the shares on the 10th day of each month after that date. In addition, our repurchase right will lapse with respect to 50% of the remaining unvested shares held by Ms. Wainwright if she is terminated without cause within twelve months after a merger or sale of Pets.com resulting in a change of control. We have also granted to Mr. Balousek an option to purchase up to 45,000 shares of common stock at an exercise price of $1.50 per share under our 1999 Stock Plan. Mr. Balousek's stock option vests at the rate of 25% of the shares subject to this option on October 29, 2000 and 1/48th of the shares subject to this option on the 29th day of each month after that date. For additional information, see "Stock Plans." BOARD COMMITTEES In May 1999, our board of directors established an audit committee and a compensation committee. The audit committee reviews our annual audited financial results and unaudited quarterly results, and meets with our independent auditors to review our financial statements, internal controls and financial management practices. Our audit committee currently consists of John Balousek and Randolph Tinsley. Our compensation committee reviews and recommends to the board the compensation arrangements for our management team and administers our stock plans. Our compensation committee currently consists of John Hummer and Randolph Tinsley. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the compensation committee of our board of directors are currently John Hummer and Randolph Tinsley. Neither of them has at any time been an officer or employee of Pets.com or any subsidiary of Pets.com. However, we have issued and sold in private placement transactions shares of preferred stock to certain entities affiliated with Hummer Winblad Venture Partners and to Amazon.com. Mr. Hummer is a general partner of Hummer Winblad Venture Partners which manages certain investment funds that have purchased shares of our preferred stock, and Mr. Tinsley is Vice President, Corporate Development of Amazon.com that has purchased shares of our preferred stock and entered into an advertising agreement with us. The following is a summary of the stock purchase transactions between us and entities affiliated with Hummer Winblad Venture Partners, and between us and Amazon.com. Entities Affiliated with Hummer Winblad Venture Partners - March 10, 1999: we issued a convertible promissory note in the principal amount of $142,500 to Hummer Winblad Venture Partners III, L.P. and a second convertible promissory note in the principal amount of $7,500 to Hummer Winblad Technology Fund III, L.P., which notes were canceled and converted into shares of Series A preferred stock at $1.45 per share on April 22, 1999. - March 19, 1999: we issued a convertible promissory note in the principal amount of $237,500 to Hummer Winblad Venture Partners III, L.P. and a second convertible promissory note in the principal amount of $12,500 to Hummer Winblad Technology Fund III, L.P., which notes were canceled and converted into shares of Series A preferred stock at $1.45 per share on April 22, 1999. - April 22, 1999: we issued and sold to Hummer Winblad Venture Partners III, L.P. 2,389,503 shares of Series A preferred stock and to Hummer Winblad Technology Fund III, L.P. 125,763 shares of Series A Preferred Stock, all at $1.45 per share, which included cancellation and 46 50 conversion of the promissory notes issued to each entity respectively on March 10, 1999 and March 19, 1999 (including conversion of accrued interest on the promissory notes). - June 18, 1999: we issued and sold to Hummer Winblad Venture Partners III, L.P. and Hummer Winblad Technology Fund III, L.P. 899,669 shares and 47,351 shares, respectively, of our Series B preferred stock at $7.55 per share. - November 5, 1999: we issued and sold to Hummer Winblad Venture Partners IV, L.P. 1,008,800 shares of Series B preferred stock at $7.55 per share and a convertible promissory note in the principal amount of $2,383,565, which note was cancelled and converted into shares of Series B Preferred Stock at $7.55 per share on December 8, 1999. - December 8, 1999: we issued and sold to Hummer Winblad Venture Partners IV, L.P. 1,375,307 shares of Series B Preferred Stock at $7.55 per share, which included cancellation and conversion of the promissory note issued to this investor on November 5, 1999. Amazon.com - April 22, 1999: we issued and sold to Amazon.com 4,401,716 shares of Series A preferred stock at $1.45 per share. - June 18, 1999: we issued and sold to Amazon.com 4,728,477 shares of Series B preferred stock at $7.55 per share. - November 5, 1999: we issued and sold to Amazon.com 1,692,038 shares of Series B preferred stock at $7.55 per share and a convertible promissory note in the principal amount of $2,975,115, which note was canceled and converted into 394,055 shares of Series B preferred stock on December 8, 1999. For additional information concerning compensation committee interlocks and insider participation in compensation decisions, please refer to our discussion of entities affiliated with Hummer Winblad Venture Partners and Amazon.com under "Related Party Transactions." 47 51 EXECUTIVE COMPENSATION The following table provides summary information concerning the compensation to be received for services rendered to us during the fiscal year ending December 31, 1999 by each person who served as our chief executive officer, or who acted in a similar capacity, and each of the other four most highly compensated executive officers, collectively, the "named officers," each of whose aggregate compensation during our last fiscal year exceeded $100,000. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS ----------------------------------- ------------ SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION --------------------------- -------- ------- ------------ ---------- ------------ Julia L. Wainwright.................. $147,568 $ -- $ -- -- $ -- Chief Executive Officer Christopher E. Deyo.................. 134,009 -- -- 653,969 -- President Paul W. Melmon....................... 111,009 -- -- 278,950 -- Vice President, Engineering John A. Hommeyer..................... 103,395 20,000 -- 175,000 25,000 Vice President, Marketing Diane R. Hourany..................... 99,802 10,000 -- 157,204 320 Vice President, Operations Gregory McLemore..................... 39,231 -- -- -- -- President
Mr. McLemore served as President of Pets.com from February 1999 until April 1999. On an annualized basis, Mr. McLemore's salary would have been $150,000. Paul Manca was hired as our Chief Financial Officer in August 1999. On an annualized basis, Mr. Manca's salary would have been $175,000. Ralph Lewis was hired as our Vice President of Distribution and Logistics in November 1999. On an annualized basis, Mr. Lewis' salary would have been $200,000. 48 52 OPTION GRANTS The following table provides summary information regarding stock options granted to each of the named officers during the fiscal year ended December 31, 1999. The options were granted pursuant to our 1999 Stock Plan. All options are immediately exercisable; however, the underlying shares are subject to our right of repurchase at the original purchase price. Our repurchase right will lapse with respect to 25% of the shares on the one year anniversary of the vesting commencement date, and with respect to 1/48th of the shares each month thereafter. Stock price appreciation of 5% and 10% is assumed pursuant to rules promulgated by the Securities and Exchange Commission and does not represent our prediction of our stock performance. There is no assurance provided to any holder of our securities that the actual stock price appreciation over the ten-year option terms will be at the assumed 5% and 10% levels or at any other defined level. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE -------------------------------------------------- VALUE AT ASSUMED PERCENT OF ANNUAL RATES OF NUMBER OF TOTAL STOCK PRICE SECURITIES OPTIONS APPRECIATION UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -------------------- NAME GRANTED FISCAL YEAR SHARE DATE 5% 10% ---- ---------- ------------ --------- ---------- ----- ----- Julia L. Wainwright............. -- --% $ -- -- $-- $-- Christopher E. Deyo............. 653,969 -- 0.15 05/12/09 -- -- Paul W. Melmon.................. 238,950 -- 0.15 05/12/09 -- -- 40,000 -- 0.75 07/29/09 -- -- John A. Hommeyer................ 150,000 -- 0.15 05/18/09 -- -- 25,000 -- 1.50 11/06/09 -- -- Diane R. Hourany................ 157,204 -- 0.15 05/12/09 -- -- Gregory McLemore................ -- -- -- -- -- --
In August 1999, we granted the right to purchase 250,000 shares of our common stock to Paul Manca, our Chief Financial Officer at an exercise price of $0.75 per share, which shares are subject to our right of repurchase at the original purchase price in the event that Mr. Manca's employment with us terminates. Our repurchase right lapses with respect to 25% of the shares in August 2000 and with respect to 1/48th of the shares monthly thereafter. In November 1999, we granted an option exercisable for 175,000 shares of our common stock to Ralph Lewis, our Vice President of Distribution and Logistics. We granted options for an aggregate of 5,266,659 shares to our employees and consultants under our 1999 Stock Plan during our fiscal year ended December 31, 1999. See "Stock Plans." Options were granted at an exercise price equal to the fair market value of the common stock, as determined by our board of directors on the date of grant. 49 53 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR OPTION VALUES The following table provides summary information concerning the shares of common stock acquired in the year ended December 31, 1999, the value realized upon exercise of stock options during that period, and the number and value of unexercised options with respect to each of the named officers as of December 31, 1999. The value was calculated by determining the difference between the fair market value of underlying common stock and the exercise price. All options are immediately exercisable; however, the underlying shares are subject to our right of repurchase at the original purchase price. Our repurchase right will lapse with respect to 25% of the shares on the one year anniversary of the vesting commencement date, and with respect to 1/48th of the shares each month thereafter. FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT SHARES DECEMBER 31, 1999 DECEMBER 31, 1999 ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- -------- ----------- ------------- ----------- ------------- Julia L. Wainwright............. -- $-- -- -- $-- $-- Christopher E. Deyo............. 653,969 0 -- -- -- -- Paul W. Melmon.................. 238,950 0 40,000 -- -- John A. Hommeyer................ 150,000 0 25,000 -- -- Diane R. Hourany................ 157,204 0 -- -- -- -- Gregory McLemore................ -- -- -- -- -- --
STOCK PLANS 1999 Stock Plan. Our 1999 Stock Plan was adopted by our board of directors in February 1999 and approved by our stockholders in March 1999. The plan was amended at various times after February 1999 to increase the number of shares reserved for issuance thereunder. These amendments were approved by our stockholders. A total of 7,269,159 shares of common stock has been reserved for issuance under our stock plan. As of December 9, 1999, options to purchase 3,881,409 shares of common stock had been exercised, options to purchase a total of 1,335,250 shares at a weighted average exercise price of $1.48 per share were outstanding and 2,050,000 shares remained available for future grants under the plan. In connection with this offering, our board amended the stock plan to provide for, among other things, an automatic annual increase in the number of shares of common stock reserved for issuance on the first day of each of our fiscal years beginning in 2001 and ending in 2009 equal to the lesser of: - 1,000,000 shares; - 3% of the shares outstanding on the last day of the immediately preceding fiscal year; or - a lesser number of shares as determined by our board of directors. The purposes of our stock plan are to attract and retain the best available personnel, to provide additional incentives to our employees and consultants and to promote the success of our business. Our stock plan provides for the granting to employees, including officers and employee directors, of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and for the granting to employees and consultants, including non-employee directors, of nonstatutory stock options and stock purchase rights. To the extent an optionee would have the right in any calendar year to exercise for the first time one or more incentive stock options for shares having an aggregate fair market value (under all plans of Pets.com and determined for each share as of the date the option to purchase the shares was granted) in excess of $100,000, any such excess options will be treated as nonstatutory stock options. If not terminated earlier, our stock plan will terminate in February 2009. 50 54 Our stock plan may be administered by the board of directors or a committee of the board. Our stock plan is currently administered by our board of directors. The administrator determines the terms of options granted under our stock plan, including the number of shares subject to the option, exercise price, term and exercisability. In no event, however, may an individual employee receive option grants for more than 2,000,000 shares under the stock plan in any fiscal year. The exercise price of all incentive stock options granted under our stock plan must be at least equal to the fair market value of our common stock on the date of grant. The exercise price of any incentive stock option granted to an optionee who owns stock representing more than 10% of the total combined voting power of all classes of our outstanding capital stock must equal at least 110% of the fair market value of the common stock on the date of grant. The exercise price of all nonstatutory stock options and stock purchase rights shall be the price determined by the administrator, provided, however, that the exercise price of any nonstatutory stock option or stock purchase right granted to a named officer must equal at least 100% of the fair market value of the common stock on the date of grant in order for that grant to qualify as performance-based compensation under applicable tax law. Payment of the exercise price may be made in cash or other consideration as determined by the administrator. The administrator determines the term of options, which may not exceed 10 years (5 years in the case of an incentive stock option granted to an optionee who owns stock representing more than 10% of the total combined voting power of all classes of our outstanding capital stock). Options and stock purchase rights are generally nontransferable. The administrator may grant nonstatutory stock options and stock purchase rights with limited transferability rights in circumstances specified in the stock plan. Each option and stock purchase right may generally be exercised during the lifetime of the optionee only by such optionee or a permitted transferee. The administrator determines the vesting terms of options and stock issued pursuant to stock purchase rights. Options granted under the 1999 Stock Plan generally may be exercised immediately after the grant date, but to the extent the shares subject to the options are not vested as of the date of exercise, we retain a right to repurchase any shares that remain unvested at the time of the optionee's termination of employment by paying an amount equal to the exercise price times the number of unvested shares. Options granted under the 1999 Stock Plan generally vest at the rate of 1/4th of the total number of shares subject to the options twelve months after the date of grant and 1/48th of the total number of shares subject to the options each month thereafter. In addition to stock options, the administrator may issue stock purchase rights under the 1999 Stock Plan to employees, non-employee directors and consultants. The administrator determines the number of shares, price, terms, conditions and restrictions related to the grant of stock purchase rights. The purchase price of a stock purchase right granted under the 1999 Stock Plan will be determined by the administrator. The period during which the stock purchase right is held open is determined by the administrator, but in no case shall this period exceed 30 days. Unless the administrator determines otherwise, the recipient of a stock purchase right must execute a restricted stock purchase agreement granting Pets.com an option to repurchase unvested shares at cost upon termination of recipient's relationship with us. In the event of a change of control due to the sale of all or substantially all of our assets or merger of Pets.com with another corporation, then each option may be assumed or an equivalent option substituted by the successor corporation. If the successor corporation does not agree to an assumption or substitution, each outstanding stock option will terminate on the effective date of the transaction. Some option agreements issued by the administrator provide for limited acceleration of vesting in certain circumstances following a change of control transaction. The administrator has the authority to amend or terminate our stock plan as long as this action would not adversely affect any outstanding option or stock purchase right and provided that stockholder approval is required for some amendments to the extent required by applicable law. 2000 Employee Stock Purchase Plan. Our 2000 Employee Stock Purchase Plan was adopted by the board of directors in December 1999 and approved by our stockholders in December 1999. A total of 500,000 shares of common stock have been reserved for issuance under our purchase plan, plus an 51 55 automatic annual increase on the first day of each of our fiscal years beginning in 2001 and ending in 2010 equal to the lesser of: - 300,000 shares; - 1% of the shares outstanding on the last day of the immediately preceding fiscal year; or - a lesser number of shares as determined by our board. Our purchase plan, which is intended to qualify under Section 423 of the Code, will be implemented by a series of overlapping offering periods of 24 months' duration, with new offering periods (other than the first offering period) commencing on February 1 and August 1 of each year. Each offering period will consist of four consecutive purchase periods of six months duration. The initial offering period is expected to commence on the date of this offering and end on January 31, 2002, and the initial purchase period is expected to end on July 31, 2000. The purchase plan will be administered by the board of directors or by a committee appointed by the board. Our employees (including officers and employee directors), and the employees of any majority-owned subsidiary designated by the board, are eligible to participate in the purchase plan if they are employed by us or any such subsidiary for at least 20 hours per week and more than five months per year. The purchase plan permits eligible employees to purchase common stock through payroll deductions, which may not exceed 20% of an employee's compensation, at a price equal to the lower of 85% of the fair market value of our common stock at the beginning of each offering period or at the end of each purchase period. In circumstances described in the purchase plan, the purchase price may be adjusted during an offering period to avoid our incurring adverse accounting charges. The maximum number of shares an employee may purchase during each purchase period is 2,000 shares, subject to certain IRS limitations specified in the plan. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment with us. If not terminated earlier, the purchase plan will have a term of ten years. The purchase plan provides that in the event of our merger with or into another corporation or a sale of all or substantially all of our assets, each right to purchase stock under the purchase plan will be assumed or an equivalent right substituted by the successor corporation. If the successor corporation does not agree to assume or substitute stock purchase rights, our board of directors will shorten the offering periods then in effect so that employees' rights to purchase stock under the purchase plan are exercised prior to the merger or sale of assets. The board of directors has the power to amend or terminate the purchase plan as long as such action does not adversely affect any outstanding rights to purchase stock thereunder, provided however, that the board of directors may amend or terminate the purchase plan or an offering period even if it would adversely affect outstanding options in order to avoid our incurring adverse accounting charges. EMPLOYEE BENEFIT PLANS 401(k) Plan. We maintain a 401(k) tax-qualified employee savings and retirement plan covering all employees who satisfy eligibility requirements relating to minimum age and length of service. Pursuant to our 401(k) plan, eligible employees may elect to contribute up to 20% of their cash compensation to the 401(k) plan. The 401(k) plan is intended to qualify under applicable law, so that contributions to the 401(k) plan and income earned on the 401(k) plan contributions are not taxable until withdrawn. The 401(k) plan is available to our executive officers on terms not more favorable than those offered to other employees. We may elect to make contributions to the 401(k) plan at the discretion of our board of directors. No contributions have been made by us as of December 31, 1999. All employee contributions are 100% vested. EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS We have entered into the following employment and change of control arrangements with our current officers. For a description of arrangements with our former officers, directors and substantial stockholders, see "Related Party Transactions" on page 58. 52 56 In March 1999, we entered into a letter agreement with Julia Wainwright, our Chief Executive Officer. Under the agreement, Ms. Wainwright receives an annual salary of $185,000 and she was granted the right to purchase 1,157,023 shares of common stock at a purchase price of $0.01 per share, which shares are subject to our right of repurchase at the original purchase price in the event that Ms. Wainwright's employment with us terminates. Our repurchase right lapses with respect to 25% of the shares on March 10, 2000 and with respect to 1/48th of the shares monthly thereafter. In the event of a change of control, 50% of any remaining unvested shares held by Ms. Wainwright will accelerate and vest. In March 1999, we entered into a letter agreement with Christopher Deyo, our President. Under the agreement, Mr. Deyo receives an annual salary of $185,000 and was granted an option to purchase 653,969 shares of common stock at an exercise price of $0.15 per share, 25% of which vest after one year of service, and 1/48th of the shares subject to the option vest every month thereafter. In the event of a change of control, 50% of any remaining unvested shares will accelerate and vest. In August 1999, we entered into a letter agreement with Paul Manca, our Chief Financial Officer. Mr. Manca receives an annual salary of $175,000 and was granted the right to purchase 250,000 shares of common stock at an exercise price of $0.75 per share, which shares are subject to our right of repurchase at the original purchase price in the event that Mr. Manca's employment with us terminates. Our repurchase right lapses with respect to 25% of the shares in August 2000 and with respect to 1/48th of the shares monthly thereafter. In April 1999, we entered into a letter agreement with John Benjamin, our Vice President of Merchandising. Under the agreement, Mr. Benjamin receives an annual salary of $125,000, relocation expenses of $25,000 and was granted an option to purchase 90,000 shares of common stock at an exercise price of $0.15 per share, 25% of which vest after one year of service and 1/48th of the shares subject to the option vest every month thereafter. In March 1999, we entered into a letter agreement with John Hollon, our Vice President of Editorial. Under the agreement, Mr. Hollon receives an annual salary of $100,000, received a signing of bonus of $10,000 and was granted an option to purchase 125,000 shares of common stock at an exercise price of $0.15 per share, 25% of which vest after one year of service and 1/48th of the shares subject to the option vest every month thereafter. In May 1999, we entered into a letter agreement with John Hommeyer, our Vice President of Marketing. Under the agreement, Mr. Hommeyer receives an annual salary of $165,000 and received a bonus of $20,000 and relocation expenses of $25,000. Mr. Hommeyer also was granted an option to purchase 150,000 shares of common stock at an exercise price of $0.15 per share, 25% of which vest after one year of service and 1/48th of the shares subject to the option vest every month thereafter. In the event Mr. Hommeyer is terminated with or without cause within one year after a change of control in connection with our merger or sale or if our office is moved more than fifty miles from our current San Francisco location, Mr. Hommeyer will receive severance equal to three months of his current monthly salary. In April 1999, we entered into a letter agreement with Diane Hourany, our Vice President of Customer Service. Under the agreement, Ms. Hourany receives an annual salary of $150,000, received a bonus of $10,000 and an option to purchase 157,204 shares of common stock at an exercise price of $0.15 per share, 25% of which vest after one year of service and 1/48th of the shares subject to the option vest every month thereafter. In the event of a change in control, 25% of Ms. Hourany's remaining unvested shares will accelerate and become fully vested. In the event Ms. Hourany is terminated with or without cause within one year after a change of control in connection with our merger or sale or if our office is moved more than fifty miles from our current San Francisco location, Ms. Hourany will receive severance equal to three months of her current monthly salary. In May 1999, we entered into a letter agreement with Sue Ann Latterman, our Vice President of Strategic Alliances. Under the agreement, Ms. Latterman receives an annual salary of $150,000, received a bonus of $10,000 and was granted an option to purchase 150,000 shares of common stock at an exercise 53 57 price of $0.15 per share, 25% of which vest after one year of service and 1/48th of the shares subject to the option vest every month thereafter. In the event Ms. Latterman is terminated with or without cause within one year after a change of control in connection with our merger or sale or if our office is moved more than fifty miles from our current San Francisco location, Ms. Latterman will receive severance equal to three months of her current monthly salary. In November 1999, we entered into a letter agreement with Ralph Lewis, our Vice President of Distribution and Logistics. Under the agreement, Mr. Lewis receives an annual salary of $200,000, received a bonus of $20,000, relocation expenses of $75,000, and was granted an option to purchase 175,000 shares of common stock at an exercise price of $1.50 per share, 25% of which vest after one year of service and 1/48th of the shares subject to the option vest every month thereafter. In the event Mr. Lewis is terminated with or without cause within one year after a change of control in connection with our merger or sale or if our office is moved more than fifty miles from our current San Francisco location, Mr. Lewis will receive severance equal to three months of his current salary. In April 1999, we entered into a letter agreement with Paul Melmon, our Vice President of Engineering. Under the agreement, Mr. Melmon receives an annual salary of $160,000 and was granted an option to purchase 238,950 shares of common stock, 25% of which vest after one year of service and 1/48th of the shares subject to the option vest every month thereafter. In March 1999, we entered into a letter agreement with Kathryn Ringewald, our Vice President of Human Resources. Under the agreement, Ms. Ringewald receives an annual salary of $120,000 and was granted an option to purchase 125,763 shares of common stock, 25% of which vest after one year of service and 1/48th of the shares subject to the option vest every month thereafter. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS As permitted by the Delaware General Corporation Law, we have included in our restated certificate of incorporation a provision to eliminate the personal liability of our officers and directors for monetary damages for breach or alleged breach of their fiduciary duties as officers or directors, respectively, subject to certain exceptions. In addition, our bylaws provide that we are required to indemnify our officers and directors under certain circumstances, including those circumstances in which indemnification would otherwise be discretionary, and we are required to advance expenses to our officers and directors as incurred in connection with proceedings against them for which they may be indemnified. We have entered into indemnification agreements with our officers and directors containing provisions that are in some respects broader than the specific indemnification provisions contained in Delaware Law. The indemnification agreements require that we, among other things, indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as officers and directors (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors' and officers' insurance if available on reasonable terms. We intend to obtain directors' and officers' liability insurance prior to the completion of this offering. At present, we are not aware of any pending or threatened litigation or proceeding involving any of our directors, officers, employees or agents in which indemnification would be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. We believe that our charter provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. 54 58 RELATED PARTY TRANSACTIONS The following describes the significant transactions entered into between us and our directors, executive officers, stockholders and affiliates of our stockholders. All future transactions, other than compensation, stock options pursuant to our plans and other benefits to employees, generally will be approved by a majority of our board of directors including a majority of our independent and disinterested directors. If required by law, future transactions will be approved by a majority of our stockholders. STOCK ISSUANCES TO OUR DIRECTORS, OFFICERS AND PRINCIPAL STOCKHOLDERS Some stock option grants to our directors and executive officers are described under the caption "Management -- Executive Compensation." Since our inception, we have issued and sold shares of our common stock and granted options to purchase common stock to our employees, directors and consultants from time to time. In addition, we have issued in private placement transactions, shares of preferred stock as follows: an aggregate of 7,227,328 shares of Series A preferred stock at $1.45 per share in April 1999 and an aggregate of 13,148,347 shares of Series B preferred stock at $7.55 per share in June, November and December 1999. The following table summarizes the shares of common stock and preferred stock purchased by our named executive officers, directors and 5% stockholders and persons and entities associated with them:
SERIES A SERIES B COMMON PREFERRED PREFERRED STOCKHOLDER STOCK STOCK STOCK ----------- --------- --------- --------- Amazon.com, Inc. (Randolph J. Tinsley).............. -- 4,401,716 6,814,570 Entities Affiliated with Bowman Capital Management, L.L.C. (Matthew T. Cowan)......................... -- -- 1,728,477 Entities Affiliated with Hummer Winblad Venture Partners (John R. Hummer)......................... -- 2,515,266 3,331,127 Gregory McLemore.................................... 1,610,587 275,863 --
DEBT FINANCINGS In March 1999 we issued and sold convertible promissory notes to our following named executive officers, directors and 5% stockholders and persons and entities associated with them, in the amounts set forth opposite each such party's name. The promissory notes were canceled and converted into share of our Series A preferred stock at $1.45 per share on April 22, 1999.
AMOUNT OF STOCKHOLDER PROMISSORY NOTE(S) ----------- ------------------ Entities Affiliated with Hummer Winblad Venture Partners (John R. Hummer).......................................... $450,000.00
In November 1999 we issued and sold convertible promissory notes to our following named executive officers, directors and 5% stockholders and persons and entities associated with them, in the amounts set forth opposite each such party's name. The promissory notes were cancelled and converted into shares of our Series B preferred stock at $7.55 per share on December 8, 1999.
AMOUNT OF STOCKHOLDER PROMISSORY NOTE(S) ----------- ------------------ Amazon.com, Inc............................................. $2,975,115.25 Entities Affiliated with Bowman Capital Management, L.L.C....................................................... $1,430,136.10 Entities Affiliated with Hummer Winblad Venture Partners.... $2,383,565.20
TRANSACTIONS WITH DIRECTORS AND OFFICERS Affiliate Relationships. The following members of our board of directors are affiliated with certain investors that participated in the transactions listed above: Randolph J. Tinsley (Amazon.com, Inc.), 55 59 Matthew T. Cowan (entities affiliated with Bowman Capital Management, L.C.C.) and John Hummer (entities affiliated with Hummer Winblad Venture Partners). In April 1999, we entered into an advertising agreement with Amazon.com pursuant to which we and Amazon.com agreed to display certain advertising of the other party on our respective Web sites and to provide other related promotional services. For more information on this relationship, see "Business -- Relationship with Amazon.com" and "Risk Factors -- We Depend on Our Relationship with Amazon.com to Provide Operational Expertise, Attract and Retain a Significant Number of Our Customers and Build Our Brand." In connection with our Series A and Series B preferred stock financings, we entered into an agreement, as amended, dated November 5, 1999 with our preferred stockholders and a holder of over common stock in which we agreed, among other things and subject to applicable laws, rules and regulations, to use reasonable efforts to cause the underwriters in this offering to offer to Amazon.com that number of shares of our common stock such that Amazon.com would hold 46% of our outstanding common stock immediately after this offering. Under the agreement, the managing underwriters may prohibit Amazon.com from purchasing any shares in this offering or only allow Amazon.com to purchase a number of shares which in their sole discretion will not jeopardize the success of this offering. We are currently negotiating a waiver from Amazon.com with respect to its right of first offer. The agreement further provides that if Amazon.com is unable in this offering to purchase enough shares to reach the 46% threshold, then to the extent the managing underwriters determine that the sale of additional shares will not jeopardize the success of this offering, we will use best efforts to offer and sell to Amazon.com, and Amazon.com may, but is not obligated to, purchase up to that number of additional shares in a private placement so that its ownership percentage is 46%. However, the agreement provides that the foregoing terms are not intended to be, and shall not be, construed as an offer by us to sell shares to Amazon.com. The agreement also provides that, if Amazon.com is unable in this offering and in the private placement offering described above to purchase enough shares to reach the 46% threshold, then for a period of one year following the closing of this offering, we will negotiate with Amazon.com to agree upon a means by which Amazon.com may purchase the number of shares that it was not permitted to purchase in this offering or the private placement described above to enable it to reach the 46% threshold. Furthermore, if Amazon.com is unable to achieve the 46% threshold in this offering, for one year following the closing of this offering, if we offer additional shares of our capital stock to any purchasers, Amazon.com shall have a right of first offer to purchase that number of the offered shares that will enable it to attain the 46% threshold. However, if Amazon.com disposes of any of our shares held by it, then all of its rights described above shall terminate. Pursuant to the agreement, Amazon.com also may not increase its ownership of our stock above the 46% threshold until the earliest to occur of the second anniversary of the closing date of our initial public offering, immediately following a change of control in connection with our merger or sale, or April 22, 2003. Until this occurs, we are required to provide notice to Amazon.com of any merger or sale that would result in our change of control. Additional terms of the agreement require that Amazon.com gives us notice of its purchase of any additional shares of our stock and complies with restrictions to allow us to qualify for pooling accounting treatment in the event of our merger or sale. In connection with proxy contests, tender offers or exchange offers, however, Amazon.com shall not be subject to the 46% threshold limit. For information on employment and change in control arrangements with our officers, see "-- Employment and Change of Control Arrangements." OTHER TRANSACTIONS In February 1999, we issued 1,610,587 shares of our common stock to Greg McLemore in consideration of the transfer to us of the Pets.com Web store and certain domain names and software assets pursuant to a bill of sale and assignment by Mr. McLemore and Koala Computer Products, a sole proprietorship of which Mr. McLemore is sole proprietor. 56 60 In April 1999, we issued 275,863 shares of our Series A preferred stock to Mr. McLemore in consideration of the transfer to us by Mr. McLemore of certain domain names and agreements concerning domain names pursuant to a bill of sale and assignment. We have reimbursed certain operating expenses of approximately $175,000 that were paid on our behalf by Koala Computer Products, of which Mr. McLemore is the sole proprietor, between February 1999 and the relocation of our executive offices to San Francisco in April 1999. Mr. McLemore and Webmagic, a corporation of which Mr. McLemore is the sole shareholder, have agreed to indemnify us for up to $500,000 in connection with a third-party online promotional agreement entered into by Webmagic and the third party relating to the Pets.com business conducted by Mr. McLemore and Webmagic prior to April 1999. In November 1999, we loaned $187,500 to Paul Manca, our Chief Financial Officer. Mr. Manca used the loan proceeds to exercise in November 1999 options held by him to purchase 250,000 shares of our common stock at an exercise price of $0.75 per share. These shares are subject to our right of repurchase at the original purchase price in the event that Mr. Manca's employment with us terminates. Our repurchase right lapses with respect to 25% of the shares in August 2000 and with respect to 1/48th of the shares monthly thereafter. The loan is full recourse, accrues interest at the rate of 6.08% compounded annually, and matures in November 2003 or on Mr. Manca's termination of employment. The loan is secured by the 250,000 shares of common stock held by Mr. Manca. INDEMNIFICATION AGREEMENTS We have entered into indemnification agreements with our officers and directors that contain provisions which may require us, among other things, to indemnify our officers and directors against liabilities that may arise by reason of their status or service as officers or directors (other than liabilities arising from willful misconduct of a culpable nature) and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. See "Management -- Limitation of Liability and Indemnification Matters." 57 61 PRINCIPAL STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock as of December 9, 1999 and as adjusted to reflect the sale of the common stock offered by us under this prospectus and upon conversion of all outstanding shares of preferred stock into common stock by: - each stockholder known to us to own beneficially more than 5% of our common stock; - each of our directors and named officers; and - all directors and executive officers as a group. Except as otherwise noted, the address of each person listed in the table is c/o Pets.com, Inc., 435 Brannan Street, Suite 100, San Francisco, California 94107. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and investment power with respect to shares. To our knowledge, except under applicable community property laws or as otherwise indicated, the persons named in the table have sole voting and sole investment control with respect to all shares beneficially owned by each stockholder as of December 9, 1999. In computing the number of shares beneficially owned by a person and the percentage of ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of December 9, 1999 are deemed outstanding. Those shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. The percent of beneficial ownership for each stockholder is based on 26,068,921 shares of common stock outstanding as of December 9, 1999 on an as converted basis, and shares of common stock outstanding after this offering.
PERCENT BENEFICIALLY OWNED SHARES -------------------- BENEFICIALLY BEFORE AFTER NAME AND ADDRESS OWNED OFFERING OFFERING ---------------- ------------ -------- -------- Amazon.com, Inc............................................. 11,216,286 43.0% % 1200 12th Avenue South, Suite 1200 Seattle, WA 98108-1226 Entities Affiliated with Hummer Winblad Venture Partners.... 5,846,393 22.4% % 2 South Park, 2nd Floor San Francisco, CA 94107 Gregory McLemore............................................ 1,886,450 7.2% % Entities Affiliated with Bowman Capital Management, L.L.C..................................................... 1,728,477 6.6% % 1875 South Grant Street, Suite 600 San Mateo, CA 94402-7013 Randolph J. Tinsley......................................... 11,216,286 43.0% % John R. Hummer.............................................. 5,846,393 22.4% % Matthew T. Cowan............................................ 1,728,477 6.6% % John B. Balousek............................................ 45,000 * * Julia L. Wainwright......................................... 1,157,023 4.4% % Christopher E. Deyo......................................... 653,969 2.5% % Paul W. Melmon.............................................. 278,950 1.1% % John A. Hommeyer............................................ 150,000 * * Diane R. Hourany............................................ 157,204 * * All executive officers and directors as a group (15 persons).................................................. 22,149,065 83.8% %
- --------------- * Less than 1% of the outstanding shares of common stock. The beneficial ownership for entities affiliated with Hummer Winblad Venture Partners is comprised of 3,289,172 shares held by Hummer Winblad Venture Partners III, L.P., 173,114 shares held by Hummer Winblad Technology Fund III, L.P., and 2,384,107 shares held by Hummer Winblad Venture Partners IV, L.P. The general partner of each of the first two funds listed in the first sentence of this paragraph is 58 62 Hummer Winblad Equity Partners III, LLC, and the general partner of the third fund is Hummer Winblad Equity Partners IV, LLC. The members of each of the foregoing general partners are principals of Hummer Winblad Venture Partners. The beneficial ownership for entities affiliated with Bowman Capital Management, L.L.C. is comprised of 607,933 shares held by Spinnaker Technology Fund, L.P., 371,764 shares held by Spinnaker Founders Fund, L.P., 24,901 shares held by Spinnaker Clipper Fund, L.P., 512,697 shares held by Spinnaker Technology Offshore Fund Limited, and 211,182 shares held by Spinnaker Offshore Founders Fund Cayman Limited. Bowman Capital Management, L.C.C. is the general partner of each of the first three entities and investment adviser to the last two offshore entities listed in the first sentence of this paragraph. The beneficial ownership for Randolph J. Tinsley is comprised of 11,216,286 shares held by Amazon.com. Mr. Tinsley is a director of Pets.com and Vice President of Corporate Development of Amazon.com and he disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in these shares. The beneficial ownership for John R. Hummer is comprised of 3,289,172 shares held by Hummer Winblad Venture Partners III, L.P., 173,114 shares held by Hummer Winblad Technology Fund III, L.P., and 2,384,107 shares held by Hummer Winblad Venture Partners IV, L.P. Mr. Hummer is a director of Pets.com and a member of each of Hummer Winblad Equity Partners III, LLC and Hummer Winblad Equity Partners IV, LLC, the general partners for the three investment funds listed in the first two sentences of this paragraph, and he disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in these shares. The beneficial ownership for Matthew T. Cowan is comprised of 607,933 shares held by Spinnaker Technology Fund, L.P., 371,764 shares held by Spinnaker Founders Fund, L.P., 24,901 shares held by Spinnaker Clipper Fund, L.P., 512,697 shares held by Spinnaker Technology Offshore Fund Limited, and 211,182 shares held by Spinnaker Offshore Founders Fund Cayman Limited. Mr. Cowan is a director of Pets.com and a member of Bowman Capital Management, L.C.C., the general partner of each of the first three entities listed in the first sentence of this paragraph and investment adviser to the last two entities listed in the first sentence of this paragraph, and he disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in these shares. The beneficial ownership for John B. Balousek includes 45,000 shares under outstanding stock options that are currently exercisable or exercisable within 60 days of December 9, 1999. The beneficial ownership for Paul W. Melmon includes 40,000 shares under outstanding stock options that are currently exercisable or exercisable within 60 days of December 9, 1999. The beneficial ownership for our executive officers and directors as a group includes 350,000 shares under outstanding stock options that are currently exercisable or exercisable within 60 days of December 9, 1999. 59 63 DESCRIPTION OF CAPITAL STOCK Upon the completion of this offering, our authorized capital stock will consist of 150,000,000 shares of common stock, $0.001 par value per share, and 5,000,000 shares of undesignated preferred stock, $0.001 par value per share. COMMON STOCK As of December 9, 1999, there were 26,068,921 shares of common stock outstanding held of record by 120 stockholders. Options to purchase an aggregate of 1,335,250 shares of common stock were also outstanding. There will be shares of common stock outstanding, assuming no exercise of the underwriter's option to purchase additional shares, or exercise of outstanding options under our stock plans after December 9, 1999, after giving effect to the sale of the shares of common stock offered to the public in this prospectus. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, holders of common stock are entitled to receive ratably such dividends as may be declared by the board of directors out of funds legally available for that purpose. In the event of liquidation, dissolution or winding up of Pets.com, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to the prior distribution rights of any outstanding preferred stock. The common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. The outstanding shares of common stock are, and the shares of common stock to be issued upon completion of this offering will be, fully paid and non-assessable. PREFERRED STOCK Upon the closing of the offering, the board of directors will have the authority, without further action by the stockholders, to issue up to 5,000,000 shares of preferred stock. The board of directors will also have the authority to designate the rights, preferences, privileges and restrictions of each such series, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control of Pets.com without further action by the stockholders. The issuance of preferred stock with voting and conversion rights may also adversely affect the voting power of the holders of common stock. In some circumstances, an issuance of preferred stock could have the effect of decreasing the market price of the common stock. As of the closing of the offering, no shares of preferred stock will be outstanding and we currently have no plans to issue any shares of preferred stock. REGISTRATION RIGHTS As of December 9, 1999, the holders of 21,986,262 shares of common stock or their transferees are entitled to certain rights with respect to the registration of such shares under the Securities Act. These rights are provided under the terms of an agreement between the holders of these registrable securities and us. Subject to limitations in the agreement, the holders of at least 33 1/3% of the then outstanding registrable securities may require, on two occasions beginning six months after the date of this prospectus, that we use our best efforts to register these securities for public resale if Form S-3 is not available. If we register any of our common stock either for our own account or for the account of other security holders, all holders of these securities are entitled to include their shares of common stock in that registration, subject to the ability of the underwriters to limit the number of shares included in the offering. The holders of at least 30% of the then outstanding registrable securities may also require that we, not more than twice in any twelve-month period, register all or a portion of such securities on Form S-3 when the use of that form becomes available to us, provided, among other limitations, that the proposed aggregate selling price, net of any underwriters' discounts or commissions, is at least $1,000,000. We will be 60 64 responsible for paying all registration expenses, and the holders selling their shares will be responsible for paying all selling expenses. ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND OUR CHARTER DOCUMENTS Provisions of Delaware law and our charter documents could make the acquisition of Pets.com and the removal of incumbent officers and directors more difficult. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of Pets.com to negotiate with us first. 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 Pets.com outweigh the disadvantages of discouraging such proposals because, among other things, negotiation of such proposals could result in an improvement of their terms. Delaware Law. We are subject to the provisions of Section 203 of the Delaware law. In general, the statute prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date that the person became an interested stockholder unless, subject to exceptions, the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years prior, did own, 15% or more of the corporation's voting stock. These provisions may have the effect of delaying, deferring or preventing a change of control of Pets.com without further action by the stockholders. Charter Documents. Our amended and restated certificate of incorporation provides that stockholder action can be taken only at an annual or special meeting of stockholders and may not be taken by written consent. Our bylaws provide that special meetings of stockholders can be called only by the board of directors, the chairman of the board, if any, the president and holders of 50% of the votes entitled to be cast at a meeting. Moreover, the business permitted to be conducted at any special meeting of stockholders is limited to the business brought before the meeting by the board of directors, the chairman of the board, if any, the president or any such 50% holder. Our bylaws set forth an advance notice procedure with regard to the nomination, other than by or at the direction of the board of directors, of candidates for election as directors and with regard to business to be brought before a meeting of stockholders. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is U.S. Stock Transfer Corporation. The transfer agent's address and telephone number is 1745 Gardena Avenue, 2nd Floor, Glendale, California 91204, (818) 502-1404. NASDAQ STOCK MARKET LISTING We intend to apply for listing for quotation on the Nasdaq National Market under the trading symbol "IPET." 61 65 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for our common stock. Future sales of substantial amounts of our common stock in the public market could adversely affect prevailing market prices. Furthermore, only a limited number of shares will be available for sale shortly after this offering because of certain contractual and legal restrictions on resale. Sales of substantial amounts of our common stock in the public market after the restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon completion of the offering, we will have outstanding shares of common stock, based on the number of shares outstanding as of December 9, 1999. Of these shares, the shares sold in the offering, plus any shares issued upon exercise of the underwriters' option to purchase additional shares, will be freely tradable without restriction under the Securities Act, unless purchased by our "affiliates," as that term is defined in Rule 144 under the Securities Act. In general, affiliates include officers, directors or 10% stockholders. The remaining 26,068,921 shares of our common stock outstanding are "restricted securities" within the meaning of Rule 144. These shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 of the Securities Act, which are summarized below. Sales of these shares in the public market, or the availability of such shares for sale, could adversely affect the market price of our common stock. Our directors, officers, employees and other stockholders have entered into lock-up agreements in connection with this offering generally providing that they will not, without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated, directly or indirectly, offer, pledge, sell, contract to sell or sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of their shares of our common stock or any securities exercisable for or convertible into shares of our common stock for a period of 180 days following the effective date of the registration statement filed pursuant to this offering. As a result of these contractual restrictions, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements will not be saleable until such agreements expire or are waived by Merrill Lynch, Pierce, Fenner & Smith Incorporated. Taking into account the lock-up agreements, and assuming Merrill Lynch, Pierce, Fenner & Smith Incorporated does not release stockholders from these agreements, the following shares will be eligible for sale in the public market at the following times:
NUMBER OF DATE OF AVAILABILITY FOR SALE SHARES ----------------------------- --------- 30 days after the date of the final prospectus.............. 180 days after the date of the final prospectus........... At various times between the date 180 days after the date of the final prospectus and November 5, 2000........... At various times between November 5, 2000 and December 8, 2000................................................... At various times thereafter upon the expiration of applicable holding periods.............................
Under Rule 144, the number of shares that may be sold by affiliates of our stockholders are subject to volume restrictions. In general, under Rule 144, and beginning after the expiration of the lock-up agreements, a person who has beneficially owned restricted shares, including shares that are aggregated to such person or persons, for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - one percent of the number of shares of common stock then outstanding which will equal approximately shares immediately after the offering; or - the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a Form 144 with respect to the sale. 62 66 In order to sell shares under Rule 144, the selling stockholder must comply with manner of sale provisions and notice requirements and current public information about us must be available. Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. The holders of approximately 20,375,675 shares of common stock or their transferees are also entitled to certain rights with respect to registration of their shares of common stock for offer or sale to the public. If the holders, by exercising their registration rights, cause a large number of shares to be registered and sold in the public market, the sales could have a material adverse effect on the market price of our common stock. As part of the lock-up agreements, all of our employees holding common stock or stock options may not sell shares acquired upon exercise of their options until 180 days after the effective date. Beginning 180 days after the effective date, any of our employees, officers, directors of or consultants who purchased his or her shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell their shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. In addition, we intend to file one or more registration statements under the Securities Act as promptly as possible after the effective date to register shares to be issued under our employee benefit plans. As a result, any options exercised under our stock option plans or any other benefit plan after the effectiveness of a registration statement will also be freely tradable in the public market, unless the shares are held by affiliates of ours. Shares held by our affiliates will still be subject to the volume limitation, manner of sale, notice and public information requirements of Rule 144 unless the shares may otherwise be sold under Rule 701. As of December 9, 1999 there were outstanding options for the purchase of 1,335,250 shares, of which 740,000 shares subject to those options were exercisable. No shares have been issued to date under our purchase plan or directors plan. See "Risk Factors -- Shares Eligible for Future Sale," "Management -- Stock Plans" and "Description of Capital Stock -- Registration Rights." 63 67 UNDERWRITING GENERAL We are offering our shares in the U.S. and Canada through the U.S. underwriters and elsewhere through the international managers. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc. Thomas Weisel Partners LLC, and Warburg Dillon Read LLC are acting as U.S. representatives of the U.S. underwriters named below. Subject to the terms and conditions described in a U.S. purchase agreement among us and the U.S. underwriters, and concurrently with the sale of shares to the international managers, we have agreed to sell to the U.S. underwriters, and the U.S. underwriters severally have agreed to purchase from us the number of shares listed opposite their names below.
UNDERWRITERS NUMBER OF SHARES ------------ ---------------- Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... Bear, Stearns & Co. Inc..................................... Thomas Weisel Partners LLC.................................. Warburg Dillon Read LLC..................................... -------- Total.......................................... ========
We have also entered into an international purchase agreement with the international managers for sale of the shares outside the U.S. and Canada for whom Merrill Lynch International is acting as lead manager. Subject to the terms and conditions in the international purchase agreement, and concurrently with the sale of shares to the U.S. underwriters pursuant to the U.S. purchase agreement, we have agreed to sell to the international managers, and the international managers severally have agreed to purchase shares from us. The initial public offering price per share and the total underwriting discount per share are identical under the U.S. purchase agreement and the international purchase agreement. The U.S. underwriters and the international managers have agreed to purchase all of the shares sold under the U.S. and international purchase agreements if any of these shares are purchased. If an underwriter defaults, the U.S. and international purchase agreements provide that the purchase commitments of the nondefaulting underwriters may be increased or the purchase agreements may be terminated. The closings for the sale of shares to be purchased by the U.S. underwriters and the international managers are conditioned on one another. We have agreed to indemnify the U.S. underwriters and the international managers against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the U.S. underwriters and international managers 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 U.S. representatives have advised us that the U.S. underwriters propose initially to offer the shares to the public at the initial public offering price set forth on the cover page of this prospectus and to dealers at that price less a concession not in excess of $ per share. The U.S. 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. 64 68 The following table shows the per share and total public offering price, underwriting discount and proceeds before expenses to Pets.com. The information assumes either no exercise or full exercise by the U.S. underwriters and the international managers of their over-allotment options.
PER SHARE WITHOUT OPTION WITH OPTION --------- -------------- ----------- Public offering price...................................... $ $ $ Underwriting discount...................................... $ $ $ Proceeds, before expenses, to Pets.com..................... $ $ $
The total expenses of the offering, not including the underwriting discount, are estimated at $1,000,000 and are payable by Pets.com. INTERSYNDICATE AGREEMENT The U.S. underwriters and the international managers have entered into an intersyndicate agreement that provides for the coordination of their activities. Under the intersyndicate agreement, the U.S. underwriters and the international managers may sell shares to each other for purposes of resale at the initial public offering price, less an amount not greater than the selling concession. Under the intersyndicate agreement, the U.S. underwriters and any dealer to whom they sell shares will not offer to sell or sell shares to persons who are non-U.S. or non-Canadian persons or to persons they believe intend to resell to persons who are non-U.S. or non-Canadian persons, except in the case of transactions under the intersyndicate agreement. Similarly, the international managers and any dealer to whom they sell shares will not offer to sell or sell shares to U.S. persons or Canadian persons or to persons they believe intend to resell to U.S. or Canadian persons, except in the case of transactions under the intersyndicate agreement. OVER-ALLOTMENT OPTION We have granted an option to the U.S. underwriters to purchase up to additional shares at the public offering price less the underwriting discount. The U.S. underwriters may exercise this option for 30 days from the date of this prospectus solely to cover any over-allotments. If the U.S. underwriters exercise this option, each will be obligated, subject to conditions contained in the purchase agreements, to purchase a number of additional shares proportionate to that U.S. underwriter's initial amount reflected in the above table. We have also granted an option to the international managers, exercisable for 30 days from the date of this prospectus, to purchase up to additional shares to cover any over-allotments on terms similar to those granted to the U.S. underwriters. RESERVED SHARES At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares offered by this prospectus for sale to some of our directors, officers, employees, business associates and related persons. If these persons purchase reserved shares, the number of shares available for sale to the general public will be reduced accordingly. Any reserved shares that are not orally confirmed for purchase within one business 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 and 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 65 69 obtaining the written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated. Specifically, we and these other individuals 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. 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 "IPET." Before this offering, there has been no public market for our common stock. The initial public offering price will be determined through negotiations among us and the U.S. representatives and lead managers. 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 U.S. representatives and the lead managers 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 being offered in this offering to accounts over which they exercise discretionary authority. Thomas Weisel Partners LLC, one of the representatives of the underwriters, was organized and registered as a broker-dealer in December 1998. Since December 1998, Thomas Weisel Partners LLC has been named as a lead or co-manager on 91 filed public offerings of equity securities, of which 78 have been completed, and has acted as a syndicate member in an additional 48 public offerings of equity securities. Thomas Weisel Partners LLC does not have any material relationship with us or any of our officers, directors or controlling persons, except with respect to its contractual relationship with us under the underwriting agreement entered into in connection with this offering. 66 70 PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS Until the distribution of the shares is completed, SEC rules may limit underwriters from bidding for and purchasing our common stock. However, the U.S. 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 U.S. representatives may reduce that short position by purchasing shares in the open market. The U.S. 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 U.S. representatives may also impose a penalty bid on underwriters and selling group members. This means that if the U.S. representatives purchase shares in the open market to reduce the underwriter's 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 U.S. representatives or the lead managers will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice. 67 71 LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for Pets.com by Venture Law Group, A Professional Corporation, Menlo Park, California. John V. Bautista, a director at Venture Law Group, is a Secretary of Pets.com. Legal matters specified by the underwriters in connection with this offering will be passed upon for the underwriters by Shearman & Sterling, Menlo Park, California. As of the date of this prospectus, an investment partnership associated with Venture Law Group owns an aggregate of 56,877 shares of our common stock, and certain directors and attorneys of Venture Law Group beneficially own a total of 60,719 shares of our common stock. EXPERTS Ernst & Young LLP, independent auditors, have audited our financial statements as of September 30, 1999 and for the period from February 17, 1999 (inception) to September 30, 1999, as set forth in their report. The financial statements audited by Ernst & Young LLP have been included in reliance on their report given on their authority as experts in accounting and auditing. ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission, a registration statement on Form S-1, including the exhibits and schedules filed with the registration statement, under the Securities Act with respect to the shares of common stock offered hereby. This prospectus does not contain all the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to us and our common stock, we refer you to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference. A copy of the registration statement may be inspected by anyone without charge at the Public Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of all or any portion of the registration statement may be obtained from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees. The SEC maintains a Web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. 68 72 PETS.COM, INC. FINANCIAL STATEMENTS PERIOD FROM FEBRUARY 17, 1999 (INCEPTION) TO SEPTEMBER 30, 1999 CONTENTS
PAGE ---- Report of Independent Auditors.............................. F-2 Audited Financial Statements Balance Sheet............................................... F-3 Statement of Operations..................................... F-4 Statement of Stockholders' Equity........................... F-5 Statement of Cash Flows..................................... F-6 Notes to Financial Statements............................... F-7
F-1 73 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Pets.com, Inc. We have audited the accompanying balance sheet of Pets.com, Inc. as of September 30, 1999, and the related statements of operations, stockholders' equity, and cash flows for the period from February 17, 1999 (inception) to September 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pets.com, Inc. at September 30, 1999, and the results of its operations and its cash flows for the period from February 17, 1999 (inception) to September 30, 1999, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP San Francisco, California December 6, 1999, except for Paragraph 3 of Note 8 as to which the date is December 8, 1999 F-2 74 PETS.COM, INC. BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA) SEPTEMBER 30, 1999 ASSETS Current assets: Cash and cash equivalents................................. $ 36,231 Inventories............................................... 1,872 Prepaid advertising expenses.............................. 2,214 Other prepaid expenses and current assets................. 411 -------- Total current assets........................................ 40,728 Certificate of deposit...................................... 150 Fixed assets, net........................................... 7,249 Other assets................................................ 272 -------- Total assets................................................ $ 48,399 ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 5,495 Accrued expenses.......................................... 193 Other..................................................... 127 -------- Total current liabilities................................... 5,815 Stockholders' equity: Convertible preferred stock, $.001 par value: Authorized shares -- 14,127,328 Series A preferred stock, designated 7,227,328 shares Issued and outstanding shares -- 7,227,328 (aggregate liquidation preference of $10,480)..... 7 Series B preferred stock, designated 6,900,000 shares Issued and outstanding shares -- 6,622,517 (aggregate liquidation preference of $50,000)..... 7 Common stock, $.001 par value: Authorized shares -- 30,000,000 Issued and outstanding shares -- 5,098,746........... 5 Additional paid-in capital................................ 73,671 Accumulated deficit....................................... (19,355) Stock-based compensation.................................. (11,751) -------- Total stockholders' equity.................................. 42,584 -------- Total liabilities and stockholders' equity.................. $ 48,399 ========
See accompanying notes. F-3 75 PETS.COM, INC. STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE DATA) PERIOD FROM FEBRUARY 17, 1999 (INCEPTION) TO SEPTEMBER 30, 1999 Net sales................................................... $ 619 Cost of goods sold.......................................... (1,842) ---------- Gross margin................................................ (1,223) Operating expenses: Marketing and sales....................................... 11,815 Product development....................................... 3,835 General and administrative................................ 2,043 Amortization of stock-based compensation.................. 1,139 ---------- Total operating expenses.................................... (18,832) ---------- Operating loss.............................................. (20,055) Interest income, net........................................ 700 ---------- Net loss.................................................... $ (19,355) ========== Basic and diluted net loss per share...................... $ (10.84) ========== Weighted average shares outstanding used to compute basic and diluted net loss per share............................ 1,786,156 ==========
See accompanying notes. F-4 76 PETS.COM, INC. STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA) PERIOD FROM FEBRUARY 17, 1999 (INCEPTION) TO SEPTEMBER 30, 1999
CONVERTIBLE PREFERRED STOCK --------------------------------------- SERIES A SERIES B COMMON STOCK ADDITIONAL ------------------ ------------------ ------------------ PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT --------- ------ --------- ------ --------- ------ ---------- ----------- Initial issuance of common shares to founders in exchange for cash and intellectual property.................. -- $-- -- $-- 1,811,837 $2 $ 16 $ -- Issuance of restricted shares to employee................................. -- -- -- -- 1,157,023 1 11 -- Issuance of Series A preferred stock in April, net of offering costs of $59.... 7,227,328 7 -- -- -- -- 10,414 -- Issuance of Series B preferred stock in June, net of offering costs of $39..... -- -- 6,622,517 7 -- -- 49,954 -- Exercise of common stock options......... -- -- -- -- 2,129,886 2 386 -- Compensation related to issuance of stock options and restricted common stock.... -- -- -- -- -- -- 12,890 -- Amortization of stock-based compensation........................... -- -- -- -- -- -- -- -- Net loss and comprehensive loss.......... -- -- -- -- -- -- -- (19,355) --------- -- --------- -- --------- -- ------- -------- Balance at September 30, 1999............ 7,227,328 $7 6,622,517 $7 5,098,746 $5 $73,671 $(19,355) ========= == ========= == ========= == ======= ======== TOTAL STOCK-BASED STOCKHOLDERS' COMPENSATION EQUITY ------------ ------------- Initial issuance of common shares to founders in exchange for cash and intellectual property.................. $ -- $ 18 Issuance of restricted shares to employee................................. -- 12 Issuance of Series A preferred stock in April, net of offering costs of $59.... -- 10,421 Issuance of Series B preferred stock in June, net of offering costs of $39..... -- 49,961 Exercise of common stock options......... -- 388 Compensation related to issuance of stock options and restricted common stock.... (12,890) -- Amortization of stock-based compensation........................... 1,139 1,139 Net loss and comprehensive loss.......... -- (19,355) -------- -------- Balance at September 30, 1999............ $(11,751) $ 42,584 ======== ========
See accompanying notes. F-5 77 PETS.COM, INC. STATEMENT OF CASH FLOWS (IN THOUSANDS) PERIOD FROM FEBRUARY 17, 1999 (INCEPTION) TO SEPTEMBER 30, 1999 OPERATING ACTIVITIES Net loss.................................................... $(19,355) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation.............................................. 319 Common and preferred stock issued for intellectual property............................................... 416 Amortization of stock-based compensation related to stock options................................................ 1,139 Changes in: Inventories............................................ (1,872) Prepaid marketing expenses............................. (2,214) Other prepaid expenses and current assets.............. (411) Certificate of deposit................................. (150) Other assets........................................... (272) Accounts payable, accrued expenses and other........... 5,815 -------- Net cash used in operating activities....................... (16,585) INVESTING ACTIVITIES Purchase of fixed assets.................................... (7,568) -------- Net cash used in investing activities....................... (7,568) FINANCING ACTIVITIES Proceeds from issuances of common stock..................... 14 Proceeds from exercise of stock options..................... 388 Net proceeds from issuances of Series A preferred stock..... 10,021 Net proceeds from issuances of Series B preferred stock..... 49,961 -------- Net cash provided by financing activities................... 60,384 -------- Net increase in cash and cash equivalents................... 36,231 Cash and equivalents at beginning of period................. -- -------- Cash and equivalents at end of period....................... $ 36,231 ========
See accompanying notes. F-6 78 PETS.COM, INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Pets.com, Inc. (the Company) was formed on February 17, 1999 with the acquisition of certain assets and internet domain names. The Company is engaged in the sale over the Internet of pet products, services, and information primarily in the United States. FISCAL YEAR The Company's fiscal year begins on January 1 and ends on December 31 of each year. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. REVENUE RECOGNITION Revenues on product sales, net of discounts, coupons and allowances, are recognized upon shipment of the related goods. Outbound shipping and handling fees are included in net sales upon shipment. The Company provides for an estimated allowance for sales returns in the period of sale. PRODUCT DEVELOPMENT Product development expenses consist primarily of payroll and related expenses for Web site development, systems personnel, consultants, and other website costs. As the Company believes that its website is subject to continual and substantial change, expenditures relating to product development are expensed as incurred. ADVERTISING Advertising costs are expensed as incurred. Advertising expense was $7,634,000 for the period from February 17, 1999 (inception) to September 30, 1999, respectively. MARKETING AGREEMENT In conjunction with the sale of its Series A preferred stock, the Company entered into a co-marketing agreement with a shareholder, which allows for certain reciprocal advertising, promotional and customer acquisition activities for an initial term of 18 months. Under the agreement, both the Company and the shareholder will reimburse each other in equal amounts for customers acquired as a result of the marketing agreement. CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. The Company's cash equivalents consist mainly of money market funds. F-7 79 PETS.COM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVENTORIES Inventories are stated at the lower of cost (using the first-in, first-out method) or market. CERTIFICATE OF DEPOSIT The certificate of deposit is restricted and secures a letter of credit related to the Company's lease agreement (see Note 3). The carrying amount approximates fair value. FIXED ASSETS Fixed assets are stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets, which range from three to seven years. The Company capitalizes certain internal use software costs in accordance with Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Capitalized internal use software costs with an expected useful life in excess of one year are amortized on a straight-line basis over their estimated useful lives. Internal use software costs, which are subject to continual and substantial change, are expensed as incurred. LONG-LIVED ASSETS Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets is measured by comparison of the carrying amount of the asset to net future cash flows expected to be generated from the asset. No impairment has been recognized in the accompanying financial statements. NET LOSS PER SHARE Net loss per share is computed using the weighted-average number of shares of common stock outstanding less the number of shares subject to repurchase. Shares associated with stock options, warrants and the convertible preferred stock are not included in the calculation of diluted net loss per share because they are antidilutive. At September 30, 1999, there were 3,286,909 unvested or restricted common shares that are subject to repurchase and 901,000 stock options that were excluded from the computation of diluted net loss per share. If the Company had reported net income, the calculation of these per share amounts would have included the dilutive effect of these common stock equivalents using the treasury stock method. CONCENTRATION OF CREDIT RISK The Company is subject to concentrations of credit risk from its cash investments. The Company's credit risk is managed through monitoring the stability of the financial institutions utilized and diversification of its financial resources. The Company's financial instruments consist of cash and cash equivalents. The fair value of all financial instruments approximates the carrying amount based on the current rate offered to the Company for similar instruments. F-8 80 PETS.COM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related interpretations, in accounting for its employee stock options rather than the alternative fair value accounting allowed by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). APB No. 25 provides that the compensation expense relative to the Company's employee stock options is measured based on the intrinsic value of the stock option. SFAS No. 123 requires companies that continue to follow APB No. 25 to provide a pro forma disclosure of the impact of applying the fair value method of SFAS No. 123 (see Note 5). INCOME TAXES The Company accounts for income taxes under the liability method. Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to be recovered. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. COMPREHENSIVE INCOME The Company adopted SFAS No. 130, Reporting Comprehensive Income, which requires that all items that are recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The items of other comprehensive income that are typically required to be displayed are foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. There were no items of other comprehensive income in 1999. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designed as part of a hedge transaction and, if it is, the type of hedge transaction. The Company does not expect that the adoption of SFAS No. 133 will have a material impact on its financial statements because the Company does not currently hold any derivative instruments. F-9 81 PETS.COM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 2. FIXED ASSETS Fixed assets at September 30, 1999 consists of the following:
(In thousands) Computers and equipment..................................... $3,150 Purchased software.......................................... 2,034 Furniture and fixtures...................................... 269 Plant and equipment......................................... 1,076 Leasehold improvements...................................... 1,039 ------ 7,568 Less accumulated depreciation............................... (319) ------ $7,249 ======
3. LEASE AGREEMENTS The Company leases its office and warehouse facilities under various operating leases, which call for fixed rental payments through 2011. The lease arrangements require letters of credit totaling $1,350,000, in the event the Company defaults on any of its lease payments. Provided the Company is not in default, the letters of credit shall be reduced over the terms of the leases. Total rent expense under operating leases for the period ended September 30, 1999 approximated $239,000. Future minimum commitments under operating leases at September 30, 1999 are as follows:
(In thousands) 2000........................................................ $ 1,380 2001........................................................ 2,165 2002........................................................ 1,940 2003........................................................ 1,977 2004........................................................ 2,021 Thereafter.................................................. 9,820 ------- Total minimum lease payments.............................. $19,303 =======
4. INCOME TAXES There has been no provision for U.S. federal, U.S. state, or foreign income taxes for any period as the Company has incurred operating losses in all periods and for all jurisdictions. The following is a reconciliation of the statutory federal income tax rate to the Company's effective income tax rate: Statutory federal income tax benefit........................ (34)% State income tax benefit.................................... (6) Valuation allowance......................................... 38 Non-deductible stock-based compensation..................... 2 --- Income tax provision........................................ --% ===
F-10 82 PETS.COM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 4. INCOME TAXES (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows:
(In thousands) Deferred tax assets: Net operating loss carryforward............................. $ 7,101 Other temporary differences............................... 176 ------- Total deferred tax assets................................... 7,277 Less valuation allowance.................................... (7,277) ------- Net deferred tax assets................................ $ -- =======
Net deferred tax assets have been fully offset by a valuation allowance due to a lack of operating history combined with risks and uncertainties surrounding the Company's ability to generate future taxable income. The valuation allowance increased by $7,277,000 for the period from February 17, 1999 (inception) to September 30, 1999. As of September 30, 1999, the Company had net operating loss carryforwards for federal income tax purposes of approximately $17,752,000, which expire in the year 2019. The Company also had net operating loss carryforwards for state income tax purposes of approximately $17,752,000 expiring in the year 2007. Utilization of the Company's net operating loss may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss before utilization. 5. STOCKHOLDERS' EQUITY CONVERTIBLE PREFERRED STOCK In April 1999, the Company issued 7,227,328 shares of Series A preferred stock in a private placement offering in exchange for cash proceeds of $10,079,624 and rights to certain internet domain names valued at $400,001. In connection with the issuance of the Series A preferred stock, the Articles of Incorporation were amended to increase the total authorized number of common shares to 25,000,000, and to authorize a series of preferred stock consisting of 7,500,000 shares. In June 1999, the Company issued 6,622,517 shares of Series B preferred stock in a private placement offering in exchange for cash proceeds of $50,000,003. In connection with the issuance of the Series B preferred stock, the Articles of Incorporation were amended to increase the total authorized number of common shares to 30,000,000 and preferred shares to 14,127,328. Each share of the Company's Series A and B preferred stock is convertible into one share of common stock at the option of the holder, subject to certain antidilution adjustments, in accordance with the conversion formula provided in the Company's Articles (currently on a 1:1 ratio). Outstanding preferred shares automatically convert into common stock at the option of the holder and upon the closing of an initial public offering of the Company's common stock in which gross proceeds exceed $10.0 million and minimum per share price equal or exceeds $10.00 per share. Holders of each share of preferred stock are entitled to the number of votes per share that would be equivalent to the number of shares of common F-11 83 PETS.COM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 5. STOCKHOLDERS' EQUITY (CONTINUED) stock into which a share of preferred stock is convertible and are entitled to dividends in preference to common stock, if and when declared by the Board of Directors. The Company also granted the preferred stockholders certain registration rights and agreed not to carry out certain actions without prior approval of the holders of not less than two-thirds of the outstanding preferred shares, voting together as a single class. As a condition to the Series A and B preferred stock agreements, one shareholder agreed to restrict its acquisitions of Company shares to no more than a 46% interest for a period of up to 4 years. COMMON STOCK Under certain conditions, 50,000 shares of common stock issued to the Company's founders are subject to repurchase at the greater of the price originally paid or the fair market value of the stock at the time of repurchase. The repurchase provisions expire at the earlier of 36 months from the issuance date of the common stock or an initial public offering of the Company. On February 17, 1999, the Company issued 1,610,587 common shares, for total consideration of $16,106 to a former officer in exchange for certain tangible and intangible assets. In connection with subsequent upgrades to the Company's website, these costs were recorded to general and administrative expense in the accompanying statement of operations. 1999 STOCK PLAN Under the terms of the 1999 Stock Plan (the 1999 option plan), the Board of Directors may grant incentive and nonqualified stock options to employees, officers, directors, agents, consultants, and independent contractors of the Company. In connection with the introduction of the 1999 Stock Plan, 3,537,167 shares of common stock were reserved for future issuance. In June and September 1999, the Company increased the number of shares reserved for future issuance under such plan by a total of 660,742 shares. Generally, the Company grants stock options with exercise prices equal to the fair market value of the common stock on the date of grant, as determined by the Company's Board of Directors. Options generally vest over a four-year period and expire ten years from the date of grant. The 1999 option plan also contains a restricted stock purchase feature which provides the employee the opportunity to exercise their options immediately and vest over their employment period as set out in their stock option award. If the employee terminates before vesting, the Company may repurchase the unvested options at the original strike price. A summary of stock option activity follows:
OUTSTANDING OPTIONS ----------------------- SHARES WEIGHTED- AVAILABLE AVERAGE FOR NUMBER OF EXERCISE GRANT OPTIONS PRICE ---------- ---------- --------- 1999 Plan introduction........................... 3,537,167 -- $ -- Restricted stock award issued.................... (1,157,023) -- .01 Additional authorization....................... 660,742 -- -- Options granted................................ (3,080,636) 3,080,636 .33 Options exercised.............................. -- (2,132,386) .18 Exercised shares repurchased................... -- (2,500) .75 Options canceled............................... 44,750 (44,750) .52 ---------- ---------- Outstanding at September 30, 1999................ 5,000 901,000 $.67 ========== ==========
F-12 84 PETS.COM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 5. STOCKHOLDERS' EQUITY (CONTINUED) The following table summarizes information regarding stock options outstanding as of September 30, 1999:
WEIGHTED- AVERAGE REMAINING EXERCISE NUMBER CONTRACTUAL PRICE OF OPTIONS LIFE -------- ---------- ----------- $0.15 115,000 9.7 years $0.75 786,000 9.9 years - ---------- ------- --------- $.15 - .75 901,000 9.9 years ========== ======= =========
All of the remaining stock options are exercisable at September 30, 1999, but are subject to repurchase for the portion of options that have not yet vested. At September 30, 1999, none of the above employee option awards had reached their first vesting tranche. For the period from February 17, 1999 (inception) to September 30, 1999, pro forma net loss and pro forma net loss per share were as follows:
(In thousands, except share amount) Net loss -- as reported..................................... $(19,355) Incremental pro forma compensation expense under SFAS No. 123......................................................... (12) -------- Net loss -- pro forma..................................... $(19,367) ======== Net loss per share -- pro forma........................... $ (10.84) ========
The fair value of each option grant is estimated on the date of grant using the minimum value option pricing model, assuming no expected dividends and with the following weighted-average assumptions for the period ended September 30, 1999: Average risk-free interest rate............................. 6.3% Average expected life....................................... 7 years Dividend yield.............................................. 0.0%
For purposes of the pro forma disclosures, the per share weighted-average fair value of the options granted, estimated to be $0.11 at September 30, 1999, is amortized to expense over the options' vesting period. Compensation expense recognized in providing pro forma disclosures may not be representative of the effects on pro forma earnings for future years because the amounts above include only the amortization for the fair value of 1999 grants. COMMON STOCK RESERVED FOR FUTURE ISSUANCE The following shares of common stock were reserved at September 30, 1999: Stock option plan........................................... 906,000 Conversion of Series A preferred stock...................... 7,227,328 Conversion of Series B preferred stock...................... 6,622,517 ---------- 14,755,845 ==========
6. LEGAL PROCEEDINGS On September 2, 1999 Biolink LLC dba ERI International filed suit against the Company in Los Angeles County Superior Court for breach of contract, anticipatory breach of contract, breach of the F-13 85 PETS.COM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 6. LEGAL PROCEEDINGS (CONTINUED) implied covenant of good faith and fair dealing, and fraud arising out of a contract entered into for the shipment of live animals, including fish and reptiles. ERI International has stated four causes of action, three seeking damages each in an amount in excess of $2,000,000 and one cause of action seeking damages in an amount in excess of $500,000. The Company has answered and asserted affirmative defenses to their complaint. No trial date has been set and discovery has not yet commenced. The Company believes it has meritorious defenses to these claims and intends to vigorously defend against them. The Company believes that any liability that may ultimately result from the resolution of these matters will not have a material adverse effect on the Company's financial position, operating results, or cash flows. From time to time, the Company is subject to other legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks and other intellectual property rights. The Company currently is not aware of any such legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its business, prospects, financial condition and operating results. 7. RELATED-PARTY TRANSACTIONS In conjunction with the sale of its Series A preferred stock, the Company entered into a co-marketing agreement with a shareholder, which allows for certain reciprocal advertising, promotional and customer acquisition activities for an initial term of 18 months. Under the agreement, both the Company and the shareholder will pay each other in equal amounts for each customer acquired as a result of the marketing agreement. In connection with the above mentioned sale of Series A preferred stock, the Company issued 275,863 Series A preferred shares with a total consideration of $400,001 to a former officer in exchange for certain internet domain names. For the period from February 17, 1999 (inception) to September 30, 1999, a preferred stockholder provided legal services to the Company totaling approximately $153,000. 8. SUBSEQUENT EVENTS SALE OF SERIES B CONVERTIBLE PREFERRED STOCK In November 1999 the Company issued 3,560,967 additional shares of Series B convertible preferred stock and notes payable totaling $7,384,708, in a private placement offering in exchange for cash proceeds of $34,270,008. The notes payable are conditionally convertible, depending on the structure of an anticipated second closing of the Series B offering. In connection with the issuance of additional Series B convertible preferred stock, the Articles of Incorporation were amended to increase the total authorized number of common shares to 36,000,000, and authorized preferred stock to 21,427,328 shares, including authorization of 1,300,000 Series B-1 preferred non-voting shares. In December 1999, the Company completed the second closing of the November 1999 Series B convertible preferred stock private placement offering. In conjunction with the closing, 1,986,756 shares of Series B convertible preferred stock were issued in exchange for cash proceeds of $15,000,008. An additional 978,107 shares of Series B convertible preferred stock were issued in connection with the conversion of the convertible notes payable issued at the initial closing. F-14 86 PETS.COM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 8. SUBSEQUENT EVENTS (CONTINUED) PURCHASE OF INTEREST IN COMPANY In November 1999, the Company purchased 2,150,537 shares of Series A convertible preferred stock of PetPlace.com, Inc. for consideration of approximately $2.0 million. The Company is obligated to purchase an additional 1,612,903 shares of Series A convertible stock for approximately $1.5 million, by February 1, 2000, concurrent with the launch of PetPlace.com, Inc.'s Web site. PROPOSED INITIAL PUBLIC OFFERING OF COMMON STOCK In December 1999, the board of directors authorized the Company to proceed with an initial public offering of its common stock. If the offering is consummated as presently anticipated, all of the outstanding shares of preferred stock will automatically convert into common stock upon the closing of the initial public offering. In December 1999, the board of directors also approved, subject to stockholder approval, the reincorporation of the Company in Delaware, and a change in the number of authorized shares of 155,000,000 shares of which 150,000,000 will be common stock and 5,000,000 will be undesignated preferred stock. 1999 STOCK PLAN In December 1999, the board of directors increased the number of shares reserved under the 1999 stock plan by 2,000,000 shares. As of December 5, 1999, the Company has reserved a total of 7,269,159 shares of common stock under the 1999 plan, plus an evergreen provision which allows for an increase in the authorized number of shares on the first day of each of the fiscal years from 2001 to 2009, equal to the lesser of (i) 1,000,000 shares, (ii) 3% of the Company's outstanding common stock on the last day of the preceding fiscal year, or (iii) a lesser number of shares as determined by the board of directors. 2000 EMPLOYEE STOCK PURCHASE PLAN In December 1999, the board of directors adopted the 2000 employee stock purchase plan, effective upon completion of the Company's initial offering of its common stock. A total number of 500,000 shares has been reserved for issuance under the employee stock purchase plan. The plan also contains an evergreen provision which allows for an annual increase in the authorized number of shares on the first day of each fiscal year from 2001 to 2010, equal to the lesser of (i) 300,000 shares, (ii) 1% of the Company's outstanding common stock on the last day of the preceding fiscal year, or (iii) a lesser number of shares as determined by the board of directors. DEFINED CONTRIBUTION PLAN In October 1999, the Company adopted a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code which covers substantially all employees. Eligible employees may contribute amounts to the plan, via payroll withholding, subject to certain limitations. Under the 401(k) plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit ($10,000 in 1999) and to have the amount of such reduction contributed to the 401(k) plan. The 401(k) plan permits, but does not require, additional matching contributions to the 401(k) plan by the Company on behalf of all participants in the plan. F-15 87 [DESCRIPTION OF ARTWORK] [OUTSIDE OF FRONT GATEFOLD] Outside of the gatefold contains the Pets.com logo and the following text: The Pets.com logo is located at the top of the page. A picture of the Pets.com sock puppet icon is located in the bottom right hand corner of the page. Above this graphic is the heading "Pets.com is committed to serving pets and their owners through products, information and services." 88 [INSIDE OF FRONT GATEFOLD] The first page of the inside of the front gatefold contains "Pets.com" at the top of the page, with the sock puppet icon poking through to "O" in "Pets.com." The following text and pictures are located on the first page: "Shopping and Selection" followed by pictures of some products carried by Pets.com and the Pets.complete branded product line. These pictures are described by the following text: We carry many product lines including bird cages, pet food, aquariums, pet collars and toys. We buy directly from manufacturers. In the first half of 2000, we plan to introduce our Pets.complete branded line." "Shopping at our Web store" followed by a picture of Web site home page. This picture is described by the following text: "Our resource center offers databases with national and local information for pet owners. Consumers can instantly find special offers on featured products. Navigation by type of pet is simple and easy to use. Topical editorial helps consumers make purchase decisions." Each sentence of text is preceded by an asterisk leading to an arrow pointing to the highlighted feature on the screenshot of our Web store. The second page of the inside of the front gatefold contains a picture of a woman and child sitting on a chair looking at a laptop computer screen with a dog sitting next to them. The following text and pictures are located on the second page: A picture of a product category page on the Pets.com Web store showing a dog food bowl. The accompanying text describing the picture says "The shopping experience is based on how consumers actually shop. Virtual aisles let consumers move quickly to the product categories that interest them. Products are grouped the way consumers naturally think about them." A picture of the product lines within a product category page on the Pets.com Web store showing types of dog food bowls available at. The accompanying text describing the picture says "A visual browsing experience makes it easy for consumers to find the product they're looking for." A picture of an individual product page on the Pets.com Web store describing product information about a dog treat jar. The accompanying text describing he picture says "Product displays are large and clear, so consumers know what they're buying." A picture of the ordering steps for Nutro Natural Choice Dry Dog Food with accompanying text stating "Simple steps will walk consumers through the ordering process." Each sentence of text is preceded by an asterisk leading to an arrow pointing to the highlighted feature on the screen shot of our Web store. 89 [INSIDE OF BACK GATEFOLD] The first page of the inside of the back gatefold contains the word "Information" with three pictures. The first picture is of the Pets.com magazine with accompanying text describing the picture which says "The first issue of Pets.com, The Magazine for Pets and Their Humans was published in November 1999." The second picture is of the Pets Vet column on the Pets.com Web store with accompanying text describing the picture which says "Web store features such as Pets Vet and Pets Law provide pet owners with professional advice - information to improve the lives of their pets. Experts on staff at Pets.com can help pet owners with questions on pet issues." The third is a picture of the Pets Law column on the Pets.com Web store with accompanying text describing the picture which says "Within each article pet owners are referred to related products they can purchase to help their pets." The second and third pictures have accompanying text describing the pictures which says "Topical articles on our Web store offer pet information authored by our contributing writers." Each sentence of text is preceded by an asterisk leading to an arrow pointing to the highlighted feature on the screen shot of our Web store. The second page of the inside of the back gatefold contains the word "Community" with two pictures. The first picture is of the message boards on the Pets.com Web store with accompanying text describing the picture which says "We also bring people together through online forums - a place for pet lovers to talk with each other about pet-related topics." The second picture is of the Pets.commitment page on the Pets.com Web store with accompanying text describing the picture which says "We started Pets.commitment, a national program that contributes funds and encourages support for organizations devoted to people helping animals and animals helping people. For the year 2000, we have inaugurated the Heroes of Pets.commitment program to encourage volunteerism on behalf of animal organizations." Each sentence of text is preceded by an asterisk leading to an arrow pointing to the highlighted feature on the screen shot of our Web store. The second page of the inside of back gatefold also contains the word "Service" with a picture of the Pets.com's distribution center and a picture of a customer service person with the following accompanying text describing the pictures: "We operate our own distribution and order fulfillment process through our 227,232 square foot distribution center in the San Francisco area. We own and manage our own customer service call center." Each sentence of text is preceded by an asterisk leading to an arrow pointing to the highlighted feature on the screen shot of our Web store. 90 [OUTSIDE OF BACK GATEFOLD] The outside page of the back gatefold contains a picture of the Pets.com sock puppet icon with four of our boxes and the following accompany text: "Meet the Pets.com Sock Puppet." 91 [BACK PAGE OF PROSPECTUS] The outside page of the prospectus contains the Pets.com logo at the bottom of the page. 92 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 LOGO COMMON STOCK --------------------- PROSPECTUS --------------------- MERRILL LYNCH & CO. BEAR, STEARNS & CO. INC. THOMAS WEISEL PARTNERS LLC WARBURG DILLON READ LLC , 2000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 93 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by Pets.com in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee and the Nasdaq National Market listing fee.
AMOUNT TO BE PAID ---------- SEC registration fee........................................ $ 26,400 NASD filing fee............................................. $ 10,500 Nasdaq National Market listing fee.......................... * Printing and engraving expenses............................. * Legal fees and expenses..................................... * Accounting fees and expenses................................ * Blue Sky qualification fees and expenses.................... * Transfer Agent and Registrar fees........................... * Miscellaneous fees and expenses............................. * ---------- Total............................................. 1,000,000 ==========
- --------------- * to be filed by amendment ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law (the "Delaware Law") authorizes a court to award, or a corporation's board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). Article XII of our proposed Amended and Restated Certificate of Incorporation (Exhibit 3.2 hereto) and Article VI of our proposed Amended and Restated Bylaws (Exhibit 3.4 hereto) provide for indemnification of our directors, officers, employees and other agents to the maximum extent permitted by Delaware Law. In addition, we have entered into Indemnification Agreements (Exhibit 10.1 hereto) with our officers and directors. The U.S. Purchase Agreement (Exhibit 1.1) also provides for cross-indemnification among Pets.com and the Underwriters with respect to certain matters, including matters arising under the Securities Act. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since our formation on February 17, 1999, we have issued and sold (without payment of any selling commission to any person) the following unregistered securities: 1. On March 10, 1999, we issued two convertible promissory notes in the principal amounts of $142,500 and $7,500 to two accredited investors. The notes were canceled and converted into shares of Series A preferred stock on April 22, 1999. 2. On March 19, 1999, we issued two convertible promissory notes in the principal amounts of $237,500 and $12,500 to two accredited investors. The notes were canceled and converted into shares of Series A preferred stock on April 22, 1999. 3. On April 22, 1999, we issued 7,227,328 shares of our Series A preferred stock to eight accredited investors for an aggregate cash consideration of $10,479,625.60, which included conversion of the II-1 94 convertible promissory notes described in items 1 and 2 above into a total of 277,127 shares of our Series A preferred stock (including conversion of accrued interest on the promissory notes). 4. On June 18, 1999, we issued 6,622,517 shares of our Series B preferred stock to nine accredited investors for an aggregate cash consideration of $50,000,003.35. 5. On November 5, 1999, we issued 3,560,967 shares of our Series B preferred stock for cash consideration of $26,885,300.85 to eight accredited investors; six convertible promissory notes in the aggregate principal amount of $4,409,592.60 to six accredited investors, which notes were cancelled and converted into 584,052 shares of our Series B preferred stock on December 8, 1999; and one convertible promissory note in the principal amount of $2,975,115.25 to one accredited investor, which note was cancelled and converted into 394,055 shares of our Series B preferred stock on December 8, 1999. 6. On December 8, 1999, we issued to a total of twenty-five accredited investors 2,964,863 shares of our Series B preferred stock for cash consideration of $15,000,007.80 and conversion of outstanding convertible promissory notes in the aggregate principal amount of $7,384,707.85. 7. As of December 9, 1999, an aggregate of approximately 5,693,246 shares of common stock had been issued upon exercise of options or pursuant to restricted stock purchase agreement and an aggregate of approximately 1,335,250 shares of common stock were issuable upon exercise of outstanding options under the registrant's stock plans. The issuances of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering. In addition, certain issuances described in Item 7 above were deemed exempt from registration under the Securities Act in reliance upon Rule 701 under the Securities Act. The recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and warrants issued in such transactions. All recipients had adequate access, through their relationships with us, to information about Pets.com. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
NUMBER DESCRIPTION ------ ----------- 1.1* Form of U.S. Purchase Agreement. 3.1 Third Amended and Restated Articles of Incorporation of Pets.com. 3.2 Form of Certificate of Incorporation of Pets.com, to be filed and effective upon completion of this offering. 3.3 Bylaws of Pets.com, as amended. 3.4 Form of Bylaws of Pets.com, to be effective upon completion of this offering. 4.1* Form of Pets.com common stock certificate. 5.1* Opinion of Venture Law Group, a Professional Corporation. 10.1 Form of Indemnification Agreement between Pets.com and each of its officers and directors. 10.2.1 1999 Stock Plan, as amended. 10.2.2 2000 Employee Stock Purchase Plan. 10.3 Common Stock Purchase Agreement with Greg McLemore dated February 17, 1999. 10.4 Restricted Stock Purchase Agreement dated March 10, 1999 with Julia Wainwright. 10.5 Bill of Sale and Assignment with Greg McLemore and Koala Computer Products dated February 17, 1999. 10.6 Offer Letter dated March 4, 1999 with Julia L. Wainwright. 10.7 Offer Letter dated March 19, 1999 with Kathryn C. Ringewald. 10.8 Offer Letter dated March 24, 1999 with Christopher E. Deyo. 10.9 Offer Letter dated March 26, 1999 with John M. Hollon.
II-2 95
NUMBER DESCRIPTION ------ ----------- 10.10 Offer Letter dated April 7, 1999 with Paul G. Melmon. 10.11 Offer Letter dated April 21, 1999 with John R. Benjamin. 10.12 Offer Letter dated April 22, 1999 with Diane R. Hourany. 10.13 Offer Letter dated May 4, 1999 with Sue Ann Latterman. 10.14 Offer Letter dated May 5, 1999 with John A. Hommeyer. 10.15 Offer Letter dated August 20, 1999 with Paul G. Manca. 10.16 Offer Letter dated November 15, 1999 with Ralph E. Lewis. 10.17 Series A Preferred Stock Purchase Agreement dated April 22, 1999. 10.18** Advertising Agreement with Amazon.com dated April 22, 1999. 10.19** Software License and Service Agreement with BroadVision, Inc. dated May 15, 1999. 10.20 Series B Preferred Stock Purchase Agreement dated June 18, 1999 10.21** License and Integration Agreement with Quality Software Systems, Inc. dated June 25, 1999. 10.22 PetPlace.com, Inc. Series A Preferred Stock Purchase Agreement dated November 12, 1999. 10.23 Series B Preferred Stock and Convertible Note Purchase Agreement dated November 5, 1999. 10.24 Amended and Restated Investors' Rights Agreement dated November 5, 1999. 10.25** Lease Agreement, as amended, with the Paulsen Family Partnership dated April 8, 1999 for offices at 435 Brannan Street, San Francisco, California. 10.26** Sublease Agreement, as amended, with National Distribution Agency, Inc. dated July 1, 1999 for a warehouse and distribution center at 33201 Dowe Avenue, Union City, California. 10.27** Lease Agreement with Bryant Springs L.L.C. dated September 20, 1999 for offices at 945 Bryant Street, San Francisco, California. 10.28** Lease Agreement with Rosenburg SOMA Investments IV, L.L.C. dated September 27, 1999 for a warehouse and distribution center at 150-160 King Street, San Francisco, California. 10.29 Lease Agreement with Whipple Properties 1001, L.L.C. dated November 5, 1999 for a warehouse and distribution center at 1035 Whipple Road, Hayward, California. 10.30** Lease Agreement with Precedent Industrial Group L.L.C. dated December 7, 1999, for a warehouse and distribution center at Building Number 1, Precedent South Business Center, Greenwood, Indiana. 10.31* Loan and Security Agreement with Paul Manca dated November, 1999. 21.1 List of Subsidiaries. 23.1 Consent of Independent Auditors 23.2* Consent of Counsel (included in Exhibit 5.1) 24.1 Power of Attorney (see page II-5) 27.1 Financial Data Schedule
- ------------------------- * To be supplied by amendment. ** Material has been omitted pursuant to a request for confidential treatment. (b) FINANCIAL STATEMENT SCHEDULES Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, II-3 96 unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 97 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant 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 December 9, 1999. PETS.COM, INC. By: /s/ JULIA L. WAINWRIGHT ------------------------------------ Julia L. Wainwright, Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints, jointly and severally, Julia Wainwright and Paul Manca, and each of them, as his attorney-in-fact, with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments), and any and all Registration Statements filed pursuant to Rule 462 under the Securities Act of 1933, as amended, in connection with or related to the offering contemplated by this Registration Statement and its amendments, if any, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney to any and all amendments to said Registration Statement. 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/ JULIA L. WAINWRIGHT Chief Executive Officer and December 9, 1999 - ----------------------------------------------------- Director Julia L. Wainwright /s/ PAUL G. MANCA Chief Financial Officer December 9, 1999 - ----------------------------------------------------- Paul G. Manca /s/ JOHN B. BALOUSEK Director December 9, 1999 - ----------------------------------------------------- John B. Balousek /s/ MATTHEW T. COWAN Director December 9, 1999 - ----------------------------------------------------- Matthew T. Cowan /s/ JOHN R. HUMMER Director December 9, 1999 - ----------------------------------------------------- John R. Hummer /s/ RANDOLPH J. TINSLEY Director December 9, 1999 - ----------------------------------------------------- Randolph J. Tinsley
II-5 98 INDEX TO EXHIBITS
NUMBER DESCRIPTION ------ ----------- 1.1* Form of U.S. Purchase Agreement. 3.1 Third Amended and Restated Articles of Incorporation of Pets.com. 3.2 Form of Certificate of Incorporation of Pets.com, to be filed and effective upon completion of this offering. 3.3 Bylaws of Pets.com, as amended. 3.4 Form of Bylaws of Pets.com, to be effective upon completion of this offering. 4.1* Form of Pets.com common stock certificate. 5.1* Opinion of Venture Law Group, a Professional Corporation. 10.1 Form of Indemnification Agreement between Pets.com and each of its officers and directors. 10.2.1 1999 Stock Plan, as amended. 10.2.2 2000 Employee Stock Purchase Plan. 10.3 Common Stock Purchase Agreement with Greg McLemore dated February 17, 1999. 10.4 Restricted Stock Purchase Agreement dated March 10, 1999 with Julia Wainwright. 10.5 Bill of Sale and Assignment with Greg McLemore and Koala Computer Products dated February 17, 1999. 10.6 Offer Letter dated March 4, 1999 with Julia L. Wainwright. 10.7 Offer Letter dated March 19, 1999 with Kathryn C. Ringewald. 10.8 Offer Letter dated March 24, 1999 with Christopher E. Deyo. 10.9 Offer Letter dated March 26, 1999 with John M. Hollon. 10.10 Offer Letter dated April 7, 1999 with Paul G. Melmon. 10.11 Offer Letter dated April 21, 1999 with John R. Benjamin. 10.12 Offer Letter dated April 22, 1999 with Diane R. Hourany. 10.13 Offer Letter dated May 1, 1999 with Sue Ann Latterman. 10.14 Offer Letter dated May 5, 1999 with John A. Hommeyer. 10.15 Offer Letter dated August 20, 1999 with Paul G. Manca. 10.16 Offer Letter dated November 15, 1999 with Ralph E. Lewis. 10.17 Series A Preferred Stock Purchase Agreement dated April 22, 1999. 10.18** Advertising Agreement with Amazon.com dated April 22, 1999. 10.19** Software License and Service Agreement with BroadVision, Inc. dated May 15, 1999. 10.20 Series B Preferred Stock Purchase Agreement dated June 18, 1999 10.21** License and Integration Agreement with Quality Software Systems, Inc. dated June 25, 1999. 10.22 PetPlace.com, Inc. Series A Preferred Stock Purchase Agreement dated November 12, 1999. 10.23 Series B Preferred Stock and Convertible Note Purchase Agreement dated November 5, 1999. 10.24 Amended and Restated Investors' Rights Agreement dated November 5, 1999. 10.25** Lease Agreement, as amended, with the Paulsen Family Partnership dated April 8, 1999 for offices at 435 Brannan Street, San Francisco, California. 10.26** Sublease Agreement, as amended, with National Distribution Agency, Inc. dated July 1, 1999 for a warehouse and distribution center at 33201 Dowe Avenue, Union City, California. 10.27** Lease Agreement with Bryant Springs L.L.C. dated September 20, 1999 for offices at 945 Bryant Street, San Francisco, California. 10.28** Lease Agreement with Rosenburg SOMA Investments IV, L.L.C. dated September 27, 1999 for a warehouse and distribution center at 150-160 King Street, San Francisco, California. 10.29 Lease Agreement with Whipple Properties 1001, L.L.C. dated November 5, 1999 for a warehouse and distribution center at 1035 Whipple Road, Hayward, California. 10.30** Lease Agreement with Precedent Industrial Group L.L.C. dated December 7, 1999 for a warehouse and distribution center at Building Number 1, Precedent South Business Center, Greenwood, Indiana. 10.31* Loan and Security Agreement with Paul Manca dated November, 1999.
99
NUMBER DESCRIPTION ------ ----------- 21.1 List of Subsidiaries. 23.1 Consent of Independent Auditors 23.2* Consent of Counsel (included in Exhibit 5.1) 24.1 Power of Attorney (see page II-5) 27.1 Financial Data Schedule
- ------------------------- * To be supplied by amendment. ** Material has been omitted pursuant to a request for confidential treatment. EX-3.1 2 THIRD AMENDED & RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 THIRD AMENDED AND RESTATED ARTICLES OF INCORPORATION OF PETS.COM, INC. The undersigned, Julie Wainwright and John V. Bautista, hereby certify that: 1. They are the duly elected and acting Chief Executive Officer and Secretary, respectively, of Pets.com, Inc., a California corporation. 2. The Articles of Incorporation of this corporation shall be amended and restated to read in full as follows: "ARTICLE I The name of this corporation is Pets.com, Inc. (the "Corporation"). ARTICLE II The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE III (A) CLASSES OF STOCK. The Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is Fifty-Seven Million Four Hundred Twenty-Seven Thousand Three Hundred Twenty-Eight (57,427,328) shares, each with a par value of $0.001 per share. Thirty-Six Million (36,000,000) shares shall be Common Stock and Twenty-One Million Four Hundred Twenty-Seven Thousand Three Hundred Twenty-Eight (21,427,328) shares shall be Preferred Stock. (B) RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The Preferred Stock authorized by these Third Amended and Restated Articles of Incorporation may be issued from time to time in one or more series. The first series of Preferred Stock shall be designated "Series A Preferred Stock" and shall consist of Seven Million Two Hundred Twenty-Seven Thousand Three Hundred Twenty-Eight (7,227,328) shares, the second series of Preferred Stock shall be designated "Series B Preferred Stock" and shall consist of Twelve Million Nine Hundred Thousand (12,900,000) shares, and the third series of Preferred Stock shall be designated "Series B-1 Preferred Stock" and shall consist of One Million Three Hundred Thousand (1,300,000) shares. The rights, preferences, privileges, and restrictions granted to and imposed -1- 2 on the Series A Preferred Stock and Series B Preferred Stock are as set forth below in this Article III(B). The rights, preferences, privileges, and restrictions granted to and imposed on the Series B-1 Preferred Stock shall be identical to those of the Series B Preferred Stock, and each reference to the Series B Preferred Stock shall also be deemed to be a reference to the Series B-1 Preferred Stock, except for the rights, preferences, privileges, restrictions and references set forth in Section 5 of this Article III(B). 1. DIVIDEND PROVISIONS. The holders of shares of Series A and Series B Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the Corporation) on the Common Stock of the Corporation, at the rate of (a) $0.15 per share (appropriately adjusted to reflect subsequent stock splits, stock dividends, combinations or other recapitalizations) per annum on each outstanding share of Series A Preferred Stock and (b) $0.75 per share (appropriately adjusted to reflect subsequent stock splits, stock dividends, combinations or other recapitalizations) per annum on each outstanding share of Series B Preferred Stock, payable when, as and if declared by the Board of Directors. Such dividends shall not be cumulative. No dividend shall be paid on the Common Stock in any fiscal year unless a dividend shall first have been paid in full on the Preferred Stock in an amount for each such share of Preferred Stock equal to or greater than the aggregate amount of dividends for all Common Stock into which each such share of Preferred Stock could then be converted. The holders of outstanding Series A Preferred Stock can waive any dividend preference that such holders shall be entitled to receive under this Section 1 upon the affirmative vote or written consent of the holders of at least seventy percent (70%) of the Series A Preferred Stock then outstanding. The holders of outstanding Series B Preferred Stock can waive any dividend preference that such holders shall be entitled to receive under this Section 1 upon the affirmative vote or written consent of the holders of at least seventy percent (70%) of the Series B Preferred Stock then outstanding. 2. LIQUIDATION. (a) PREFERENCE. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of the Series A and Series B Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Common Stock by reason of their ownership thereof, an amount per share equal to (i) $1.45 per share (appropriately adjusted to reflect subsequent stock splits, stock dividends, combinations or other recapitalizations) for each share of Series A Preferred Stock then held by them, plus declared but unpaid dividends (appropriately adjusted to reflect subsequent stock splits, stock dividends, combinations or other recapitalizations) and (ii) $7.55 per share (appropriately adjusted to reflect subsequent stock splits, stock dividends, combinations or other recapitalizations) for each share of Series B Preferred Stock then held by them, plus declared but unpaid dividends (appropriately adjusted to reflect subsequent stock splits, stock dividends, combinations or other recapitalizations). If, upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A and Series B Preferred Stock shall be insufficient to permit the payment to such holders -2- 3 of the full aforesaid preferential amounts, then, the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series A and Series B Preferred Stock in proportion to the preferential amount each such holder is otherwise entitled to receive. (b) REMAINING ASSETS. Upon the completion of the distribution required by Section 2(a) above, the remaining assets of the Corporation available for distribution to shareholders shall be distributed among the holders of the Series A Preferred Stock and the Common Stock pro rata based on the number of shares of Common Stock held by each (assuming conversion of all such Series A Preferred Stock) until the holders of the Series A Preferred Stock shall have received an aggregate of $5.80 per share (including amounts paid pursuant to Section 2(a) above)(appropriately adjusted to reflect subsequent stock splits, stock dividends, combinations or other recapitalizations); thereafter, if assets remain in the Corporation, the holders of the Common Stock of the Corporation shall receive all of the remaining assets of the Corporation pro rata based on the number of shares of Common Stock held by each. (c) CERTAIN ACQUISITIONS. (i) DEEMED LIQUIDATION. For purposes of this Section 2, a liquidation, dissolution or winding up of the Corporation shall be deemed to occur if the Corporation shall sell, convey, or otherwise dispose of all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any other transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Corporation is disposed of, provided that this Section 2(c)(i) shall not apply to a merger effected solely for the purpose of changing the domicile of the Corporation. (ii) VALUATION OF CONSIDERATION. In the event of a deemed liquidation as described in Section 2(c)(i) above, if the consideration received by the Corporation is other than cash, its value will be deemed its fair market value. Any securities shall be valued as follows: (A) Securities not subject to investment letter or other similar restrictions on free marketability: (1) If traded on a securities exchange or The Nasdaq Stock Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the thirty-day (30) period ending three (3) days prior to the closing; (2) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty-day (30) period ending three (3) days prior to the closing; and -3- 4 (3) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by the Corporation and the holders of at least a majority of the voting power of all then outstanding shares of Preferred Stock. (B) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a shareholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in Section 2(c)(ii)(A) to reflect the approximate fair market value thereof, as mutually determined by the Corporation and the holders of at least a majority of the voting power of all then outstanding shares of Preferred Stock. (iii) NOTICE OF TRANSACTION. The Corporation shall give each holder of record of Series A Preferred Stock and each holder of record of Series B Preferred Stock written notice of such impending transaction not later than fifteen (15) days prior to the shareholders' meeting called to approve such transaction, or fifteen (15) days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 2, and the Corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than fifteen (15) days after the Corporation has given the first notice provided for herein or sooner than ten (10) days after the Corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of Preferred Stock that are entitled to such notice rights or similar notice rights and that represent at least a majority of the voting power of all then outstanding shares of such Preferred Stock. (iv) EFFECT OF NONCOMPLIANCE. In the event the requirements of this Section 2(c) are not complied with, the Corporation shall forthwith either cause the closing of the transaction to be postponed until such requirements have been complied with, or cancel such transaction, in which event the rights, preferences and privileges of the holders of the Series A Preferred Stock and Series B Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in Section 2(c)(iii) hereof. 3. REDEMPTION. The Preferred Stock is not redeemable. 4. CONVERSION. The holders of the Series A and Series B Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) RIGHT TO CONVERT. Subject to Section 4(c), each share of Series A and Series B Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the Corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing (i) $1.45 in the case of Series A Preferred Stock and (ii) $7.55 in the case of Series B Preferred Stock by the Conversion Price applicable to such share, determined as -4- 5 hereafter provided, in effect on the date the certificate is surrendered for conversion. The initial Conversion Price per share of Series A Preferred Stock shall be $1.45 and per share of Series B Preferred Stock shall be $7.55. Such initial Conversion Prices shall be subject to adjustment as set forth in Section 4(d). (b) AUTOMATIC CONVERSION. Each share of Series A Preferred Stock and Series B Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such share immediately upon the earlier of (i) except as provided below in Section 4(c), the Corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), the public offering price of which is not less than $10.00 per share (appropriately adjusted to reflect subsequent stock splits, stock dividends, combinations or other recapitalizations) and which results in aggregate cash proceeds to the Corporation of $10,000,000 (net of underwriting discounts and commissions) or (ii) the date specified by written consent or agreement of the holders of at least seventy percent (70%) of the then outstanding shares of Preferred Stock. (c) MECHANICS OF CONVERSION. Before any holder of Series A or Series B Preferred Stock shall be entitled to convert the same into shares of Common Stock, it shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for such series of Preferred Stock, and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of such series of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Act the conversion may, at the option of any holder tendering such Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive Common Stock upon conversion of such Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (d) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK FOR CERTAIN DILUTIVE ISSUANCES, SPLITS AND COMBINATIONS. The Conversion Price of the Series A and Series B Preferred Stock shall be subject to adjustment from time to time as follows: (i) ISSUANCE OF ADDITIONAL STOCK BELOW PURCHASE PRICE. If the Corporation shall issue, after the date upon which any shares of Series A or Series B Preferred Stock were first issued (the "Purchase Date" with respect to such series), any -5- 6 Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price for such series in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for such series in effect immediately prior to each such issuance shall automatically be adjusted as set forth in this Section 4(d)(i), unless otherwise provided in this Section 4(d)(i). (A) ADJUSTMENT FORMULA. Whenever the Conversion Price is adjusted pursuant to this Section (4)(d)(i), the new Conversion Price shall be determined by multiplying the Conversion Price then in effect by a fraction, (x) the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (the "Outstanding Common") plus the number of shares of Common Stock that the aggregate consideration received by the Corporation for such issuance would purchase at such Conversion Price; and (y) the denominator of which shall be the number of shares of Outstanding Common plus the number of shares of such Additional Stock. For purposes of the foregoing calculation, the term "Outstanding Common" shall include shares of Common Stock deemed issued pursuant to Section 4(d)(i)(E) below. (B) DEFINITION OF "ADDITIONAL STOCK". For purposes of this Section 4(d)(i), "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to Section 4(d)(i)(E)) by the Corporation after the Purchase Date) other than (1) Common Stock issued pursuant to a transaction described in Section 4(d)(ii) hereof, (2) Up to 4,623,909 shares of Common Stock or such additional number of shares of Common Stock as shall have been approved unanimously by the Corporation's Board of Directors (appropriately adjusted to reflect subsequent stock splits, stock dividends, combinations or other recapitalizations) issuable or issued to employees, consultants or directors of the Corporation directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of the Corporation, (3) Capital stock, or options or warrants to purchase capital stock, issued to financial institutions or lessors in connection with commercial credit arrangements, equipment financings or similar transactions, provided (i) that such transactions have been approved by the Board of Directors of the Corporation and are not primarily for purposes of an equity financing, and (ii) that any options or warrants for Preferred Stock of the Corporation issued in connection therewith are exercisable for a price that is equal to or greater than the Conversion Price set forth in Section 4(a) above, (4) Shares of Common Stock or Preferred Stock issuable upon exercise of warrants outstanding as of the date of these Amended and Restated Articles of Incorporation, (5) Capital stock or warrants or options to purchase capital stock issued in connection with bona fide acquisitions, mergers or similar -6- 7 transactions, the terms of which are approved by the Board of Directors of the Corporation, and provided that any warrants or options for Preferred Stock of the Corporation issued in connection therewith are exercisable for a price that is equal to or greater than the Conversion Price set forth in Section 4(a) above, (6) Shares of Common Stock issued or issuable upon conversion of the Preferred Stock, and (7) Shares of Common Stock issued or issuable in a public offering in which all outstanding shares of Preferred Stock will be converted to Common Stock immediately prior to consummation of such public offering. (C) NO FRACTIONAL ADJUSTMENTS. No adjustment of the Conversion Price for the Series A or Series B Preferred Stock shall be made in an amount less than one cent per share, provided that any adjustments that are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. (D) DETERMINATION OF CONSIDERATION. In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. (E) DEEMED ISSUANCES OF COMMON STOCK. In the case of the issuance (whether before, on or after the applicable Purchase Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this Section 4(d)(i): (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments)(to the extent then exercisable) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Section 4(d)(i)(D)), if any, received by the Corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. -7- 8 (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (assuming the satisfaction of any conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments)(to the extent convertible or exchangeable) for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Corporation (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Section 4(d)(i)(D). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price of each of the Series A Preferred Stock and the Series B Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of each of the Series A Preferred Stock and the Series B Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to Sections 4(d)(i)(E)(1) and 4(d)(i)(E)(2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either Section 4(d)(i)(E)(3) or 4(d)(i)(E)(4). (F) NO INCREASED CONVERSION PRICE. Notwithstanding any other provisions of this Section (4)(d)(i), except to the limited extent provided for in Sections 4(d)(i)(E)(3) and 4(d)(i)(E)(4), no adjustment of the Conversion Price pursuant to this Section 4(d)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. -8- 9 (ii) STOCK SPLITS AND DIVIDENDS. In the event the Corporation should at any time or from time to time after the Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of each of the Series A Preferred Stock and the Series B Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in Section 4(d)(i)(E). (iii) REVERSE STOCK SPLITS. If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for each of the Series A Preferred Stock and the Series B Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (e) OTHER DISTRIBUTIONS. In the event the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in Section 4(d)(ii), then, in each such case for the purpose of this Section 4(e), the holders of Series A Preferred Stock and the holders of Series B Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (f) RECAPITALIZATIONS. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 4 or Section 2) provision shall be made so that the holders of the Series A Preferred Stock and the holders of Series B Preferred Stock shall thereafter be entitled to receive upon conversion of such Preferred Stock the number of shares of stock or other securities or property of the Corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of such Preferred Stock after -9- 10 the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of such Preferred Stock) shall be applicable after that event and be as nearly equivalent as practicable. (g) NO IMPAIRMENT. The Corporation will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Preferred Stock against impairment. (h) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS. (i) No fractional shares shall be issued upon the conversion of any share or shares of the Series A Preferred Stock or Series B Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. The number of shares issuable upon such conversion shall be determined on the basis of the total number of shares of Series A Preferred Stock or Series B Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Series A Preferred Stock or Series B Preferred Stock pursuant to this Section 4, the Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of such Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series A Preferred Stock or Series B Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for such series of Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of such series of Preferred Stock. (i) NOTICES OF RECORD DATE. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of Series A or Series B Preferred Stock, at least ten (10) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. -10- 11 (j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A or Series B Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of such series of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of such series of Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite shareholder approval of any necessary amendment to these articles. (k) NOTICES. Any notice required by the provisions of this Section 4 to be given to the holders of shares of Series A or Series B Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of the Corporation. 5. VOTING RIGHTS. (a) SERIES A AND SERIES B PREFERRED STOCK. Except as otherwise required by law, the holder of each share of Series A or Series B Preferred Stock shall have the right to one vote for each share of Common Stock into which such Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any shareholders' meeting in accordance with the bylaws of the Corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as-converted basis (after aggregating all shares into which shares of Series A or Series B Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one-half being rounded upward). (b) SERIES B-1 PREFERRED STOCK. The holder of each share of Series B-1 Preferred Stock shall not have the right to vote with respect to each share of Series B-1 Preferred Stock. 6. PROTECTIVE PROVISIONS. (a) So long as any shares of Preferred Stock are outstanding (as adjusted for stock splits, stock dividends or recapitalizations), the Corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least seventy percent (70%) of the then outstanding shares of Preferred Stock, voting together as a class: (i) effect a transaction described in Section 2(c)(i) above; -11- 12 (ii) increase or decrease (other than by redemption or conversion) the total number of authorized shares of any class or series of capital stock of the Corporation; (iii) redeem, purchase or otherwise acquire (or pay into or set funds aside for a sinking fund for such purpose) any share or shares of Common Stock; provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock not in excess of $250,000 in any fiscal year from employees, officers, directors, consultants or other persons performing services for the Corporation or any subsidiary pursuant to agreements under which the Corporation has the option to repurchase such shares at cost upon the occurrence of certain events, such as the termination of employment, or through the exercise of any right of first refusal; (iv) authorize the payment of a cash dividend to holders of any class or series of capital stock of the Corporation; (v) increase the number of directors comprising the Corporation's Board of Directors; or (vi) undertake any action that would result in taxation of the holders of Preferred Stock pursuant to Section 305 of the Internal Revenue Code of 1986, as amended. (b) So long as shares of Series A Preferred Stock are outstanding (as adjusted for stock splits, stock dividends or recapitalizations), the Corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a two-thirds (2/3rds) of the then outstanding shares of Series A Preferred Stock, voting together as a series: (i) alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock so as to affect adversely the shares of such series; or (ii) authorize or issue, or obligate itself to issue, any other equity security having a preference over, or being on a parity with, the Series A Preferred Stock. (c) So long as shares of Series B Preferred Stock are outstanding (as adjusted for stock splits, stock dividends or recapitalizations), the Corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a seventy-two percent (72%) of the then outstanding shares of Series B Preferred Stock, voting together as a series: (i) alter or change the rights, preferences or privileges of the shares of Series B Preferred Stock so as to affect adversely the shares of such series; or (ii) authorize or issue, or obligate itself to issue, any other equity security, including any other security convertible into or exercisable for any equity -12- 13 security, having any rights, preferences or privileges over, or being on a parity with, the Series B Preferred Stock. 7. STATUS OF CONVERTED STOCK. In the event any shares of Preferred Stock shall be converted pursuant to Section 4 hereof, the shares so converted shall be cancelled and shall not be issuable by the Corporation. The Articles of Incorporation of the Corporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. 8. REPURCHASE OF SHARES. In connection with repurchases by the Corporation of its Common Stock pursuant to its agreements with certain of the holders thereof, Sections 502 and 503 of the California General Corporation Law shall not apply in whole or in part with respect to such repurchases. (C) COMMON STOCK. 1. DIVIDEND RIGHTS. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of the Corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. 2. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or winding up of the Corporation, the assets of the Corporation shall be distributed as provided in Section 2 of Division (B) of this Article III. 3. REDEMPTION. The Common Stock is not redeemable. 4. VOTING RIGHTS. The holder of each share of Common Stock shall have the right to one vote, and shall be entitled to notice of any shareholders' meeting in accordance with the bylaws of the Corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. ARTICLE IV (A) The liability of the directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. (B) The Corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) to the fullest extent permissible under California law. (C) Any amendment or repeal or modification of the foregoing provisions of this Article IV by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. -13- 14 * * * 3. The foregoing amendment has been approved by the Board of Directors of this corporation. 4. The foregoing amendment was approved by the holders of the requisite number of shares of this corporation in accordance with Sections 902 and 903 of the California General Corporation Law. The total number of outstanding shares entitled to vote with respect to the foregoing amendment was 5,350,746 shares of Common Stock, 7,227,328 shares of Series A Preferred Stock, and 6,622,517 shares of Series B Preferred Stock. The number of shares voting in favor of the foregoing amendment equaled or exceeded the vote required. The percentage vote required was a majority of the outstanding shares of Common Stock, at least seventy percent (70%) of the outstanding shares of Preferred Stock voting together as a class, two-thirds (2/3rds) of the outstanding shares of Series A Preferred Stock, and 72% of the Series B Preferred Stock. [SIGNATURE PAGE FOLLOWS] -14- 15 The undersigned certify under penalty of perjury under the laws of the State of California that the matters set forth in this Certificate are true and correct of our own knowledge. Executed at Menlo Park, California, on November 1, 1999. /s/ JULIE WAINWRIGHT ----------------------------------------- Julie Wainwright, Chief Executive Officer /s/ JOHN V. BAUTISTA ----------------------------------------- John V. Bautista, Secretary -15- EX-3.2 3 FORM OF CERTIFICATE INCORPORATION OF PETS.COM 1 EXHIBIT 3.2 CERTIFICATE OF INCORPORATION OF PETS.COM, INC. ARTICLE I The name of this corporation is Pets.com, Inc. (the "Corporation"). ARTICLE II The address of the Corporation's registered office in the State of Delaware is 1013 Centre Road, Wilmington, County of New Castle. The name of its registered agent at such address is The Prentice-Hall Corporation System, Inc. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV (A) CLASSES OF STOCK. The Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is One Hundred Fifty-Five Million shares (155,000,000), each with a par value of $0.001 per share. One Hundred Fifty Million (150,000,000) shares shall be Common Stock and Five Million (5,000,000) shares shall be Preferred Stock. (B) The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, within the limitations and restrictions stated in this Certificate of Incorporation, to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and the number of shares constituting any such series and the designation thereof, or any of them; and to -1- 2 increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. ARTICLE V The number of directors of the Corporation shall be fixed from time to time by a bylaw or amendment thereof duly adopted by the Board of Directors. ARTICLE VI In the election of directors, each holder of shares of any class or series of capital stock of the Corporation shall be entitled to one vote for each share held. No stockholder will be permitted to cumulate votes at any election of directors. ARTICLE VII No action shall be taken by the stockholders of the Corporation other than at an annual or special meeting of the stockholders, upon due notice and in accordance with the provisions of the Corporation's bylaws. ARTICLE VIII The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. ARTICLE IX The Board of Directors of the Corporation is expressly authorized to make, alter or repeal Bylaws of the Corporation. ARTICLE X Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. ARTICLE XI -2- 3 The Corporation shall have perpetual existence. ARTICLE XII (A) To the fullest extent permitted by the General Corporation Law of Delaware, as the same may be amended from time to time, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. If the General Corporation Law of Delaware is hereafter amended to authorize, with the approval of a corporation's stockholders, further reductions in the liability of the Corporation's directors for breach of fiduciary duty, then a director of the Corporation shall not be liable for any such breach to the fullest extent permitted by the General Corporation Law of Delaware, as so amended. (B) Any repeal or modification of the foregoing provisions of this Article XII shall not adversely affect any right or protection of a director of the Corporation with respect to any acts or omissions of such director occurring prior to such repeal or modification. ARTICLE XIII (A) To the fullest extent permitted by applicable law, the Corporation is also authorized to provide indemnification of (and advancement of expenses to) such agents (and any other persons to which Delaware law permits the Corporation to provide indemnification) though bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the Delaware General Corporation Law, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to a corporation, its stockholders, and others. (B) Any repeal or modification of any of the foregoing provisions of this Article XIII shall not adversely affect any right or protection of a director, officer, agent or other person existing at the time of, or increase the liability of any director of the Corporation with respect to any acts or omissions of such director, officer or agent occurring prior to such repeal or modification. -3- 4 Executed at San Francisco, California, on ____________, ____. -------------------------------------------- Julie L. Wainwright, Chief Executive Officer -------------------------------------------- John V. Bautista, Secretary -4- EX-3.3 4 BYLAWS OF PETS.COM 1 EXHIBIT 3.3 BYLAWS OF PETS.COM ARTICLE I CORPORATE OFFICES 1.1 PRINCIPAL OFFICE. The Board of Directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office is located outside such state and the corporation has one or more business offices in such state, then the Board of Directors shall fix and designate a principal business office in the State of California. 1.2 OTHER OFFICES. The Board of Directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS 2.1 PLACE OF MEETINGS. Meetings of shareholders shall be held at any place within or outside the State of California designated by the Board of Directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. 2.2 ANNUAL MEETING. The annual meeting of shareholders shall be held each year on a date and at a time designated by the Board of Directors. In the absence of such designation, the annual meeting of shareholders shall be held on the second Tuesday day of April. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other proper business may be transacted. 2.3 SPECIAL MEETING. A special meeting of the shareholders may be called at any time by the Board of Directors, or by the chairman of the board, or by the president, or by one or more shareholders 2 holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting. If a special meeting is called by any person or persons other than the Board of Directors or the president or the chairman of the board, then the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the Board of Directors may be held. 2.4 NOTICE OF SHAREHOLDERS' MEETINGS. All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) (or, if sent by third-class mail pursuant to Section 2.5 of these bylaws, thirty (30)) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date, and hour of the meeting and (a) in the case of a special meeting, the general nature of the business to be transacted (no business other than that specified in the notice may be transacted) or (b) in the case of the annual meeting, those matters which the Board of Directors, at the time of giving the notice, intends to present for action by the shareholders (but subject to the provisions of the next paragraph of this Section 2.4 any proper matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the board intends to present for election. If action is proposed to be taken at any meeting for approval of (a) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California (the "Code"), (b) an amendment of the articles of incorporation, pursuant to Section 902 of the Code, (c) a reorganization of the corporation, pursuant to Section 1201 of the Code, (d) a voluntary dissolution of the corporation, pursuant to Section 1900 of the Code, or (e) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, then the notice shall also state the general nature of that proposal. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Written notice of any meeting of shareholders shall be given either (a) personally or (b) by first-class mail or (c) by third-class mail but only if the corporation has outstanding shares held of record by five hundred (500) or more persons (determined as provided in -2- 3 Section 605 of the Code) on the record date for the shareholders' meeting, or (d) by telegraphic or other written communication. Notices not personally delivered shall be sent charges prepaid and shall be addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, then all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the shareholder on written demand of the shareholder at the principal executive office of the corporation for a period of one (1) year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice. 2.6 QUORUM. The presence in person or by proxy of the holders of a majority of the shares entitled to vote thereat constitutes a quorum for the transaction of business at all meetings of shareholders. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. 2.7 ADJOURNED MEETING; NOTICE. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy. In the absence of a quorum, no other business may be transacted at that meeting except as provided in Section 2.6 of these bylaws. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken. However, if a new record date for the adjourned meeting is fixed or if the adjournment is for more than forty-five (45) days from the date set for the original meeting, then notice of the adjourned meeting shall be given. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws. At -3- 4 any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. 2.8 VOTING. The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of Sections 702 through 704 of the Code (relating to voting shares held by a fiduciary, in the name of a corporation or in joint ownership). The shareholders' vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder at the meeting and before the voting has begun. Except as provided in the last paragraph of this Section 2.8, or as may be otherwise provided in the articles of incorporation, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of the shareholders. Any shareholder entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or, except when the matter is the election of directors, may vote them against the proposal; but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares which the shareholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented and voting at a duly held meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or a vote by classes is required by the Code or by the articles of incorporation. At a shareholders' meeting at which directors are to be elected, a shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) if the candidates' names have been placed in nomination prior to commencement of the voting and the shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination either (a) by giving one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are normally entitled or (b) by distributing the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of affirmative votes, up to the number of directors to be elected, shall be elected; votes against any candidate and votes withheld shall have no legal effect. 2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT. The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though taken at a meeting duly held -4- 5 after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. The waiver of notice or consent or approval need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 2.4 of these bylaws, the waiver of notice or consent or approval shall state the general nature of the proposal. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of and presence at that meeting, except when the person objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the Code to be included in the notice of the meeting but not so included, if that objection is expressly made at the meeting. 2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. In the case of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors. However, a director may be elected at any time to fill any vacancy on the Board of Directors, provided that it was not created by removal of a director and that it has not been filled by the directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares, or a personal representative of the shareholder, or their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the secretary. If the consents of all shareholders entitled to vote have not been solicited in writing and if the unanimous written consent of all such shareholders has not been received, then the secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. Such notice shall be given to those shareholders entitled to vote who have not consented in writing and shall be given in the manner specified in Section 2.5 of these bylaws. In the case of approval of (a) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Code, (b) indemnification of a corporate "agent," pursuant to Section 317 of the Code, (c) a reorganization of the corporation, pursuant to -5- 6 Section 1201 of the Code, or (d) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. 2.11 RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, OR GIVING CONSENTS. For purposes of determining the shareholders entitled to notice of any meeting or to vote thereat or entitled to give consent to corporate action without a meeting, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in such event only shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Code. If the Board of Directors does not so fix a record date: (a) the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; and (b) the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action by the board has been taken, shall be at the close of business on the day on which the board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. The record date for any other purpose shall be as provided in Article VIII of these bylaws. 2.12 PROXIES. Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (a) the person who executed the proxy revokes it prior to the time of voting by delivering a writing to the corporation stating that the proxy is revoked or by executing a subsequent proxy and presenting it to the meeting or by voting in person at the meeting, or (b) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless -6- 7 otherwise provided in the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Code. 2.13 INSPECTORS OF ELECTION. Before any meeting of shareholders, the Board of Directors may appoint an inspector or inspectors of election to act at the meeting or its adjournment. If no inspector of election is so appointed, then the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint an inspector or inspectors of election to act at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting pursuant to the request of one (1) or more shareholders or proxies, then the holders of a majority of shares or their proxies present at the meeting shall determine whether one (l) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, then the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. Such inspectors shall: (a) determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) receive votes, ballots or consents; (c) hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) count and tabulate all votes or consents; (e) determine when the polls shall close; (f) determine the result; and (g) do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE III DIRECTORS 3.1 POWERS. Subject to the provisions of the Code and any limitations in the articles of incorporation and these bylaws relating to actions required to be approved by the shareholders or -7- 8 by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. 3.2 NUMBER OF DIRECTORS. The authorized number of directors of the corporation shall be one (1). The number of directors may be changed by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the fixed number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be elected at each annual meeting of shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. 3.4 RESIGNATION AND VACANCIES. Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the Board of Directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the Board of Directors may elect a successor to take office when the resignation becomes effective. Vacancies in the Board of Directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director; however, a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum), or by the unanimous written consent of all shares entitled to vote thereon. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. A vacancy or vacancies in the Board of Directors shall be deemed to exist (a) in the event of the death, resignation or removal of any director, (b) if the Board of Directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, (c) if the authorized number of directors is increased, or -8- 9 (d) if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be elected at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election other than to fill a vacancy created by removal, if by written consent, shall require the consent of the holders of a majority of the outstanding shares entitled to vote thereon. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE. Regular meetings of the Board of Directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such directors shall be deemed to be present in person at the meeting. 3.6 REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice if the times of such meetings are fixed by the Board of Directors. 3.7 SPECIAL MEETINGS; NOTICE. Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone (including a voice messaging system or other system or technology designed to record and communicate messages), facsimile, electronic mail, or other electronic means, to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone, telegram, facsimile, electronic mail or other electronic means, it shall be delivered at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone, facsimile or electronic mail may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. -9- 10 3.8 QUORUM. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.10 of these bylaws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the Board of Directors, subject to the provisions of Section 310 of the Code (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of the Code (as to appointment of committees), Section 317(e) of the Code (as to indemnification of directors), the articles of incorporation, and other applicable law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE. Notice of a meeting need not be given to any director (a) who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or (b) who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such waivers, consents, and approvals shall be filed with the corporate records or made part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the Board of Directors. 3.10 ADJOURNMENT. A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. 3.11 NOTICE OF ADJOURNMENT. Notice of the time and place of holding an adjourned meeting need not be given unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty-four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.7 of these bylaws, to the directors who were not present at the time of the adjournment. 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, provided that all members of the board individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the Board of Directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board. -10- 11 3.13 FEES AND COMPENSATION OF DIRECTORS. Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the Board of Directors. This Section 3.13 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. 3.14 APPROVAL OF LOANS TO OFFICERS. The corporation may make loans of money or property to, or guarantee the obligations of, any officer or director of the corporation to the extent permitted by applicable law. Without limiting the foregoing, the corporation may, upon the approval of the Board of Directors alone, make loans of money or property to, or guarantee the obligations of, any officer of the corporation or its parent or subsidiary, whether or not a director, or adopt an employee benefit plan or plans authorizing such loans or guaranties provided that (a) the Board of Directors determines that such a loan or guaranty or plan may reasonably be expected to benefit the corporation, (b) the corporation has outstanding shares held of record by 100 or more persons (determined as provided in Section 605 of the Code) on the date of approval by the Board of Directors, and (c) the approval of the Board of Directors is by a vote sufficient without counting the vote of any interested director or directors. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: (a) the approval of any action which, under the Code, also requires shareholders' approval or approval of the outstanding shares; (b) the filling of vacancies on the Board of Directors or in any committee; (c) the fixing of compensation of the directors for serving on the board or any committee; (d) the amendment or repeal of these bylaws or the adoption of new bylaws; -11- 12 (e) the amendment or repeal of any resolution of the Board of Directors which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the Board of Directors; or (g) the appointment of any other committees of the Board of Directors or the members of such committees. 4.2 MEETINGS AND ACTION OF COMMITTEES. Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section 3.12 (action without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the Board of Directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the Board of Directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS 5.1 OFFICERS. The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the Board of Directors, a chairman of the board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. 5.2 ELECTION OF OFFICERS. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws, shall be chosen by the board, subject to the rights, if any, of an officer under any contract of employment. Any contract of employment with an officer shall be unenforceable unless in writing and specifically authorized by the Board of Directors. -12- 13 5.3 SUBORDINATE OFFICERS. The Board of Directors may appoint, or may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the Board of Directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board of Directors at any regular or special meeting of the board or, except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. 5.6 CHAIRMAN OF THE BOARD. The chairman of the board, if such an officer is elected, shall, if present, preside at meetings of the Board of Directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the Board of Directors or as may be prescribed by these bylaws. If there is no president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. 5.7 PRESIDENT. Except as otherwise determined by the Board, and subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board, if there is such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and the officers of the corporation. He or she shall preside at all meetings of the shareholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the Board of Directors. The President shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or these bylaws. -13- 14 5.8 VICE PRESIDENTS. In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a vice president designated by the Board of Directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these bylaws, the president or the chairman of the board. 5.9 SECRETARY. The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and shareholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board of Directors required to be given by law or by these bylaws. He or she shall keep the seal of the corporation, if any, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these bylaws. 5.10 CHIEF FINANCIAL OFFICER. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors. He or she shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the president and directors, whenever they request it, an account of all of his or her transactions as chief financial officer and of the financial condition of the -14- 15 corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or these bylaws. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS. The corporation shall, to the maximum extent and in the manner permitted by the Code, indemnify each of its directors and officers against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Article VI, a "director" or "officer" of the corporation includes any person (a) who is or was a director or officer of the corporation, (b) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (c) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS. The corporation shall have the power, to the extent and in the manner permitted by the Code, to indemnify each of its employees and agents (other than directors and officers) against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Article VI, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (a) who is or was an employee or agent of the corporation, (b) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (c) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 PAYMENT OF EXPENSES IN ADVANCE. Expenses incurred in defending any civil or criminal action or proceeding for which indemnification is required pursuant to Section 6.1 or for which indemnification is permitted pursuant to Section 6.2 following authorization thereof by the Board of Directors shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI. -15- 16 6.4 INDEMNITY NOT EXCLUSIVE. The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the articles of incorporation. 6.5 INSURANCE INDEMNIFICATION. The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation against any liability asserted against or incurred by such person in such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article VI. 6.6 CONFLICTS. No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (1) That it would be inconsistent with a provision of the articles of incorporation, these bylaws, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER. The corporation shall keep either at its principal executive office or at the office of its transfer agent or registrar (if either is appointed), as determined by resolution of the Board of Directors, a record of its shareholders listing the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation or who hold at least one percent (1%) of such voting shares and have filed a Schedule 14A with the Securities and Exchange Commission relating to the election of directors, may (a) inspect and copy the records of shareholders' names, addresses, and shareholdings during usual business hours on five (5) -16- 17 days' prior written demand on the corporation, (b) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer agent's usual charges for such list, a list of the names and addresses of the shareholders who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of a date specified by the shareholder after the date of demand. Such list shall be made available to any such shareholder by the transfer agent on or before the later of five (5) days after the demand is received or five (5) days after the date specified in the demand as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 7.1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. 7.2 MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall keep at its principal executive office or, if its principal executive office is not in the State of California, at its principal business office in California the original or a copy of these bylaws as amended to date, which bylaws shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in such state, then the secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of these bylaws as amended to date. 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The accounting books and records and the minutes of proceedings of the shareholders, of the Board of Directors, and of any committee or committees of the Board of Directors shall be kept at such place or places as are designated by the Board of Directors or, in absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form, and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney and shall include the right to copy and make extracts. Such rights of inspection shall extend to the records of each subsidiary corporation of the corporation. -17- 18 7.4 INSPECTION BY DIRECTORS. Every director shall have the absolute right at any reasonable time to inspect all books, records, and documents of every kind as well as the physical properties of the corporation and each of its subsidiary corporations. Such inspection by a director may be made in person or by an agent or attorney. The right of inspection includes the right to copy and make extracts of documents. 7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER. The Board of Directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the corporation. Such report shall be sent at least fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days) before the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in Section 2.5 of these bylaws for giving notice to shareholders of the corporation. The annual report shall contain (a) a balance sheet as of the end of the fiscal year, (b) an income statement, (c) a statement of changes in financial position for the fiscal year, and (d) any report of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation. The foregoing requirement of an annual report shall be waived so long as the shares of the corporation are held by fewer than one hundred (100) holders of record. 7.6 FINANCIAL STATEMENTS. If no annual report for the fiscal year has been sent to shareholders, then the corporation shall, upon the written request of any shareholder made more than one hundred twenty (120) days after the close of such fiscal year, deliver or mail to the person making the request, within thirty (30) days thereafter, a copy of a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year. If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation makes a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and for a balance sheet of the corporation as of the end of that period, then the chief financial officer shall cause such statement or statements to be prepared, if not already prepared, and shall deliver personally or mail such statement or statements to the person making the request within thirty (30) days after the receipt of the request. If the corporation has not sent to the shareholders its annual report for the last fiscal year, the statements referred to in the first paragraph of this Section 7.6 shall likewise be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request. -18- 19 The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of any independent accountants engaged by the corporation or by the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. 7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The chairman of the board, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the Board of Directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by the person having such authority. ARTICLE VIII GENERAL MATTERS 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the shareholders entitled to exercise any rights in respect of any other lawful action (other than action by shareholders by written consent without a meeting), the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action. In that case, only shareholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the Code. If the Board of Directors does not so fix a record date, then the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS. From time to time, the Board of Directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. -19- 20 8.3 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board of Directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.4 CERTIFICATES FOR SHARES. A certificate or certificates for shares of the corporation shall be issued to each shareholder when any of such shares are fully paid. The Board of Directors may authorize the issuance of certificates for shares partly paid provided that these certificates shall state the total amount of the consideration to be paid for them and the amount actually paid. All certificates shall be signed in the name of the corporation by the chairman of the board or the vice chairman of the board or the president or a vice president and by the chief financial officer or an assistant treasurer or the secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certificate ceases to be that officer, transfer agent or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent or registrar at the date of issue. 8.5 LOST CERTIFICATES. Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and canceled at the same time. The Board of Directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the board may require; in such case, the board may require indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 8.6 CONSTRUCTION; DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Code shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. -20- 21 ARTICLE IX AMENDMENTS 9.1 AMENDMENT BY SHAREHOLDERS. New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation of the corporation set forth the number of authorized directors of the corporation, then the authorized number of directors may be changed only by an amendment of the articles of incorporation. 9.2 AMENDMENT BY DIRECTORS. Subject to the rights of the shareholders as provided in Section 9.1 of these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing the authorized number of directors (except to fix the authorized number of directors pursuant to a bylaw providing for a variable number of directors), may be adopted, amended or repealed by the Board of Directors. -21- 22 CERTIFICATE OF ADOPTION OF BYLAWS OF PETS.COM ADOPTION BY INCORPORATOR The undersigned person appointed in the articles of incorporation to act as the Incorporator of Pets.com hereby adopts the foregoing Bylaws, comprising _21_ pages, as the Bylaws of the corporation. Executed this 17th day of February, 1999. /s/ Greg McLemore ----------------------------------------- Greg McLemore, Incorporator CERTIFICATE BY SECRETARY OF ADOPTION BY INCORPORATOR The undersigned hereby certifies that the undersigned is the duly elected, qualified, and acting Secretary of Pets.com, and that the foregoing Bylaws, comprising _21_ pages, were adopted as the Bylaws of the corporation on February 17, 1999 , by the person appointed in the articles of incorporation to act as the Incorporator of the corporation. Executed this 17th day of February, 1999. /s/ John V. Bautista ----------------------------------------- John V. Bautista, Secretary 23 CERTIFICATE OF AMENDMENT OF BYLAWS The undersigned, John V. Bautista, hereby certifies that: 1. He is the duly elected and incumbent Secretary of Pets.com, Inc. (the "Company"). 2. At a meeting of the Board of Directors and by an Action by Written Consent of the Shareholders each dated September 8, 1999, Article III, Section 3.2 of the Bylaws of the Company was amended to read in its entirety as follows: "The authorized number of directors of the corporation shall be five (5). The number of directors may be changed by a duly adopted amendment to the corporation's Articles of Incorporation or by an amendment to this bylaw adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the fixed number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires." 3. The matters set forth in this certificate are true and correct of my own knowledge. Date: September 8, 1999 /s/ John V. Bautista ----------------------------------------- John V. Bautista, Secretary EX-3.4 5 FORM OF BYLAWS OF PETS.COM 1 EXHIBIT 3.4 BYLAWS OF PETS.COM, INC. ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE. The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent of the corporation at such location is Prentice-Hall Corporation System, Inc. 1.2 OTHER OFFICES. The Board of Directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS. Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the Board of Directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 ANNUAL MEETING. The annual meeting of stockholders shall be held on any date, time and place, either within or without the State of Delaware, as may be designated by resolution of the Board of Directors from time to time. At the meeting, directors shall be elected and any other proper business may be transacted. 2.3 SPECIAL MEETING. A special meeting of the stockholders may be called at any time by the Board of Directors, the Chairman of the Board, the President, or the holders of shares entitled to cast not less than ten percent of the votes at the meeting. No other person or persons are permitted to call a special meeting. No business may be conducted at a special meeting other than the business 2 brought before the meeting by the Board of Directors, the Chairman of the Board, the President or the holders of shares entitled to cast not less than ten percent of the votes at the meeting. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS. All notices of meetings with stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.7 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Upon request by any person or persons entitled to call a special meeting, the Chairman of the Board, President, Vice President or Secretary shall cause within twenty (20) days after receipt of the request cause notice to be given to the shareholders entitled to vote that a special meeting will be held at a time requested by the person or persons calling the meeting, but not less than thirty-five (35) nor more than sixty (60) days after receipt of the request. 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the discretion of the Board of Directors or by any stockholder of the corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this Section. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than twenty (20) days nor more than sixty (60) days prior to the meeting; provided, however, that in the event less than thirty (30) days notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (a) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a director: (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the corporation which are beneficially owned by such person, (iv) any other information relating to such person that is required by law to be disclosed in solicitations of proxies for election of directors, and (v) such person's written consent to being named as a nominee and to serving as a director if elected; and (b) as to the stockholder giving the notice: (i) the name and address, as they appear on the corporation's books, of such stockholder, and (ii) the class and number of shares of the corporation which are beneficially owned by such stockholder, and (iii) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) relating to the nomination. At the request of the Board of Directors any person nominated by the Board for election as a director shall furnish to the Secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be of eligible for election as a director of the corporation unless nominated in -2- 3 accordance with the procedures set forth in this Section. The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these bylaws, and if he should so determine, he shall so declare at the meeting and the defective nomination shall be disregarded. 2.6 ADVANCE NOTICE OF STOCKHOLDER BUSINESS. At any meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before a meeting, business must be: (a) as specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder. Business to be brought before a meeting by a stockholder shall not be considered properly brought if the stockholder has not given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than twenty (20) nor more than sixty (60) days prior to the meeting; provided, however, that in the event less than thirty (30) days notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the meeting: (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and address of the stockholder proposing such business, (iii) the class and number of shares of the corporation, which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business, and (v) any other information that is required by law to be provided by the stockholder in his capacity as a proponent of a stockholder proposal. Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at any meeting except in accordance with the procedures set forth in this Section. The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section, and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. 2.7 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. -3- 4 2.8 QUORUM. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (i) the Chairman of the meeting or (ii) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. 2.9 ADJOURNED MEETING; NOTICE. When a meeting is adjourned to another time or place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.10 CONDUCT OF BUSINESS. The Chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of business. 2.11 VOTING. The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.14 of these bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). Except as may be otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.12 WAIVER OF NOTICE. Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of -4- 5 notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. 2.13 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Unless otherwise provided in the certificate of incorporation, any action required by this chapter to be taken at any annual or special meeting of stockholders of the corporation, or any action that may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice, and without a vote if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. 2.14 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the Board of Directors does not so fix a record date: (i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (ii) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed. -5- 6 (iii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 2.15 PROXIES. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by a written proxy, signed by the stockholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212 of the General Corporation Law of Delaware. ARTICLE III DIRECTORS 3.1 POWERS. Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these Bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. 3.2 NUMBER OF DIRECTORS. Unless otherwise determined by the Board of Directors of the Company, the Board of Directors shall consist of five persons until changed by a proper amendment of this Section 3.2. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS. Except as provided in Section 3.4 of these Bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the certificate of incorporation or these Bylaws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to -6- 7 fill a vacancy, shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Elections of directors need not be by written ballot. 3.4 RESIGNATION AND VACANCIES. Any director may resign at any time upon written notice to the attention of the Secretary of the corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies. Unless otherwise provided in the certificate of incorporation or these Bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these Bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. -7- 8 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE. The Board of Directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the board. 3.7 SPECIAL MEETINGS; NOTICE. Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.8 QUORUM. At all meetings of the Board of Directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the Board of Directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. -8- 9 A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE. Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these Bylaws. 3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Unless otherwise restricted by the certificate of incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. Written consents representing actions taken by the board or committee may be executed by telex, telecopy or other facsimile transmission, and such facsimile shall be valid and binding to the same extent as if it were an original. 3.11 FEES AND COMPENSATION OF DIRECTORS. Unless otherwise restricted by the certificate of incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. No such compensation shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. 3.12 APPROVAL OF LOANS TO OFFICERS. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. -9- 10 3.13 REMOVAL OF DIRECTORS. Unless otherwise restricted by statute, by the certificate of incorporation or by these Bylaws, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided, however, that if the stockholders of the corporation are entitled to cumulative voting, if less than the entire Board of Directors is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire Board of Directors. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. 3.14 CHAIRMAN OF THE BOARD OF DIRECTORS. The corporation may also have, at the discretion of the Board of Directors, a chairman of the Board of Directors who shall not be considered an officer of the corporation. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors or in the Bylaws of the corporation, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the -10- 11 stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amend the Bylaws of the corporation; and, unless the board resolution establishing the committee, the Bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 COMMITTEE MINUTES. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES. Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting) of these Bylaws, with such changes in the context of such provisions as are necessary to substitute the committee and its members for the Board of Directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the Board of Directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws. ARTICLE V OFFICERS 5.1 OFFICERS. The officers of the corporation shall be a chief executive officer, a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the Board of Directors, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these Bylaws. Any number of offices may be held by the same person. 5.2 APPOINTMENT OF OFFICERS. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these Bylaws, shall be appointed by the Board of Directors, subject to the rights, if any, of an officer under any contract of employment. -11- 12 5.3 SUBORDINATE OFFICERS. The Board of Directors may appoint, or empower the chief executive officer or the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board of Directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the Board of Directors at any regular or special meeting of the board or, except in the case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the attention of the Secretary of the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. 5.6 CHIEF EXECUTIVE OFFICER. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board, if any, the chief executive officer of the corporation shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and the officers of the corporation. He or she shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the Board of Directors and shall have the general powers and duties of management usually vested in the office of chief executive officer of a corporation and shall have such other powers and duties as may be prescribed by the Board of Directors or these bylaws. 5.7 PRESIDENT. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board (if any) or the chief executive officer, the president shall have general supervision, direction, and control of the business and other officers of the corporation. He or she shall have the general powers and duties of management usually vested in the office of -12- 13 president of a corporation and such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. 5.8 VICE PRESIDENTS. In the absence or disability of the chief executive officer and president, the vice presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a vice president designated by the Board of Directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these Bylaws, the president or the chairman of the board. 5.9 SECRETARY. The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required to be given by law or by these Bylaws. He or she shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these Bylaws. 5.10 CHIEF FINANCIAL OFFICER. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors. He or she shall disburse the funds of the corporation as may be ordered by the Board -13- 14 of Directors, shall render to the president, the chief executive officer, or the directors, upon request, an account of all his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the Board of Directors or the bylaws. 5.11 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The chairman of the board, the chief executive officer, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the Board of Directors or the chief executive officer or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by the person having such authority. 5.12 AUTHORITY AND DUTIES OF OFFICERS. In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the Board of Directors or the stockholders. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS. The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS. The corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, -14- 15 fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 PAYMENT OF EXPENSES IN ADVANCE. Expenses incurred in defending any action or proceeding for which indemnification is required pursuant to Section 6.1 or for which indemnification is permitted pursuant to Section 6.2 following authorization thereof by the Board of Directors shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI. 6.4 INDEMNITY NOT EXCLUSIVE. The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the certificate of incorporation 6.5 INSURANCE. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. 6.6 CONFLICTS. No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (a) That it would be inconsistent with a provision of the certificate of incorporation, these Bylaws, a resolution of the stockholders or an agreement in effect at the time of the accrual -15- 16 of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS. The corporation shall, either at its principal executive offices or at such place or places as designated by the Board of Directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these Bylaws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. 7.2 INSPECTION BY DIRECTORS. Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his or her position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS. The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. -16- 17 ARTICLE VIII GENERAL MATTERS 8.1 CHECKS. From time to time, the Board of Directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS. The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES. The shares of a corporation shall be represented by certificates, provided that the Board of Directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the Board of Directors, or the chief executive officer or the president or vice-president, and by the chief financial officer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon -17- 18 partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES. If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 LOST CERTIFICATES. Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate previously issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or the owner's legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 CONSTRUCTION; DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 DIVIDENDS. The directors of the corporation, subject to any restrictions contained in (i) the General Corporation Law of Delaware or (ii) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such -18- 19 reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. 8.8 FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors and may be changed by the Board of Directors. 8.9 SEAL. The corporation may adopt a corporate seal, which may be altered at pleasure, and may use the same by causing it or a facsimile thereof, to be impressed or affixed or in any other manner reproduced. 8.10 TRANSFER OF STOCK. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 STOCK TRANSFER AGREEMENTS. The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. 8.12 REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX AMENDMENTS The Bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal Bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal Bylaws. -19- 20 CERTIFICATE OF ADOPTION OF BYLAWS OF PETS.COM, INC. ADOPTION BY INCORPORATOR The undersigned person appointed in the certificate of incorporation to act as the Incorporator of Pets.com, Inc. hereby adopts the foregoing Bylaws, comprising ____ pages, as the Bylaws of the corporation. Executed this _____ day of ____________________. ------------------------------------ [Name], Incorporator CERTIFICATE BY SECRETARY OF ADOPTION BY INCORPORATOR The undersigned hereby certifies that the undersigned is the duly elected, qualified, and acting Secretary of Pets.com, Inc. and that the foregoing Bylaws, comprising ____ pages, were adopted as the Bylaws of the corporation on ______________, by the person appointed in the certificate of incorporation to act as the Incorporator of the corporation. Executed this _____ day of ______________________. ------------------------------------ John V. Bautista, Secretary -i- EX-10.1 6 FORM OF INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.1 INDEMNIFICATION AGREEMENT This Indemnification Agreement (the "Agreement") is made as of _______________, by and between Pets.com, Inc., a Delaware corporation (the "Company"), and <> (the "Indemnitee"). RECITALS The Company and Indemnitee recognize the increasing difficulty in obtaining liability insurance for directors, officers and key employees, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance. The Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers and key employees to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited. Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and agents of the Company may not be willing to continue to serve as agents of the Company without additional protection. The Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, and to indemnify its directors, officers and key employees so as to provide them with the maximum protection permitted by law. AGREEMENT In consideration of the mutual promises made in this Agreement, and for other good and valuable consideration, receipt of which is hereby acknowledged, the Company and Indemnitee hereby agree as follows: 1. INDEMNIFICATION. (a) THIRD PARTY PROCEEDINGS. The Company shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee 2 reasonably believed to be in or not opposed to the best interests of the Company, or, with respect to any criminal action or proceeding, that Indemnitee had reasonable cause to believe that Indemnitee's conduct was unlawful. (b) PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) and, to the fullest extent permitted by law, amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld), in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or suit if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and its stockholders, except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been finally adjudicated by court order or judgment to be liable to the Company in the performance of Indemnitee's duty to the Company and its stockholders unless and only to the extent that the court in which such action or proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. (c) MANDATORY PAYMENT OF EXPENSES. To the extent that Indemnitee has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1(a) or Section 1(b) or the defense of any claim, issue or matter therein, Indemnitee shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by Indemnitee in connection therewith. 2. NO EMPLOYMENT RIGHTS. Nothing contained in this Agreement is intended to create in Indemnitee any right to continued employment. 3. EXPENSES; INDEMNIFICATION PROCEDURE. (a) ADVANCEMENT OF EXPENSES. The Company shall advance all expenses incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action, suit or proceeding referred to in Section l(a) or Section 1(b) hereof (including amounts actually paid in settlement of any such action, suit or proceeding). Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. (b) NOTICE/COOPERATION BY INDEMNITEE. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give the Company notice in -2- 3 writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company and shall be given in accordance with the provisions of Section 12(d) below. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. (c) PROCEDURE. Any indemnification and advances provided for in Section 1 and this Section 3 shall be made no later than twenty (20) days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company's Certificate of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within twenty (20) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 11 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Section 3(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties' intention that if the Company contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. (d) NOTICE TO INSURERS. If, at the time of the receipt of a notice of a claim pursuant to Section 3(b) hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (e) SELECTION OF COUNSEL. In the event the Company shall be obligated under Section 3(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel -3- 4 by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 4. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY. (a) SCOPE. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes shall be deemed to be within the purview of Indemnitee's rights and the Company's obligations under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties' rights and obligations hereunder. (b) NONEXCLUSIVITY. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested members of the Company's Board of Directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in Indemnitee's official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he or she may have ceased to serve in any such capacity at the time of any action, suit or other covered proceeding. 5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred in the investigation, defense, appeal or settlement of any civil or criminal action, suit or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled. 6. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge that in certain instances, Federal law or public policy may override applicable state law and prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. -4- 5 For example, the Company and Indemnitee acknowledge that the Securities and Exchange Commission (the "SEC") has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain ERISA violations. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 7. OFFICER AND DIRECTOR LIABILITY INSURANCE. The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts, or to ensure the Company's performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of director and officer liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, if Indemnitee is not an officer or director but is a key employee. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a parent or subsidiary of the Company. 8. SEVERABILITY. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 8. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 9. EXCEPTIONS. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law, but such indemnification or -5- 6 advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; (b) LACK OF GOOD FAITH. To indemnify Indemnitee for any expenses incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous; (c) INSURED CLAIMS. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the extent such expenses or liabilities have been paid directly to Indemnitee by an insurance carrier under a policy of officers' and directors' liability insurance maintained by the Company; or (d) CLAIMS UNDER SECTION 16(b). To indemnify Indemnitee for expenses or the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 10. CONSTRUCTION OF CERTAIN PHRASES. (a) For purposes of this Agreement, references to the "Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. 11. ATTORNEYS' FEES. In the event that any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys' fees, incurred by Indemnitee -6- 7 with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys' fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee's material defenses to such action were made in bad faith or were frivolous. 12. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflict of law. (b) ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter herein and merges all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party. (c) CONSTRUCTION. This Agreement is the result of negotiations between and has been reviewed by each of the parties hereto and their respective counsel, if any; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall be construed in favor of or against any one of the parties hereto. (d) NOTICES. Any notice, demand or request required or permitted to be given under this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by telegram or fax, or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address as set forth below or as subsequently modified by written notice. (e) COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. (f) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Company and its successors and assigns, and inure to the benefit of Indemnitee and Indemnitee's heirs, legal representatives and assigns. (g) SUBROGATION. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of -7- 8 Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company to effectively bring suit to enforce such rights. [Signature Page Follows] -8- 9 The parties hereto have executed this Agreement as of the day and year set forth on the first page of this Agreement. Pets.com, Inc. By: --------------------------------- Title: ------------------------------ Address: 435 Brannan Street San Francisco, CA 94107 AGREED TO AND ACCEPTED: <> - --------------------------------- (Signature) Address: -9- EX-10.2.1 7 1999 STOCK PURCHASE PLAN 1 EXHIBIT 10.2.1 PETS.COM, INC. 1999 STOCK PLAN (AS AMENDED DECEMBER 5, 1999) 1. PURPOSES OF THE PLAN. The purposes of this 1999 Stock Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees and Consultants of the Company and its Subsidiaries and to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options (as defined under Section 422 of the Code) or Nonstatutory Stock Options, as determined by the Administrator at the time of grant of an Option and subject to the applicable provisions of Section 422 of the Code, as amended, and the regulations promulgated thereunder. Stock Purchase Rights may also be granted under the Plan. 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "ADMINISTRATOR" means the Board or its Committee appointed pursuant to Section 4 of the Plan. (b) "AFFILIATE" means an entity other than a Subsidiary in which the Company owns an equity interest or which, together with the Company, is under common control of a third person or entity. (c) "APPLICABLE LAWS" means the legal requirements relating to the administration of stock option plans under applicable U.S. state corporate laws, U.S. federal and applicable state securities laws, the Code, any Stock Exchange rules or regulations and the applicable laws of any other country or jurisdiction where Options or Stock Purchase Rights are granted under the Plan, as such laws, rules, regulations and requirements shall be in place from time to time. (d) "BOARD" means the Board of Directors of the Company. (e) "CODE" means the Internal Revenue Code of 1986, as amended. (f) "COMMITTEE" means one or more committees or subcommittees of the Board appointed by the Board to administer the Plan in accordance with Section 4 below. (g) "COMMON STOCK" means the Common Stock of the Company. (h) "COMPANY" means Pets.com, Inc., a Delaware corporation. (i) "CONSULTANT" means any person, including an advisor, who renders services to the Company, or any Parent, Subsidiary or Affiliate, and is compensated for such services, and any Director of the Company whether compensated for such services or not. 2 (j) "CONTINUOUS SERVICE STATUS" means the absence of any interruption or termination of service as an Employee or Consultant to the Company or a Parent, Subsidiary or Affiliate. Continuous Service Status shall not be considered interrupted in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Administrator, provided that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to Company policy adopted from time to time; or (iv) in the case of transfers between locations of the Company or between the Company, its Parents, Subsidiaries or Affiliates or their respective successors. Unless otherwise determined by the Administrator, a change in status from an Employee to a Consultant or from a Consultant to an Employee will not constitute an interruption of Continuous Service Status. (k) "CORPORATE TRANSACTION" means a sale of all or substantially all of the Company's assets, or a merger, consolidation or other capital reorganization of the Company with or into another corporation. (l) "DIRECTOR" means a member of the Board. (m) "EMPLOYEE" means any person, including officers and Directors, employed by the Company or any Parent, Subsidiary or Affiliate of the Company. The payment by the Company of a director's fee to a Director shall not be sufficient to constitute "employment" of such Director by the Company. (n) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (o) "FAIR MARKET VALUE" means, as of any date, the fair market value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system including without limitation the National Market of the National Association of Securities Dealers, Inc. Automated Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported), as quoted on such system or exchange on the date of determination, or if no trading occurred on the date of determination, on the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is quoted on the Nasdaq System (but not on the National Market thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. -2- 3 (p) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code, as designated in the applicable Option Agreement. (q) "LISTED SECURITY" means any security of the Company that is listed or approved for listing on a national securities exchange or designated or approved for designation as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. (r) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option, as designated in the applicable Option Agreement. (s) "OPTION" means a stock option granted pursuant to the Plan. (t) "OPTION AGREEMENT" means a written document, the form(s) of which shall be approved from time to time by the Administrator, reflecting the terms of an Option granted under the Plan and includes any documents attached to or incorporated into such Option Agreement, including, but not limited to, a notice of stock option grant and a form of exercise notice. (u) "OPTION EXCHANGE PROGRAM" means a program approved by the Administrator whereby outstanding Options are exchanged for Options with a lower exercise price. (v) "OPTIONED STOCK" means the Common Stock subject to an Option or a Stock Purchase Right. (w) "OPTIONEE" means an Employee or Consultant who receives an Option. (x) "PARENT" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code, or any successor provision. (y) "PARTICIPANT" means any holder of one or more Options or Stock Purchase Rights, or of the Shares issuable or issued upon exercise of such awards, under the Plan. (z) "PLAN" means this 1999 Stock Plan. (aa) "REPORTING PERSON" means an officer, Director, or greater than 10% shareholder of the Company within the meaning of Rule 16a-2 under the Exchange Act, who is required to file reports pursuant to Rule 16a-3 under the Exchange Act. (bb) "RESTRICTED STOCK" means shares of Common Stock acquired pursuant to a grant of a Stock Purchase Right under Section 10 below. (cc) "RESTRICTED STOCK PURCHASE AGREEMENT" means a written document, the form(s) of which shall be approved from time to time by the Administrator, reflecting the terms of a Stock Purchase Right granted under the Plan and includes any documents attached to such agreement. -3- 4 (dd) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act, as the same may be amended from time to time, or any successor provision. (ee) "SHARE" means a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan. (ff) "STOCK EXCHANGE" means any stock exchange or consolidated stock price reporting system on which prices for the Common Stock are quoted at any given time. (gg) "STOCK PURCHASE RIGHT" means the right to purchase Common Stock pursuant to Section 10 below. (hh) "SUBSIDIARY" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code, or any successor provision. (ii) "TEN PERCENT HOLDER" means a person who owns stock representing more than 10% of the voting power of all classes of stock of the Company or any Parent or Subsidiary. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares that may be sold under the Plan is 7,269,159 Shares of Common Stock, plus an automatic annual increase on the first day of each of the Company's fiscal years beginning in 2001 and ending in 2009 equal to the lesser of : (i) 1,000,000 Shares; (ii) three percent (3%) of the Shares outstanding on the last day of the immediately preceding fiscal year; or (iii) such lesser number of shares as is determined by the Board of Directors. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option expires or becomes unexercisable for any reason without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares that were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. In addition, any Shares of Common Stock that are retained by the Company upon exercise of an Option or Stock Purchase Right in order to satisfy the exercise or purchase price for such Option or Stock Purchase Right or any withholding taxes due with respect to such exercise shall be treated as not issued and shall continue to be available under the Plan. Shares issued under the Plan and later repurchased by the Company pursuant to any repurchase right that the Company may have shall not be available for future grant under the Plan. 4. ADMINISTRATION OF THE PLAN. (a) GENERAL. The Plan shall be administered by the Board or a Committee, or a combination thereof, as determined by the Board. The Plan may be administered by different administrative bodies with respect to different classes of Optionees and, if permitted by the Applicable Laws, the Board may authorize one or more officers to grant Options or Stock Purchase Rights under the Plan. -4- 5 (b) ADMINISTRATION WITH RESPECT TO REPORTING PERSONS. With respect to Options granted to Reporting Persons and Named Executives, the Plan may (but need not) be administered so as to permit such Options to qualify for the exemption set forth in Rule 16b-3 and to qualify as performance-based compensation under Section 162(m) of the Code. (c) COMMITTEE COMPOSITION. If a Committee has been appointed pursuant to this Section 4, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of any Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies (however caused) and remove all members of a Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws and, in the case of a Committee administering the Plan pursuant to Section 4(b) above, to the extent permitted or required by Rule 16b-3 and Section 162(m) of the Code. (d) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan and in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, including the approval, if required, of any Stock Exchange, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2 (o) of the Plan; (ii) to select the Consultants and Employees to whom Options and Stock Purchase Rights or any combination thereof may from time to time be granted; (iii) to determine whether and to what extent Options and Stock Purchase Rights or any combination thereof are granted; (iv) to determine the number of Shares of Common Stock to be covered by each such award granted hereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder, which terms and conditions include but are not limited to the exercise or purchase price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option, Optioned Stock, Stock Purchase Right or Restricted Stock, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vii) to determine whether and under what circumstances an Option may be settled in cash under Section 9(f) instead of Common Stock; (viii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have -5- 6 declined since the date the Option was granted and to make any other amendments or adjustments to any Option that the Administrator determines, in its discretion and under the authority granted to it under the Plan, to be necessary or advisable, provided however that no amendment or adjustment to an Option that would materially and adversely affect the rights of any Optionee shall be made without the prior written consent of the Optionee; (ix) to determine the terms and restrictions applicable to Stock Purchase Rights and the Restricted Stock purchased by exercising such Stock Purchase Rights; (x) to initiate an Option Exchange Program; (xi) to construe and interpret the terms of the Plan and awards granted under the Plan; and (xii) in order to fulfill the purposes of the Plan and without amending the Plan, to modify grants of Options or Stock Purchase Rights to Participants who are foreign nationals or employed outside of the United States in order to recognize differences in local law, tax policies or customs. (e) EFFECT OF ADMINISTRATOR'S DECISION. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Participants. 5. ELIGIBILITY. (a) RECIPIENTS OF GRANTS. Nonstatutory Stock Options and Stock Purchase Rights may be granted to Employees and Consultants. Incentive Stock Options may be granted only to Employees; provided however that Employees of Affiliates shall not be eligible to receive Incentive Stock Options. An Employee or Consultant who has been granted an Option or Stock Purchase Right may, if he or she is otherwise eligible, be granted additional Options or Stock Purchase Rights. (b) TYPE OF OPTION. Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value of Shares with respect to which Options designated as Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares subject to an Incentive Stock Option shall be determined as of the date of grant of such Option. (c) AT-WILL RELATIONSHIP. The Plan shall not confer upon any Participant any right with respect to continuation of employment or consulting relationship with the Company, nor shall it interfere in any way with such holder's right or the Company's right to terminate his or her employment or consulting relationship at any time, with or without cause. -6- 7 (d) LIMITATION ON GRANTS TO EMPLOYEES. Subject to adjustment as provided in Section 13 below, the maximum number of Shares which may be subject to Options and Stock Purchase Rights and granted to any one Employee under this Plan for any fiscal year of the Company shall be 2,000,000 Shares. 6. TERM OF PLAN. The Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten years unless sooner terminated under Section 15 of the Plan. 7. TERM OF OPTION. The term of each Option shall be the term stated in the Option Agreement; provided, however, that the term shall be no more than ten years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. However, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, is a Ten Percent Holder, the term of such Option shall be five years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. 8. OPTION EXERCISE PRICE AND CONSIDERATION. (a) The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Administrator and set forth in the Option Agreement, but shall be subject to the following: (i) In the case of an Incentive Stock Option that is: (A) granted to an Employee who at the time of grant is a Ten Percent Holder, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option that is: (A) granted prior to the date, if any, on which the Common Stock becomes a Listed Security to a person who at the time of grant is a Ten Percent Holder, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of the grant if required by the Applicable Laws and, if not so required, shall be such price as is determined by the Administrator. (B) granted prior to the date, if any, on which the Common Stock becomes a Listed Security to any other eligible person, the per Share exercise price shall be no less than 85% of the Fair Market Value per Share on the date of grant if required by the Applicable Laws and, if not so required, shall be such price as is determined by the Administrator. -7- 8 (C) granted on or after the date, if any, on which the Common Stock becomes a Listed Security to any eligible person, the per share Exercise Price shall be such price as determined by the Administrator; provided, however, that if such eligible person is, at the time of the grant of such Option, a Named Executive of the Company, the per share Exercise Price shall be no less than 100% of the Fair Market Value on the date of grant if such Option is intended to qualify as performance-based compensation under Section 162(m) of the Code. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required above pursuant to a merger or other corporate transaction. (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, 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) and may consist entirely of (1) cash; (2) check; (3) delivery of Optionee's promissory note with such recourse, interest, security and redemption provisions as the Administrator determines to be appropriate (subject to the provisions of Section 409 of the California General Corporation Law); (4) cancellation of indebtedness; (5) other Shares that (x) in the case of Shares acquired upon exercise of an Option, either have been owned by the Optionee for more than six months on the date of surrender or such other period as may be required to avoid a charge to the Company's earnings or were not acquired, directly or indirectly, from the Company, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised; (6) authorization for the Company to retain from the total number of Shares as to which the Option is exercised that number of Shares having a Fair Market Value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised; (7) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect exercise of the Option and prompt delivery to the Company of the sale or loan proceeds required to pay the exercise price and any applicable withholding taxes; (8) any combination of the foregoing methods of payment; or (9) such other consideration and method of payment for the issuance of Shares to the extent permitted under the Applicable Laws. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company, and the Administrator may refuse to accept a particular form of consideration at the time of any Option exercise if, in its sole discretion, acceptance of such form of consideration is not in the best interests of the Company at such time. 9. EXERCISE OF OPTION. (a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator, consistent with the term of the Plan and reflected in the Option Agreement, including vesting requirements and/or performance criteria with respect to the Company and/or the Optionee; provided however, that, if required by the Applicable Laws, any Option granted prior to the date, if any, upon which the Common Stock becomes a Listed Security shall become -8- 9 exercisable at the rate of at least 20% per year over five years from the date the Option is granted. In the event that any of the Shares issued upon exercise of an Option (which exercise occurs prior to the date, if any, upon which the Common Stock becomes a Listed Security) should be subject to a right of repurchase in the Company's favor, such repurchase right shall, if required by the Applicable Laws, lapse at the rate of at least 20% per year over five years from the date the Option is granted. Notwithstanding the above, in the case of an Option granted to an officer, Director or Consultant of the Company or any Parent, Subsidiary or Affiliate of the Company, the Option may become fully exercisable, or a repurchase right, if any, in favor of the Company shall lapse, at any time or during any period established by the Administrator. The Administrator shall have the discretion to determine whether and to what extent the vesting of Options shall be tolled during any leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and the Company has received full payment for the Shares with respect to which the Option is exercised. Full payment may, as authorized by the Administrator, consist of any consideration and method of payment allowable under Section 8(b) of the Plan. 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 shareholder shall exist with respect to the Optioned Stock, not withstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. 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 13 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares that thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) TERMINATION OF EMPLOYMENT OR CONSULTING RELATIONSHIP. In the event of termination of an Optionee's Continuous Service Status with the Company, such Optionee may, but only within three months (or such other period of time, not less than 30 days, as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) after the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise his or her Option to the extent that the Optionee was entitled to exercise it at the date of such termination. To the extent that the Optionee was not entitled to exercise the Option at the date of such termination, or if the Optionee does not exercise the Option to the extent so entitled within the time specified above, the Option shall terminate and the Optioned Stock underlying the unexercised portion of the Option shall revert to the Plan. Unless otherwise determined by the Administrator, no termination shall be deemed to occur and this Section 9(b) shall not apply if (i) the Optionee is a Consultant who becomes an Employee, or (ii) the Optionee is an Employee who becomes a Consultant. -9- 10 (c) DISABILITY OF OPTIONEE. (i) Notwithstanding Section 9(b) above, in the event of termination of an Optionee's Continuous Service Status as a result of his or her total and permanent disability (within the meaning of Section 22(e)(3) of the Code), such Optionee may, but only within twelve months (or such other period of time as is determined by the Administrator, with such determination in the case of an Incentive Stock Option made at the time of grant of the Option) from the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination. To the extent that the Optionee was not entitled to exercise the Option at the date of termination, or if the Optionee does not exercise such Option to the extent so entitled within the time specified above, the Option shall terminate and the Optioned Stock underlying the unexercised portion of the Option shall revert to the Plan. (ii) In the event of termination of an Optionee's Continuous Service Status as a result of a disability which does not fall within the meaning of total and permanent disability (as set forth in Section 22(e)(3) of the Code), such Optionee may, but only within twelve months (or such other period of time as is determined by the Administrator, with such determination in the case of an Incentive Stock Option made at the time of grant of the Option) from the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination. However, to the extent that such Optionee fails to exercise an Option that is an Incentive Stock Option (within the meaning of Section 422 of the Code) within three months of the date of such termination, the Option will not qualify for Incentive Stock Option treatment under the Code. To the extent that the Optionee was not entitled to exercise the Option at the date of termination, or if the Optionee does not exercise such Option to the extent so entitled within the time period specified above, the Option shall terminate and the Optioned Stock underlying the unexercised portion of the Option shall revert to the Plan. (d) DEATH OF OPTIONEE. In the event of the death of an Optionee during the period of Continuous Service Status since the date of grant of the Option, or within 30 days following termination of the Optionee's Continuous Service Status, the Option may be exercised, at any time within twelve months following the date of death (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), by such Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of death or, if earlier, the date of termination of the Optionee's Continuous Service Status. To the extent that the Optionee was not entitled to exercise the Option at the date of death or termination, as the case may be, or if the Optionee does not exercise such Option to the extent so entitled within the time specified above, the Option shall terminate and the Optioned Stock underlying the unexercised portion of the Option shall revert to the Plan. (e) EXTENSION OF EXERCISE PERIOD. The Administrator shall have full power and authority to extend the period of time for which an Option is to remain exercisable following -10- 11 termination of an Optionee's Continuous Status as an Employee or Consultant from the periods set forth in Sections 9(b), 9(c) and 9(d) above or in the Option Agreement to such greater time as the Board shall deem appropriate, provided, that in no event shall such Option be exercisable later than the date of expiration of the term of such Option as set forth in the Option Agreement. (f) BUY-OUT PROVISIONS. The Administrator may at any time offer to buy out for a payment in cash or Shares an Option previously granted under the Plan based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time such offer is made. 10. STOCK PURCHASE RIGHTS. (a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid, and the time within which such person must accept such offer, which shall in no event exceed 30 days from the date upon which the Administrator made the determination to grant the Stock Purchase Right. If required by the Applicable Laws, the purchase price of Shares subject to Stock Purchase Rights shall not be less than 85% of the Fair Market Value of the Shares as of the date of the offer, or, in the case of a person owning stock representing more than 10% of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the price shall not be less than 100% of the Fair Market Value of the Shares as of the date of the offer. If the Applicable Laws do not impose restrictions on the purchase price, the purchase price of Shares subject to Stock Purchase Rights shall be as determined by the Administrator. The offer to purchase Shares subject to Stock Purchase Rights shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator. (b) REPURCHASE OPTION. Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment with the Company for any reason (including death or disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original purchase price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at such rate as the Administrator may determine; provided, however, that with respect to a purchaser who is not an officer, Director or Consultant of the Company or of any Parent or Subsidiary of the Company, it shall lapse at a minimum rate of 20% per year if required by the Applicable Laws. (c) OTHER PROVISIONS. The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. In addition, the provisions of Restricted Stock Purchase Agreements need not be the same with respect to each purchaser. -11- 12 (d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 13 of the Plan. 11. TAXES. (a) As a condition of the exercise of an Option or Stock Purchase Right granted under the Plan, the Participant (or in the case of the Participant's death, the person exercising the Option) shall make such arrangements as the Administrator may require for the satisfaction of any applicable federal, state, local or foreign withholding tax obligations that may arise in connection with the exercise of an Option or Stock Purchase Right and the issuance of Shares. The Company shall not be required to issue any Shares under the Plan until such obligations are satisfied. (b) In the case of an Employee and in the absence of any other arrangement, the Employee shall be deemed to have directed the Company to withhold or collect from his or her compensation an amount sufficient to satisfy such tax obligations from the next payroll payment otherwise payable after the date of an exercise of the Option. (c) This Section 11(c) shall apply only after the date, if any, upon which the Common Stock becomes a Listed Security. In the case of a Participant other than an Employee (or in the case of an Employee where the next payroll payment is not sufficient to satisfy such tax obligations, with respect to any remaining tax obligations), in the absence of any other arrangement and to the extent permitted under the Applicable Laws, the Participant shall be deemed to have elected to have the Company withhold from the Shares to be issued upon exercise of the Option or Stock Purchase Right that number of Shares having a Fair Market Value determined as of the applicable Tax Date (as defined below) equal to the amount required to be withheld. For purposes of this Section 11, the Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined under the Applicable Laws (the "Tax Date"). (d) If permitted by the Administrator, in its discretion, a Participant may satisfy his or her tax withholding obligations upon exercise of an Option or Stock Purchase Right by surrendering to the Company Shares that (i) in the case of Shares previously acquired from the Company, have been owned by the Participant for more than six months on the date of surrender, and (ii) have a Fair Market Value determined as of the applicable Tax Date equal to the amount required to be withheld. (e) Any election or deemed election by a Participant to have Shares withheld to satisfy tax withholding obligations under Section 11(c) or (d) above shall be irrevocable as to the particular Shares as to which the election is made and shall be subject to the consent or disapproval of the Administrator. Any election by a Participant under Section 11(d) above must be made on or prior to the applicable Tax Date. -12- 13 (f) In the event an election to have Shares withheld is made by a Participant and the Tax Date is deferred under Section 83 of the Code because no election is filed under Section 83(b) of the Code, the Participant shall receive the full number of Shares with respect to which the Option or Stock Purchase Right is exercised but such Participant shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date. 12. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Options and Stock Purchase Rights 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; provided however that, after the date, if any, upon which the Common Stock becomes a Listed Security, the Administrator may in its discretion grant transferable Nonstatutory Stock Options pursuant to Option Agreements specifying (i) the manner in which such Nonstatutory Stock Options are transferable and (ii) that any such transfer shall be subject to the Applicable Laws. The designation of a beneficiary by an Optionee will not constitute a transfer. An Option or Stock Purchase Right may be exercised, during the lifetime of the holder of the Option or Stock Purchase Right, only by such holder or a transferee permitted by this Section 12. 13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, CORPORATE TRANSACTIONS AND CERTAIN OTHER TRANSACTIONS. (a) CHANGES IN CAPITALIZATION. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option or Stock Purchase Right, and the number of shares of Common Stock that have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or that have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per Share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued Shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination, recapitalization or reclassification of the Common Stock (including any change in the number of Shares of Common Stock effected in connection with a change of domicile of the Company), or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares of Common Stock subject to an Option or Stock Purchase Right. (b) DISSOLUTION OR LIQUIDATION. In the event of the dissolution or liquidation of the Company, each outstanding Option or Stock Purchase Right shall terminate immediately prior to the consummation of such action, unless otherwise provided by the Administrator. -13- 14 (c) CORPORATE TRANSACTIONS. In the event of a Corporate Transaction, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right shall be substituted by the successor corporation or a Parent or Subsidiary of such successor corporation, unless such successor corporation does not agree to assume the outstanding Options or Stock Purchase Rights or to substitute equivalent options or rights, in which case such Options or Stock Purchase Rights shall terminate upon the consummation of the transaction. For purposes of this Section 13(c), an Option or a Stock Purchase Right shall be considered assumed, without limitation, if, at the time of issuance of the stock or other consideration upon a Corporate Transaction, each holder of an Option or Stock Purchase Right would be entitled to receive upon exercise of the Option or Stock Purchase Right the same number and kind of shares of stock or the same amount of property, cash or securities as such holder would have been entitled to receive upon the occurrence of the transaction if the holder had been, immediately prior to such transaction, the holder of the number of Shares of Common Stock covered by the Option or the Stock Purchase Right at such time (after giving effect to any adjustments in the number of Shares covered by the Option or Stock Purchase Right as provided for in this Section 13); provided however that if such consideration received in the transaction is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon exercise of the Option or Stock Purchase Right to be solely common stock of the successor corporation or its Parent equal to the Fair Market Value of the per Share consideration received by holders of Common Stock in the transaction. (d) CERTAIN DISTRIBUTIONS. In the event of any distribution to the Company's shareholders of securities of any other entity or other assets (other than dividends payable in cash or stock of the Company) without receipt of consideration by the Company, the Administrator may, in its discretion, appropriately adjust the price per Share of Common Stock covered by each outstanding Option or Stock Purchase Right to reflect the effect of such distribution. 14. TIME OF GRANTING OPTIONS AND STOCK PURCHASE RIGHTS. The date of grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other date as is determined by the Administrator; provided, however, that in the case of any Incentive Stock Option, the grant date shall be the later of the date on which the Administrator makes the determination granting such Incentive Stock Option or the date of commencement of the Optionee's employment relationship with the Company. Notice of the determination shall be given to each Employee or Consultant to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant. 15. AMENDMENT AND TERMINATION OF THE PLAN. (a) AUTHORITY TO AMEND OR TERMINATE. The Board may at any time amend, alter, suspend, discontinue or terminate the Plan, but no amendment, alteration, suspension, discontinuation or termination (other than an adjustment made pursuant to Section 13 above) shall be made that would materially and adversely affect the rights of any Optionee or holder of -14- 15 Stock Purchase Rights under any outstanding grant, without his or her consent. In addition, to the extent necessary and desirable to comply with the Applicable Laws, the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required. (b) EFFECT OF AMENDMENT OR TERMINATION. No amendment or termination of the Plan shall materially and adversely affect Options already granted, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. 16. CONDITIONS UPON ISSUANCE OF SHARES. Notwithstanding any other provision of the Plan or any agreement entered into by the Company pursuant to the Plan, the Company shall not be obligated, and shall have no liability for, failure to issue or deliver any Shares under the Plan unless such issuance or delivery would comply with the Applicable Laws, with such compliance determined by the Company in consultation with its legal counsel. As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right 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 law. 17. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 18. AGREEMENTS. Options and Stock Purchase Rights shall be evidenced by Option Agreements and Restricted Stock Purchase Agreements, respectively, in such form(s) as the Administrator shall from time to time approve. 19. SHAREHOLDER APPROVAL. If required by the Applicable Laws, continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve months before or after the date the Plan is adopted. Such shareholder approval shall be obtained in the degree and manner required under the Applicable Laws. 20. INFORMATION AND DOCUMENTS TO OPTIONEES AND PURCHASERS. Prior to the date, if any, upon which the Common Stock becomes a Listed Security and if required by the Applicable Laws, the Company shall provide financial statements at least annually to each Optionee and to each individual who acquired Shares pursuant to the Plan, during the period such Optionee or purchaser has one or more Options or Stock Purchase Rights outstanding, and in the case of an individual who acquired Shares pursuant to the Plan, during the period such individual owns such Shares. The Company shall not be required to provide such information if the issuance of Options or Stock Purchase Rights under the Plan is limited to key employees whose duties in connection with the Company assure their access to equivalent information. In addition, at the time of issuance of any securities under the Plan, the Company shall provide to the Optionee or the purchaser a copy of the Plan and any agreement(s) pursuant to which securities granted under the Plan are issued. -15- EX-10.2.2 8 2000 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.2.2 PETS.COM, INC. 2000 EMPLOYEE STOCK PURCHASE PLAN The following constitute the provisions of the 2000 Employee Stock Purchase Plan of Pets.com, Inc. 1. PURPOSE. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company. 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 shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. DEFINITIONS. (a) "BOARD" means the Board of Directors of the Company. (b) "CODE" means the Internal Revenue Code of 1986, as amended. (c) "COMMON STOCK" means the Common Stock of the Company. (d) "COMPANY" means Pets.com, Inc., a Delaware corporation. (e) "COMPENSATION" means all regular straight time gross earnings, and shall not include commissions, payments for overtime, shift premium, incentive compensation, incentive payments, bonuses and other compensation. (f) "CONTINUOUS STATUS AS AN EMPLOYEE" means the absence of any interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Administrator, provided that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to Company policy adopted from time to time; or (iv) in the case of transfers between locations of the Company or between the Company and its Designated Subsidiaries. (g) "CONTRIBUTIONS" means all amounts credited to the account of a participant pursuant to the Plan. (h) "CORPORATE TRANSACTION" means a sale of all or substantially all of the Company's assets, or a merger, consolidation or other capital reorganization of the Company with or into another corporation. (i) "DESIGNATED SUBSIDIARIES" means the Subsidiaries which have been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan; provided however that the Board shall only have the discretion to designate Subsidiaries if -1- 2 the issuance of options to such Subsidiary's Employees pursuant to the Plan would not cause the Company to incur adverse accounting charges. (j) "EMPLOYEE" means any person, including an Officer, who is customarily employed for at least twenty (20) hours per week and more than five (5) months in a calendar year by the Company or one of its Designated Subsidiaries. (k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (l) "OFFERING DATE" means the first business day of each Offering Period of the Plan. (m) "OFFERING PERIOD" means a period of twenty-four (24) months commencing on February 1 and August 1 of each year, except for the first Offering Period as set forth in Section 4(a). (n) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (o) "PLAN" means this Employee Stock Purchase Plan. (p) "PURCHASE DATE" means the last day of each Purchase Period of the Plan. (q) "PURCHASE PERIOD" means a period of six (6) months within an Offering Period, except for the first Purchase Period as set forth in Section 4(b). (r) "PURCHASE PRICE" means with respect to a Purchase Period an amount equal to 85% of the Fair Market Value (as defined in Section 7(b) below) of a Share of Common Stock on the Offering Date or on the Purchase Date, whichever is lower; provided, however, that in the event (i) of any increase in the number of Shares available for issuance under the Plan as a result of a stockholder-approved amendment to the Plan, and (ii) all or a portion of such additional Shares are to be issued with respect to one or more Offering Periods that are underway at the time of such increase ("Additional Shares"), and (iii) the Fair Market Value of a Share of Common Stock on the date of such increase (the "Approval Date Fair Market Value") is higher than the Fair Market Value on the Offering Date for any such Offering Period, then in such instance the Purchase Price with respect to Additional Shares shall be 85% of the Approval Date Fair Market Value or the Fair Market Value of a Share of Common Stock on the Purchase Date, whichever is lower. (s) "SHARE" means a share of Common Stock, as adjusted in accordance with Section 19 of the Plan. (t) "SUBSIDIARY" means a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. -2- 3 3. ELIGIBILITY. (a) Any person who is an Employee as of the Offering Date of a given Offering Period shall be eligible to participate in such Offering Period under the Plan, subject to the requirements of Section 5(a) and the limitations imposed by Section 423(b) of the Code; provided however that eligible Employees may not participate in more than one Offering Period at a time. (b) 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 (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company 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 subsidiary of the Company, or (ii) if such option would permit his or her rights to purchase stock under all employee stock purchase plans (described in Section 423 of the Code) of the Company and its Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) of the Fair Market Value (as defined in Section 7(b) below) of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. OFFERING PERIODS AND PURCHASE PERIODS. (a) OFFERING PERIODS. The Plan shall be implemented by a series of Offering Periods of twenty-four (24) months duration, with new Offering Periods commencing on or about February 1 and August 1 of each year (or at such other time or times as may be determined by the Board of Directors). The first Offering Period shall commence on the beginning of the effective date of the Registration Statement on Form S-1 for the initial public offering of the Company's Common Stock (the "IPO Date") and continue until January 31, 2002. The Plan shall continue until terminated in accordance with Section 20 hereof. The Board of Directors of the Company shall have the power to change the duration and/or the frequency of Offering Periods with respect to future offerings without stockholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected. (b) PURCHASE PERIODS. Each Offering Period shall consist of four (4) consecutive Purchase Periods of six (6) months' duration. The last day of each Purchase Period shall be the "Purchase Date" for such Purchase Period. A Purchase Period commencing on February 1 shall end on the next July 31. A Purchase Period commencing on August 1 shall end on the next January 31. The first Purchase Period shall commence on the IPO Date and shall end on July 31, 2000. The Board of Directors of the Company shall have the power to change the duration and/or frequency of Purchase Periods with respect to future purchases without stockholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Purchase Period to be affected. -3- 4 5. PARTICIPATION. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement on the form provided by the Company and filing it with the Company's payroll office prior to the applicable Offering Date, unless a later time for filing the subscription agreement is set by the Board for all eligible Employees with respect to a given Offering Period. The subscription agreement shall set forth the percentage of the participant's Compensation (subject to Section 6(a) below) to be paid as Contributions pursuant to the Plan. (b) Payroll deductions shall commence on the first payroll following the Offering Date and shall end on the last payroll paid on or prior to the last Purchase Period of the Offering Period to which the subscription agreement is applicable, unless sooner terminated by the participant as provided in Section 10. 6. METHOD OF PAYMENT OF CONTRIBUTIONS. (a) A participant shall elect to have payroll deductions made on each payday during the Offering Period in an amount not less than one percent (1%) and not more than twenty percent (20%) (or such greater percentage as the Board may establish from time to time before an Offering Date) of such participant's Compensation on each payday during the Offering Period. All payroll deductions made by a participant shall be credited to his or her account under the Plan. A participant may not make any additional payments into such account. (b) A participant may discontinue his or her participation in the Plan as provided in Section 10, or, on one occasion only during a Purchase Period may increase and on one occasion only during a Purchase Period may decrease the rate of his or her Contributions with respect to the Offering Period by completing and filing with the Company a new subscription agreement authorizing a change in the payroll deduction rate. The change in rate shall be effective as of the beginning of the next calendar month following the date of filing of the new subscription agreement, if the agreement is filed at least ten (10) business days prior to such date and, if not, as of the beginning of the next succeeding calendar month. (c) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b), a participant's payroll deductions may be decreased by the Company to 0% at any time during a Purchase Period. Payroll deductions shall re-commence at the rate provided in such participant's subscription agreement at the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10. In addition, a participant's payroll deductions may be decreased by the Company to 0% at any time during a Purchase Period in order to avoid unnecessary payroll contributions as a result of application of the maximum share limit set forth in Section 7(a), in which case payroll deductions shall re-commence at the rate provided in such participant's subscription agreement at the beginning of the next Purchase Period, unless terminated by the participant as provided in Section 10. -4- 5 7. GRANT OF OPTION. (a) On the Offering Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on each Purchase Date a number of Shares of the Company's Common Stock determined by dividing such Employee's Contributions accumulated prior to such Purchase Date and retained in the participant's account as of the Purchase Date by the applicable Purchase Price; provided however that the maximum number of Shares an Employee may purchase during each Purchase Period shall be 2000 Shares (subject to any adjustment pursuant to Section 19 below), and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 13. (b) The fair market value of the Company's Common Stock on a given date (the "Fair Market Value") shall be determined by the Board in its discretion based on the closing sales price of the Common Stock for such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported by the National Association of Securities Dealers Automated Quotation (Nasdaq) National Market or, if such price is not reported, the mean of the bid and asked prices per share of the Common Stock as reported by Nasdaq or, in the event the Common Stock is listed on a stock exchange, the Fair Market Value per share shall be the closing sales price on such exchange on such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported in The Wall Street Journal. For purposes of the Offering Date under the first Offering Period under the Plan, the Fair Market Value of a share of the Common Stock of the Company shall be the Price to Public as set forth in the final prospectus filed with the Securities and Exchange Commission pursuant to Rule 424 under the Securities Act of 1933, as amended. 8. EXERCISE OF OPTION. Unless a participant withdraws from the Plan as provided in Section 10, his or her option for the purchase of Shares will be exercised automatically on each Purchase Date of an Offering Period, and the maximum number of full Shares subject to the option will be purchased at the applicable Purchase Price with the accumulated Contributions in his or her account. No fractional Shares shall be issued. The Shares purchased upon exercise of an option hereunder shall be deemed to be transferred to the participant on the Purchase Date. During his or her lifetime, a participant's option to purchase Shares hereunder is exercisable only by him or her. 9. DELIVERY. As promptly as practicable after each Purchase Date of each Offering Period, the Company shall arrange the delivery to each participant, as appropriate, the Shares purchased upon exercise of his or her option. No fractional Shares shall be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full Share shall be retained in the participant's account for the subsequent Purchase Period or Offering Period, subject to earlier withdrawal by the participant as provided in Section 10 below. Any other amounts left over in a participant's account after a Purchase Date shall be returned to the participant. -5- 6 10. VOLUNTARY WITHDRAWAL; TERMINATION OF EMPLOYMENT. (a) A participant may withdraw all but not less than all the Contributions credited to his or her account under the Plan at any time prior to each Purchase Date by giving written notice to the Company. All of the participant's Contributions credited to his or her account will be paid to him or her promptly after receipt of his or her notice of withdrawal and his or her option for the current period will be automatically terminated, and no further Contributions for the purchase of Shares will be made during the Offering Period. (b) Upon termination of the participant's Continuous Status as an Employee prior to the Purchase Date of an Offering Period for any reason, including retirement or death, the Contributions credited to his or her account will be returned to him or her or, in the case of his or her death, to the person or persons entitled thereto under Section 14, and his or her option will be automatically terminated. (c) In the event an Employee fails to remain in Continuous Status as an Employee of the Company for at least twenty (20) hours per week during the Offering Period in which the employee is a participant, he or she will be deemed to have elected to withdraw from the Plan and the Contributions credited to his or her account will be returned to him or her and his or her option terminated. (d) A participant's withdrawal from an offering will not have any effect upon his or her eligibility to participate in a succeeding offering or in any similar plan which may hereafter be adopted by the Company. 11. AUTOMATIC WITHDRAWAL. If the Fair Market Value of the Shares on any Purchase Date of an Offering Period is less than the Fair Market Value of the Shares on the Offering Date for such Offering Period, then every participant shall automatically (i) be withdrawn from such Offering Period at the close of such Purchase Date and after the acquisition of Shares for such Purchase Period, and (ii) be enrolled in the Offering Period commencing on the first business day subsequent to such Purchase Period. 12. INTEREST. No interest shall accrue on the Contributions of a participant in the Plan. 13. STOCK. (a) Subject to adjustment as provided in Section 19, the maximum number of Shares which shall be made available for sale under the Plan shall be 500,000 Shares, plus an annual increase on the first day of each of the Company's fiscal years during the term of the Plan beginning in 2001 and ending in 2010 equal to the lesser of (i) 300,000 Shares, (ii) one percent (1%) of the Shares outstanding on the last day of the immediately preceding fiscal year, or (iii) such lesser number of Shares as is determined by the Board. If the Board determines that, on a given Purchase Date, the number of shares with respect to which options are to be exercised may exceed (i) the number of shares of Common Stock that were available for sale under the Plan on the Offering Date of the applicable Offering Period, or (ii) the number of shares available for sale -6- 7 under the Plan on such Purchase Date, the Board may in its sole discretion provide (x) that the Company shall make a pro rata allocation of the Shares of Common Stock available for purchase on such Offering Date or Purchase Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Purchase Date, and continue all Offering Periods then in effect, or (y) that the Company shall make a pro rata allocation of the shares available for purchase on such Offering Date or Purchase Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Purchase Date, and terminate any or all Offering Periods then in effect pursuant to Section 20 below. The Company may make pro rata allocation of the Shares available on the Offering Date of any applicable Offering Period pursuant to the preceding sentence, notwithstanding any authorization of additional Shares for issuance under the Plan by the Company's stockholders subsequent to such Offering Date. (b) The participant shall have no interest or voting right in Shares covered by his or her option until such option has been exercised. (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. 14. ADMINISTRATION. The Board, or a committee named by the Board, shall supervise and administer the Plan and shall have full power to adopt, amend and rescind any rules deemed desirable and appropriate for the administration of the Plan and not inconsistent with the Plan, to construe and interpret the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. 15. DESIGNATION OF BENEFICIARY. (a) A participant may 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 such participant's death subsequent to the end of a Purchase Period but prior to delivery to him or her of such Shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to the Purchase Date of an Offering Period. 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 his or her 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 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 Company), the Company, in its discretion, may deliver such Shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, -7- 8 or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. TRANSFERABILITY. Neither Contributions 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 15) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Section 10. 17. USE OF FUNDS. All Contributions 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 Contributions. 18. REPORTS. Individual accounts will be maintained for each participant in the Plan. Statements of account will be given to participating Employees at least annually, which statements will set forth the amounts of Contributions, the per Share Purchase Price, the number of Shares purchased and the remaining cash balance, if any. 19. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS. (a) ADJUSTMENT. Subject to any required action by the stockholders of the Company, the number of Shares covered by each option under the Plan which has not yet been exercised and the number of Shares which have been authorized for issuance under the Plan but have not yet been placed under option (collectively, the "Reserves"), as well as the maximum number of shares of Common Stock which may be purchased by a participant in a Purchase Period, the number of shares of Common Stock set forth in Section 13(a) above, and the price per Share of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for 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 Common Stock (including any such change in the number of Shares of Common Stock effected in connection with a change in domicile of the Company), or any other increase or decrease in the number of Shares effected without receipt of consideration by the Company; provided however that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an option. (b) CORPORATE TRANSACTIONS. In the event of a dissolution or liquidation of the Company, any Purchase Period and Offering Period then in progress will terminate immediately prior to the consummation of such action, unless otherwise provided by the Board. In the event of a Corporate Transaction, each option outstanding under the Plan shall be assumed or an equivalent option shall be substituted by the successor corporation or a parent or Subsidiary of such successor corporation. In the event that the successor corporation refuses to assume or -8- 9 substitute for outstanding options, each Purchase Period and Offering Period then in progress shall be shortened and a new Purchase Date shall be set (the "New Purchase Date"), as of which date any Purchase Period and Offering Period then in progress will terminate. The New Purchase Date shall be on or before the date of consummation of the transaction and the Board shall notify each participant in writing, at least ten (10) days prior to the New Purchase Date, that the Purchase Date for his or her option has been changed to the New Purchase Date and that his or her option will be exercised automatically on the New Purchase Date, unless prior to such date he or she has withdrawn from the Offering Period as provided in Section 10. For purposes of this Section 19, an option granted under the Plan shall be deemed to be assumed, without limitation, if, at the time of issuance of the stock or other consideration upon a Corporate Transaction, each holder of an option under the Plan would be entitled to receive upon exercise of the option the same number and kind of shares of stock or the same amount of property, cash or securities as such holder would have been entitled to receive upon the occurrence of the transaction if the holder had been, immediately prior to the transaction, the holder of the number of Shares of Common Stock covered by the option at such time (after giving effect to any adjustments in the number of Shares covered by the option as provided for in this Section 19); provided however that if the consideration received in the transaction is not solely common stock of the successor corporation or its parent (as defined in Section 424(e) of the Code), the Board may, with the consent of the successor corporation, provide for the consideration to be received upon exercise of the option to be solely common stock of the successor corporation or its parent equal in Fair Market Value to the per Share consideration received by holders of Common Stock in the transaction. The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per Share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of Shares of its outstanding Common Stock, and in the event of the Company's being consolidated with or merged into any other corporation. 20. AMENDMENT OR TERMINATION. (a) The Board may at any time and for any reason terminate or amend the Plan. Except as provided in Section 19, no such termination of the Plan may affect options previously granted, provided that the Plan or an Offering Period may be terminated by the Board on a Purchase Date or by the Board's setting a new Purchase Date with respect to an Offering Period and Purchase Period then in progress if the Board determines that termination of the Plan and/or the Offering Period is in the best interests of the Company and the stockholders or if continuation of the Plan and/or the Offering Period would cause the Company to incur adverse accounting charges as a result of a change after the effective date of the Plan in the generally accepted accounting rules applicable to the Plan. Except as provided in Section 19 and in this Section 20, no amendment to the Plan shall make any change in any option previously granted which adversely affects the rights of any participant. In addition, to the extent necessary to comply with Rule 16b-3 under the Exchange Act, or under Section 423 of the Code (or any -9- 10 successor rule or provision or any applicable law or regulation), the Company shall obtain stockholder approval in such a manner and to such a degree as so required. (b) Without stockholder consent and without regard to whether any participant rights may be considered to have been adversely affected, the Board (or its committee) shall be entitled to change the Offering Periods and Purchase Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, 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 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 Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 21. 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 Company at the location, or by the person, designated by the Company for the receipt thereof. 22. 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 provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, applicable state securities laws and the requirements of any stock exchange upon which the Shares may then be listed, 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 person exercising such option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 23. TERM OF PLAN; EFFECTIVE DATE. The Plan shall become effective upon the IPO Date. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 20. 24. ADDITIONAL RESTRICTIONS OF RULE 16b-3. The terms and conditions of options granted hereunder to, and the purchase of Shares by, persons subject to Section 16 of the Exchange Act shall comply with the applicable provisions of Rule 16b-3. This Plan shall be deemed to contain, and such options shall contain, and the Shares issued upon exercise thereof shall be subject to, such additional conditions and restrictions as may be required by Rule 16b-3 to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. -10- 11 PETS.COM, INC. 2000 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT New Election ______ Change of Election ______ 1. I, ________________________, hereby elect to participate in the Pets.com, Inc. 2000 Employee Stock Purchase Plan (the "Plan") for the Offering Period ______________, ____ to _______________, ____, and subscribe to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Plan. 2. I elect to have Contributions in the amount of ____% of my Compensation, as those terms are defined in the Plan, applied to this purchase. I understand that this amount must not be less than 1% and not more than 20% of my Compensation during the Offering Period. (Please note that no fractional percentages are permitted). 3. I hereby authorize payroll deductions from each paycheck during the Offering Period at the rate stated in Item 2 of this Subscription Agreement. I understand that all payroll deductions made by me shall be credited to my account under the Plan and that I may not make any additional payments into such account. I understand that all payments made by me shall be accumulated for the purchase of shares of Common Stock at the applicable purchase price determined in accordance with the Plan. I further understand that, except as otherwise set forth in the Plan, shares will be purchased for me automatically on the Purchase Date of each Offering Period unless I otherwise withdraw from the Plan by giving written notice to the Company for such purpose. 4. I understand that I may discontinue at any time prior to the Purchase Date my participation in the Plan as provided in Section 10 of the Plan. I also understand that I can increase or decrease the rate of my Contributions on one occasion only with respect to any increase and one occasion only with respect to any decrease during any Purchase Period by completing and filing a new Subscription Agreement with such increase or decrease taking effect as of the beginning of the calendar month following the date of filing of the new Subscription Agreement, if filed at least ten (10) business days prior to the beginning of such month. Further, I may change the rate of deductions for future Offering Periods by filing a new Subscription Agreement, and any such change will be effective as of the beginning of the next Offering Period. In addition, I acknowledge that, unless I discontinue my participation in the Plan as provided in Section 10 of the Plan, my election will continue to be effective for each successive Offering Period. 12 5. I have received a copy of the Company's most recent description of the Plan and a copy of the complete "Pets.com, Inc. 2000 Employee Stock Purchase Plan." I understand that my participation in the Plan is in all respects subject to the terms of the Plan. 6. Shares purchased for me under the Plan should be issued in the name(s) of (name of employee or employee and spouse only): ------------------------------------ ------------------------------------ 7. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due to me under the Plan: NAME: (Please print) ------------------------------------ (First) (Middle) (Last) - -------------------- ------------------------------------ (Relationship) (Address) ------------------------------------ 8. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Offering Date (the first day of the Offering Period during which I purchased such shares) or within 1 year after the Purchase Date, I will be treated for federal income tax purposes as having received ordinary compensation income at the time of such disposition in an amount equal to the excess of the fair market value of the shares on the Purchase Date over the price which I paid for the shares, regardless of whether I disposed of the shares at a price less than their fair market value at the Purchase Date. The remainder of the gain or loss, if any, recognized on such disposition will be treated as capital gain or loss. I hereby agree to notify the Company in writing within 30 days after the date of any such disposition, and I will make adequate provision for federal, state or other tax withholding obligations, if any, which arise upon the disposition of the Common Stock. The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to the sale or early disposition of Common Stock by me. 9. If I dispose of such shares at any time after expiration of the 2-year and 1-year holding periods, I understand that I will be treated for federal income tax purposes as having received compensation income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares under the option, or (2) 15% of the fair market value of the -2- 13 shares on the Offering Date. The remainder of the gain or loss, if any, recognized on such disposition will be treated as capital gain or loss. I understand that this tax summary is only a summary and is subject to change. I further understand that I should consult a tax advisor concerning the tax implications of the purchase and sale of stock under the Plan. 10. I hereby agree to be bound by the terms of the Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Plan. SIGNATURE: -------------------------- SOCIAL SECURITY #: ------------------ DATE: ------------------------------- SPOUSE'S SIGNATURE (necessary if beneficiary is not spouse): - ------------------------------------ (Signature) - ------------------------------------ (Print name) -3- 14 PETS.COM, INC. 2000 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL I, __________________________, hereby elect to withdraw my participation in the Pets.com, Inc. 2000 Employee Stock Purchase Plan (the "Plan") for the Offering Period that began on _________ ___, _____. This withdrawal covers all Contributions credited to my account and is effective on the date designated below. I understand that all Contributions credited to my account will be paid to me within ten (10) business days of receipt by the Company of this Notice of Withdrawal and that my option for the current period will automatically terminate, and that no further Contributions for the purchase of shares can be made by me during the Offering Period. The undersigned further understands and agrees that he or she shall be eligible to participate in succeeding offering periods only by delivering to the Company a new Subscription Agreement. Dated: ------------------------------ ------------------------------------ Signature of Employee ------------------------------------ Social Security Number EX-10.3 9 COMMON STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.3 PETS.COM COMMON STOCK PURCHASE AGREEMENT This Common Stock Purchase Agreement (the "Agreement") is made as of February 17, 1999 by and between Pets.com, a California corporation (the "Company"), and Greg McLemore ("Purchaser"). 1. SALE OF STOCK. Subject to the terms and conditions of this Agreement, on the Purchase Date (as defined below) the Company will issue and sell to Purchaser, and Purchaser agrees to purchase from the Company, 1,610,587 shares of the Company's Common Stock (the "Shares") at a purchase price of $16,105.87 per Share for a total purchase price of $0.01. The term "Shares" refers to the purchased Shares and all securities received in replacement of or in connection with the Shares pursuant to stock dividends or splits, all securities received in replacement of the Shares in a recapitalization, merger, reorganization, exchange or the like, and all new, substituted or additional securities or other properties to which Purchaser is entitled by reason of Purchaser's ownership of the Shares. 2. PURCHASE. The purchase and sale of the Shares under this Agreement shall occur at the principal office of the Company simultaneously with the execution of this Agreement by the parties or on such other date as the Company and Purchaser shall agree (the "Purchase Date"). On the Purchase Date, the Company will deliver to Purchaser a certificate representing the Shares to be purchased by Purchaser (which shall be issued in Purchaser's name) against payment of the purchase price therefor by an assignment of certain assets as set forth in the Bill of Sale and Instrument of Assignment in the form attached to this Agreement as Exhibit A. 3. LIMITATIONS ON TRANSFER. In addition to any other limitation on transfer created by applicable securities laws, Purchaser shall not assign, encumber or dispose of any interest in the Shares except in compliance with the provisions below and applicable securities laws. (a) RIGHT OF FIRST REFUSAL. Before any Shares held by Purchaser or any transferee of Purchaser (either being sometimes referred to herein as the "Holder") may be sold or otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section 3(a) (the "Right of First Refusal"). (i) NOTICE OF PROPOSED TRANSFER. The Holder of the Shares shall deliver to the Company a written notice (the "Notice") stating: (A) the Holder's bona fide intention to sell or otherwise transfer such Shares; (B) the name of each proposed purchaser or other transferee ("Proposed Transferee"); (C) the number of Shares to be transferred to each Proposed Transferee; and (D) the terms and conditions of each proposed sale or transfer. The Holder shall offer the Shares at the same price (the "Offered Price") and upon the same terms (or terms as similar as reasonably possible) to the Company or its assignee(s). 2 (ii) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within 30 days after receipt of the Notice, the Company and/or its assignee(s) may, by giving written notice to the Holder, elect to purchase all, but not less than all, of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the purchase price determined in accordance with subsection (iii) below. (iii) PURCHASE PRICE. The purchase price ("Purchase Price") for the Shares purchased by the Company or its assignee(s) under this Section 3(a) shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Company in good faith. (iv) PAYMENT. Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within 30 days after receipt of the Notice or in the manner and at the times set forth in the Notice. (v) HOLDER'S RIGHT TO TRANSFER. If all of the Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in this Section 3(a), then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within 60 days after the date of the Notice and provided further that any such sale or other transfer is effected in accordance with any applicable securities laws and the Proposed Transferee agrees in writing that the provisions of this Section 3 shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, or if the Holder proposes to change the price or other terms to make them more favorable to the Proposed Transferee, a new Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal before any Shares held by the Holder may be sold or otherwise transferred. (vi) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything to the contrary contained in this Section 3(a) notwithstanding, the transfer of any or all of the Shares during Purchaser's lifetime or on Purchaser's death by will or intestacy to Purchaser's Immediate Family or a trust for the benefit of Purchaser's Immediate Family shall be exempt from the provisions of this Section 3(a). "Immediate Family" as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section 3, and there shall be no further transfer of such Shares except in accordance with the terms of this Section 3. (b) INVOLUNTARY TRANSFER. (i) COMPANY'S RIGHT TO PURCHASE UPON INVOLUNTARY TRANSFER. In the event, at any time after the date of this Agreement, of any transfer by operation of law or -2- 3 other involuntary transfer (including divorce or death, but excluding in the event of death a transfer to Immediate Family as set forth in Section 3(a)(vi) above) of all or a portion of the Shares by the record holder thereof, the Company shall have the right to purchase all of the Shares transferred at the greater of the purchase price paid by Purchaser pursuant to this Agreement or the fair market value of the Shares on the date of transfer. Upon such a transfer, the person acquiring the Shares shall promptly notify the Secretary of the Company of such transfer. The right to purchase such Shares shall be provided to the Company for a period of 30 days following receipt by the Company of written notice by the person acquiring the Shares. (ii) PRICE FOR INVOLUNTARY TRANSFER. With respect to any stock to be transferred pursuant to Section 3(b)(i), the price per Share shall be a price set by the Board of Directors of the Company that will reflect the current value of the stock in terms of present earnings and future prospects of the Company. The Company shall notify Purchaser or his or her executor of the price so determined within 30 days after receipt by it of written notice of the transfer or proposed transfer of Shares. However, if Purchaser does not agree with the valuation as determined by the Board of Directors of the Company, Purchaser shall be entitled to have the valuation determined by an independent appraiser to be mutually agreed upon by the Company and Purchaser and whose fees shall be borne equally by the Company and Purchaser. (c) ASSIGNMENT. The right of the Company to purchase any part of the Shares may be assigned in whole or in part to any shareholder or shareholders of the Company or other persons or organizations. (d) RESTRICTIONS BINDING ON TRANSFEREES. All transferees of Shares or any interest therein will receive and hold such Shares or interest subject to the provisions of this Agreement. Any sale or transfer of the Shares shall be void unless the provisions of this Agreement are satisfied. (e) TERMINATION OF RIGHTS. The Right of First Refusal and the Company's right to repurchase the Shares in the event of an involuntary transfer pursuant to Section 3(b) above shall terminate upon the first sale of Common Stock of the Company 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, (the "Securities Act"). (f) MARKET STANDOFF AGREEMENT. In connection with the initial public offering of the Company's securities and upon request of the Company or the underwriters managing such offering of the Company's securities, Purchaser agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any securities of the Company (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as may be requested by the Company or such managing underwriters and to execute an agreement reflecting the foregoing as may be requested by the underwriters at the time of the Company's initial public offering. 4. INVESTMENT AND TAXATION REPRESENTATIONS. In connection with the purchase of the Shares, Purchaser represents to the Company the following: -3- 4 (a) Purchaser is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Shares. Purchaser is purchasing the Shares for investment for his or her own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act. (b) Purchaser understands that the Shares have not been registered under the Securities Act by reason of a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Purchaser's investment intent as expressed herein. (c) Purchaser understands that the Shares are "restricted securities" under applicable U.S. federal and state securities laws and that, pursuant to these laws, Purchaser must hold the Shares indefinitely unless they are registered with the Securities and Exchange Commission and qualified by state authorities, or an exemption from such registration and qualification requirements is available. Purchaser acknowledges that the Company has no obligation to register or qualify the Shares for resale. Purchaser further acknowledges that if an exemption from registration or qualification is available, it may be conditioned on various requirements including, but not limited to, the time and manner of sale, the holding period for the Shares, and requirements relating to the Company which are outside of the Purchaser's control, and which the Company is under no obligation and may not be able to satisfy. (d) Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser's purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice. 5. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS. (a) LEGENDS. The certificate or certificates representing the Shares shall bear the following legends (as well as any legends required by applicable state and federal corporate and securities laws): (i) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. -4- 5 (ii) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. (iii) Any legend required to be placed thereon by the California Commissioner of Corporations. (b) STOP-TRANSFER NOTICES. Purchaser agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate "stop transfer" instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. (c) REFUSAL TO TRANSFER. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred. (d) REMOVAL OF LEGEND. When all of the following events have occurred, the Shares then held by Purchaser will no longer be subject to the legend referred to in Section 5(a)(ii): (i) the termination of the Right of First Refusal; and (ii) the expiration or termination of the market standoff provisions of Section 3(f) (and of any agreement entered pursuant to Section 3(f)). After such time, and upon Purchaser's request, a new certificate or certificates representing the Shares not repurchased shall be issued without the legend referred to in Section 5(a)(ii), and delivered to Purchaser. 6. NO EMPLOYMENT RIGHTS. Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a parent or subsidiary of the Company, to terminate Purchaser's employment or consulting relationship, for any reason, with or without cause. 7. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. (b) ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter herein and merges all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in -5- 6 writing signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party. (c) SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of the Agreement shall be enforceable in accordance with its terms. (d) CONSTRUCTION. This Agreement is the result of negotiations between and has been reviewed by each of the parties hereto and their respective counsel, if any; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall be construed in favor of or against any one of the parties hereto. (e) NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by telegram or fax or 48 hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address or fax number as set forth below or as subsequently modified by written notice. (f) COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. (g) SUCCESSORS AND ASSIGNS. The rights and benefits of this Agreement shall inure to the benefit of, and be enforceable by the Company's successors and assigns. The rights and obligations of Purchaser under this Agreement may only be assigned with the prior written consent of the Company. (h) CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES 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 UPON THE QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. [Signature Page Follows] -6- 7 The parties have executed this Agreement as of the date first set forth above. PETS.COM By: /s/ Greg McLemore ------------------------------- Title: President ---------------------------- Address: 87 N. Raymond Ave., Suite 850 Pasadena, CA 91103 PURCHASER: GREG MCLEMORE /s/ Greg McLemore ---------------------------------- (Signature) Address: 1581 E. Mendocino St. ---------------------------------- Altadena, CA 91001 ---------------------------------- I, N/A, spouse of Greg McLemore, have read and hereby approve the foregoing Agreement. In consideration of the Company's granting my spouse the right to purchase the Shares as set forth in the Agreement, I hereby agree to be irrevocably bound by the Agreement and further agree that any community property or similar interest that I may have in the Shares shall be similarly bound by the Agreement. I hereby appoint my spouse as my attorney-in-fact with respect to any amendment or exercise of any rights under the Agreement. ---------------------------------- Spouse of Greg McLemore -7- EX-10.4 10 RESTRICTED STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.4 PETS.COM 1999 STOCK PLAN RESTRICTED STOCK PURCHASE AGREEMENT This Restricted Stock Purchase Agreement (the "Agreement") is made as of March 10, 1999, by and between Pets.com, a California corporation (the "Company"), and Julie Wainwright ("Purchaser") pursuant to the Company's 1999 Stock Plan. To the extent any capitalized terms used in this Agreement are not defined, they shall have the meaning ascribed to them in the 1999 Stock Plan. 1. SALE OF STOCK. Subject to the terms and conditions of this Agreement, on the Purchase Date (as defined below) the Company will issue and sell to Purchaser, and Purchaser agrees to purchase from the Company, 1,157,023 shares of the Company's Common Stock (the "Shares") at a purchase price of $0.01 per Share for a total purchase price of $11,570.23. The per share purchase price of the Shares shall be not less than 85% of the Fair Market Value of the Shares as of the date of the offer of such Shares to Purchaser, or, in the case of any person owning stock representing more than 10% of the total combined voting power of all classes of stock of the Company (or any affiliated company), the per share purchase price shall be not less than 100% of the Fair Market Value of the Shares as of such date. The term "Shares" refers to the purchased Shares and all securities received in replacement of or in connection with the Shares pursuant to stock dividends or splits, all securities received in replacement of the Shares in a recapitalization, merger, reorganization, exchange or the like, and all new, substituted or additional securities or other properties to which Purchaser is entitled by reason of Purchaser's ownership of the Shares. 2. PURCHASE. The purchase and sale of the Shares under this Agreement shall occur at the principal office of the Company simultaneously with the execution of this Agreement by the parties, or on such other date as the Company and Purchaser shall agree (the "Purchase Date"). On the Purchase Date, the Company will deliver to Purchaser a certificate representing the Shares to be purchased by Purchaser (which shall be issued in Purchaser's name) against payment of the purchase price therefor by Purchaser by check made payable to the Company. 3. LIMITATIONS ON TRANSFER. In addition to any other limitation on transfer created by applicable securities laws, Purchaser shall not assign, encumber or dispose of any interest in the Shares while the Shares are subject to the Company's Repurchase Option (as defined below). After any Shares have been released from such Repurchase Option, Purchaser shall not assign, encumber or dispose of any interest in such Shares except in compliance with the provisions below and applicable securities laws. (a) REPURCHASE OPTION. (i) In the event of the voluntary or involuntary termination of Purchaser's employment or consulting relationship with the Company for any reason (including 2 death or disability), with or without cause, the Company shall upon the date of such termination (the "Termination Date") have an irrevocable, exclusive option (the "Repurchase Option") for a period of 60 days from such date to repurchase all or any portion of the Shares held by Purchaser as of the Termination Date which have not yet been released from the Company's Repurchase Option at the original purchase price per Share specified in Section 1 (adjusted for any stock splits, stock dividends and the like). (ii) The Repurchase Option shall be exercised by the Company by written notice to Purchaser or Purchaser's executor and, at the Company's option, (A) by delivery to Purchaser or Purchaser's executor with such notice of a check in the amount of the purchase price for the Shares being purchased, or (B) in the event Purchaser is indebted to the Company, by cancellation by the Company of an amount of such indebtedness equal to the purchase price for the Shares being repurchased, or (C) by a combination of (A) and (B) so that the combined payment and cancellation of indebtedness equals such purchase price. Upon delivery of such notice and payment of the purchase price in any of the ways described above, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interest therein or related thereto, and the Company shall have the right to transfer to its own name the number of Shares being repurchased by the Company, without further action by Purchaser. (iii) 100% of the Shares shall initially be subject to the Repurchase Option. 25% of the total number of Shares shall be released from the Repurchase Option on the twelve-month anniversary of the Vesting Commencement Date (as set forth on the signature page of this Agreement), and an additional 1/48th of the total number of Shares shall be released from the Repurchase Option each month thereafter, until all Shares are released from the Repurchase Option. Fractional shares shall be rounded to the nearest whole share. Notwithstanding the foregoing, in the event that the Company undergoes a Change of Control (as defined below) 50% of the Shares remaining subject to the Repurchase Option as of the date of the Change of Control (or such lesser number of Shares as then remain subject to the Repurchase Option) shall immediately be released from the Repurchase Option. (iv) A "Change of Control" shall mean a sale, conveyance or other disposal of all or substantially all of the Company's property or business, or a merger or consolidation with any other corporation (other than a wholly-owned subsidiary corporation) or any other transaction or series of related transactions in which more than sixty-six percent (50%) of the -2- 3 voting power of the Company is disposed of; provided that this definition shall not include a merger effected solely for the purpose of changing the domicile of the Company. (v) For purposes of this Agreement, "Cause" shall mean (i) Purchaser's consistent refusal to perform her duties as agreed upon from time to time between Purchaser and the Company's Board of Directors (as determined by the Board of Directors, following appropriate written warning and failure to cure within 30 days); (ii) Purchaser's consistent refusal to conform to or follow any reasonable employee policy adopted by the Company's Board of Directors (as determined by the Board of Directors, following appropriate written warning and failure to cure within 30 days); (iii) Purchaser's material breach of the Company's confidentiality and inventions assignment agreement; (iv) Purchaser's conviction of a felony under the laws of the United States or any state thereof; or (v) Purchaser's gross misconduct. (vi) For purposes of this Agreement, "Constructive Termination" shall be deemed to occur if there is a material adverse change in Purchaser's position with the Company (currently Chief Executive Officer) with regard to stature or responsibility. (b) RIGHT OF FIRST REFUSAL. Before any Shares held by Purchaser or any transferee of Purchaser (either being sometimes referred to herein as the "Holder") may be sold or otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section 3(b) (the "Right of First Refusal"). (i) NOTICE OF PROPOSED TRANSFER. The Holder of the Shares shall deliver to the Company a written notice (the "Notice") stating: (A) the Holder's bona fide intention to sell or otherwise transfer such Shares; (B) the name of each proposed purchaser or other transferee ("Proposed Transferee"); (C) the number of Shares to be transferred to each Proposed Transferee; and (D) the terms and conditions of each proposed sale or transfer. The Holder shall offer the Shares at the same price (the "Offered Price") and upon the same terms (or terms as similar as reasonably possible) to the Company or its assignee(s). (ii) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within 30 days after receipt of the Notice, the Company and/or its assignee(s) may, by giving written notice to the Holder, elect to purchase all, but not less than all, of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the purchase price determined in accordance with subsection (iii) below. (iii) PURCHASE PRICE. The purchase price ("Purchase Price") for the Shares purchased by the Company or its assignee(s) under this Section 3(b) shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Company in good faith. (iv) PAYMENT. Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an -3- 4 assignee, to the assignee), or by any combination thereof within 30 days after receipt of the Notice or in the manner and at the times set forth in the Notice. (v) HOLDER'S RIGHT TO TRANSFER. If all of the Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in this Section 3(b), then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within 60 days after the date of the Notice and provided further that any such sale or other transfer is effected in accordance with any applicable securities laws and the Proposed Transferee agrees in writing that the provisions of this Section 3 shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, or if the Holder proposes to change the price or other terms to make them more favorable to the Proposed Transferee, a new Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal before any Shares held by the Holder may be sold or otherwise transferred. (vi) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything to the contrary contained in this Section 3(b) notwithstanding, the transfer of any or all of the Shares during Purchaser's lifetime or on Purchaser's death by will or intestacy to Purchaser's Immediate Family (as defined below) or a trust for the benefit of Purchaser's Immediate Family shall be exempt from the provisions of this Section 3(b). "Immediate Family" as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section, and there shall be no further transfer of such Shares except in accordance with the terms of this Section 3. (c) INVOLUNTARY TRANSFER. (i) COMPANY'S RIGHT TO PURCHASE UPON INVOLUNTARY TRANSFER. In the event, at any time after the date of this Agreement, of any transfer by operation of law or other involuntary transfer (including divorce or death, but excluding, in the event of death, a transfer to Immediate Family as set forth in Section 3(b)(vi) above) of all or a portion of the Shares by the record holder thereof, the Company shall have the right to purchase all of the Shares transferred at the greater of the purchase price paid by Purchaser pursuant to this Agreement or the Fair Market Value of the Shares on the date of transfer. Upon such a transfer, the person acquiring the Shares shall promptly notify the Secretary of the Company of such transfer. The right to purchase such Shares shall be provided to the Company for a period of 30 days following receipt by the Company of written notice by the person acquiring the Shares. (ii) PRICE FOR INVOLUNTARY TRANSFER. With respect to any stock to be transferred pursuant to Section 3(c)(i), the price per Share shall be a price set by the Board of Directors of the Company that will reflect the current value of the stock in terms of present earnings and future prospects of the Company. The Company shall notify Purchaser or his or her executor of the price so determined within 30 days after receipt by it of written notice of the -4- 5 transfer or proposed transfer of Shares. However, if Purchaser does not agree with the valuation as determined by the Board of Directors of the Company, Purchaser shall be entitled to have the valuation determined by an independent appraiser to be mutually agreed upon by the Company and Purchaser and whose fees shall be borne equally by the Company and Purchaser. (d) ASSIGNMENT. The right of the Company to purchase any part of the Shares may be assigned in whole or in part to any shareholder or shareholders of the Company or other persons or organizations; provided, however, that an assignee, other than a corporation that is the Parent or a 100% owned Subsidiary of the Company, must pay the Company, upon assignment of such right, cash equal to the difference between the original purchase price and Fair Market Value, if the original purchase price is less than the Fair Market Value of the Shares subject to the assignment. (e) RESTRICTIONS BINDING ON TRANSFEREES. All transferees of Shares or any interest therein will receive and hold such Shares or interest subject to the provisions of this Agreement, including, insofar as applicable, the Repurchase Option. Any sale or transfer of the Shares shall be void unless the provisions of this Agreement are satisfied. (f) TERMINATION OF RIGHTS. The Right of First Refusal and the Company's right to repurchase the Shares in the event of an involuntary transfer pursuant to Section 3(c) above shall terminate upon the first sale of Common Stock of the Company 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 (the "Securities Act"). Upon termination of the Right of First Refusal and the expiration or exercise of the Repurchase Option, a new certificate or certificates representing the Shares not repurchased shall be issued, on request, without the legend referred to in Section 6(a)(ii) below and delivered to Purchaser. 4. ESCROW OF UNVESTED SHARES. For purposes of facilitating the enforcement of the provisions of Section 3 above, Purchaser agrees, immediately upon receipt of the certificate(s) for the Shares subject to the Repurchase Option, to deliver such certificate(s), together with an Assignment Separate from Certificate in the form attached to this Agreement as Exhibit A executed by Purchaser and by Purchaser's spouse (if required for transfer), in blank, to the Secretary of the Company, or the Secretary's designee, to hold such certificate(s) and Assignment Separate from Certificate 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 Agreement. Purchaser hereby acknowledges that the Secretary of the Company, or the Secretary's designee, is so appointed as the escrow holder with the foregoing authorities as a material inducement to make this Agreement and that said appointment is coupled with an interest and is accordingly irrevocable. Purchaser agrees that said escrow holder shall not be liable to any party hereof (or to any other party). The escrow holder may rely upon any letter, notice or other document executed by any signature purported to be genuine and may resign at any time. Purchaser agrees that if the Secretary of the Company, or the Secretary's designee, resigns as escrow holder for any or no reason, the Board of Directors of the Company shall have the power to appoint a successor to serve as escrow holder pursuant to the terms of this Agreement. -5- 6 5. INVESTMENT AND TAXATION REPRESENTATIONS. In connection with the purchase of the Shares, Purchaser represents to the Company the following: (a) Purchaser is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Shares. Purchaser is purchasing the Shares for investment for his or her own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act. (b) Purchaser understands that the Shares have not been registered under the Securities Act by reason of a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Purchaser's investment intent as expressed herein. (c) Purchaser understands that the Shares are "restricted securities" under applicable U.S. federal and state securities laws and that, pursuant to these laws, Purchaser must hold the Shares indefinitely unless they are registered with the Securities and Exchange Commission and qualified by state authorities, or an exemption from such registration and qualification requirements is available. Purchaser acknowledges that the Company has no obligation to register or qualify the Shares for resale. Purchaser further acknowledges that if an exemption from registration or qualification is available, it may be conditioned on various requirements including, but not limited to, the time and manner of sale, the holding period for the Shares, and requirements relating to the Company which are outside of Purchaser's control, and which the Company is under no obligation and may not be able to satisfy. (d) Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser's purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted any tax consultants Purchaser deems advisable in connection the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice. 6. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS. (a) LEGENDS. The certificate or certificates representing the Shares shall bear the following legends (as well as any legends required by applicable state and federal corporate and securities laws): (i) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH -6- 7 REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. (ii) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. (b) STOP-TRANSFER NOTICES. Purchaser agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate "stop transfer" instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. (c) REFUSAL TO TRANSFER. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred. 7. NO EMPLOYMENT RIGHTS. Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a Parent or Subsidiary of the Company, to terminate Purchaser's employment or consulting relationship, for any reason, with or without cause. 8. SECTION 83(b) ELECTION. Purchaser understands that Section 83(a) of the Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary income the difference between the amount paid for the Shares and the Fair Market Value of the Shares as of the date any restrictions on the Shares lapse. In this context, "restriction" means the right of the Company to buy back the Shares pursuant to the Repurchase Option set forth in Section 3(a) of this Agreement. Purchaser understands that Purchaser may elect to be taxed at the time the Shares are purchased, rather than when and as the Repurchase Option expires, by filing an election under Section 83(b) (an "83(b) Election") of the Code with the Internal Revenue Service within 30 days from the date of purchase. Even if the Fair Market Value of the Shares at the time of the execution of this Agreement equals the amount paid for the Shares, the election must be made to avoid income under Section 83(a) in the future. Purchaser understands that failure to file such an election in a timely manner may result in adverse tax consequences for Purchaser. Purchaser further understands that an additional copy of such election form should be filed with his or her federal income tax return for the calendar year in which the date of this Agreement falls. Purchaser acknowledges that the foregoing is only a summary of the effect of United States federal income taxation with respect to purchase of the Shares hereunder, and does not purport to be complete. Purchaser further acknowledges that the Company has directed Purchaser to seek independent advice regarding the applicable provisions of the Code, the -7- 8 income tax laws of any municipality, state or foreign country in which Purchaser may reside, and the tax consequences of Purchaser's death. Purchaser agrees that he will execute and deliver to the Company with this executed Agreement a copy of the Acknowledgment and Statement of Decision Regarding Section 83(b) Election (the "Acknowledgment"), attached hereto as Exhibit B. Purchaser further agrees that Purchaser will execute and submit with the Acknowledgment a copy of the 83(b) Election, attached hereto as Exhibit C, if Purchaser has indicated in the Acknowledgment his or her decision to make such an election. 9. MARKET STANDOFF AGREEMENT. In connection with the initial public offering of the Company's securities and upon request of the Company or the underwriters managing such underwritten offering of the Company's securities, Purchaser agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Shares (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as may be requested by the Company or such managing underwriters and to execute an agreement reflecting the foregoing as may be requested by the underwriters at the time of the Company's initial public offering. 10. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. (b) ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter herein and merges all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party. (c) SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of the Agreement shall be enforceable in accordance with its terms. (d) CONSTRUCTION. This Agreement is the result of negotiations between and has been reviewed by each of the parties hereto and their respective counsel, if any; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall be construed in favor of or against any one of the parties hereto. -8- 9 (e) NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by telegram or fax or 48 hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address as set forth below or as subsequently modified by written notice. (f) COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. (g) SUCCESSORS AND ASSIGNS. The rights and benefits of this Agreement shall inure to the benefit of, and be enforceable by the Company's successors and assigns. The rights and obligations of Purchaser under this Agreement may only be assigned with the prior written consent of the Company. (h) CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES 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 UPON THE QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. [Signature Page Follows] -9- 10 The parties have executed this Agreement as of the date first set forth above. PETS.COM By: /s/ Julie Wainwright --------------------------------- Title: CEO ------------------------------ Address: 12 Boardwalki ------------------------------------ Larkspur, CA 94939 ------------------------------------ PURCHASER: JULIE WAINWRIGHT /s/ Julie Wainwright ------------------------------------ (Signature) Address: 12 Boardwalki ------------------------------------ Larkspur, CA 94939 ------------------------------------ Vesting Commencement Date: March 10, 1999 I, David Agnew, spouse of Julie Wainwright, have read and hereby approve the foregoing Agreement. In consideration of the Company's granting my spouse the right to purchase the Shares as set forth in the Agreement, I hereby agree to be irrevocably bound by the Agreement and further agree that any community property or similar interest that I may have in the Shares shall be similarly bound by the Agreement. I hereby appoint my spouse as my attorney-in-fact with respect to any amendment or exercise of any rights under the Agreement. /s/ David Agnew ------------------------------------ Spouse of Julie Wainwright -10- 11 ATTACHMENT A ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Pledge and Security Agreement between the undersigned ("Purchaser") and Pets.com, dated _____________, (the "Agreement"), Purchaser hereby sells, assigns and transfers unto _______________________________ (________) shares of the Common Stock of Pets.com, standing in Purchaser's name on the books of said corporation represented by Certificate No. ___ herewith and hereby irrevocably appoints ____________________________ to transfer said stock on the books of the within-named corporation with full power of substitution in the premises. THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT. Dated: ____________ Signature: /s/ Julie Wainwright ------------------------------------ Julie Wainwright /s/ David Agnew ------------------------------------ Spouse of Julie Wainwright (if applicable) Instruction: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to perfect the security interest of the Company pursuant to the Agreement. 12 EXHIBIT B ACKNOWLEDGMENT AND STATEMENT OF DECISION REGARDING SECTION 83(b) ELECTION The undersigned (which term includes the undersigned's spouse), a purchaser of 1,257,633 shares of Common Stock of Pets.com, a California corporation (the "Company") by exercise of stock purchase right (the "Right") granted pursuant to the Company's 1999 Stock Plan (the "Plan"), hereby states as follows: 1. The undersigned acknowledges receipt of a copy of the Plan relating to the offering of such shares. The undersigned has carefully reviewed the Plan and the stock purchase agreement pursuant to which the Right was granted. 2. The undersigned either [check and complete as applicable]: (a)____ has consulted, and has been fully advised by, the undersigned's own tax advisor, __________________________, whose business address is _____________________________, regarding the federal, state and local tax consequences of purchasing shares under the Plan, and particularly regarding the advisability of making elections pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code") and pursuant to the corresponding provisions, if any, of applicable state law; or (b)____ has knowingly chosen not to consult such a tax advisor. 3. The undersigned hereby states that the undersigned has decided [check as applicable]: (a)____ to make an election pursuant to Section 83(b) of the Code, and is submitting to the Company, together with the undersigned's executed Restricted Stock Purchase Agreement, an executed form entitled "Election Under Section 83(b) of the Internal Revenue Code of 1986;" or (b)____ not to make an election pursuant to Section 83(b) of the Code. 13 4. Neither the Company nor any subsidiary or representative of the Company has made any warranty or representation to the undersigned with respect to the tax consequences of the undersigned's purchase of shares under the Plan or of the making or failure to make an election pursuant to Section 83(b) of the Code or the corresponding provisions, if any, of applicable state law. Date: /s/ Jule Wainwright ------------------------------------ Julie Wainwright Date: /s/ David Agnew ------------------------------------ Spouse of Julie Wainwright -2- 14 EXHIBIT C ELECTION UNDER SECTION 83(b) OF THE INTERNAL REVENUE CODE OF 1986 The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the Internal Revenue Code, to include in taxpayer's gross income for the current taxable year, the amount of any compensation taxable to taxpayer in connection with taxpayer's receipt of the property described below: 1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows: NAME OF TAXPAYER: Julie Wainwright NAME OF SPOUSE: _____________________________ ADDRESS: _________________________________________________________ IDENTIFICATION NO. OF TAXPAYER: _______________ IDENTIFICATION NO. OF SPOUSE: _______________ TAXABLE YEAR: 1999 2. The property with respect to which the election is made is described as follows: 1,257,633 shares of the Common Stock $0.001 par value, of Pets.com, a California corporation (the "Company"). 3. The date on which the property was transferred is: _______________ 4. The property is subject to the following restrictions: Repurchase option at cost in favor of the Company upon termination of taxpayer's employment or consulting relationship. 5. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $ ________________. 6. The amount (if any) paid for such property: $_______________. The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property. The undersigned understands that the foregoing election may not be revoked except with the consent of the Commissioner. Dated: /s/ Julie Wainwright -------------------- ------------------------------------ Julie Wainwright Dated: /s/ Julie Wainwright -------------------- ------------------------------------ Spouse of Julie Wainwright EX-10.5 11 BILL OF SALE AND ASSIGNMENT 1 EXHIBIT 10.5 BILL OF SALE AND ASSIGNMENT This Bill of Sale and Assignment (the "Assignment") is made from Greg McLemore ("Mr. McLemore"), an individual, and Koala Computer Products, a sole proprietorship of Mr. McLemore (collectively, the "Sellers"), to Pets.com, a California corporation (the "Buyer"). Sellers desire to assign to Buyer all of Sellers' right, title and interest in and to the trademarks, copyrights and other assets set forth on Schedule 1 hereto (the "Schedule 1 Assets"), and Mr. McLemore desires to assign to Buyer all of Mr. McLemore's right, title and interest in and to the domain names and other assets set forth on Schedule 2 hereto (the "Schedule 2 Assets") all pursuant to the Common Stock Purchase Agreement entered into between Mr. McLemore and Buyer as of February 17, 1999. In consideration for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Sellers hereby assign, transfer, grant, sell and otherwise convey to Buyer all of Sellers' right, title and interest in and to the Schedule 1 Assets, including all common law rights therein, all intellectual property rights therein including trademarks and copyrights, and all registrations and applications to register therefor, together with the good will of the business symbolized by the trademarks or the other Schedule 1 Assets and the right to sue for all past, present and future infringements of the trademarks and copyrights, including the right to collect damages for such infringements, for Buyer's own use and benefit, and for the use and benefit of Buyer's successors, assigns and other legal representatives. Sellers agree to cooperate with Buyer to effect such assignment and transfer, including, without limitation, by executing any further documentation as Sellers may deem reasonably necessary. In consideration for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Mr. McLemore hereby assigns, transfers, grants, sells and otherwise conveys to Buyer all of Mr. McLemore's right, title and interest in and to the Schedule 2 Assets, including all common law rights therein, all intellectual property rights therein including trademarks and copyrights, and all registrations and applications to register therefor, together with the good will of the business symbolized by the domain names or the other Schedule 2 Assets and the right to sue for all past, present and future infringements of the trademarks and copyrights relating thereto, including the right to collect damages for such infringements, for Buyer's own use and benefit, and for the use and benefit of Buyer's successors, assigns and other legal representatives. Mr. McLemore agrees to cooperate with Buyer to effect such assignment and transfer, including, without limitation, by executing any further documentation as Mr. McLemore may deem reasonably necessary. AGREED AND ACCEPTED: GREG McLEMORE KOALA COMPUTER PRODUCTS /s/ Greg McLemore By: /s/ Greg McLemore - ---------------------------------- --------------------------------- Print Name: Greg McLemore Print Name: Greg McLemore ----------------------- ------------------------- Date: 2/17/99 Title: Owner ----------------------------- ------------------------------ Date: 2/17/99 ------------------------------- PETS.COM By: /s/ Greg McLemore ------------------------------- Print Name: Greg McLemore ----------------------- Title: CEO ---------------------------- Date: 2/17/99 ----------------------------- 2 Schedule 1 Assets 1. Pets.com logo on the Pets.com site 2. Pets specific data-used online including hotels which accept pets, breeders, etc. located on the Pets.com site 3. Pets.com database of members 4. Pets.com forum messages on the Pets.com site 5. Pet-related articles contained on the Pets.com site 6. Product catalog of approximately 5,000 descriptions and 7,000 product photos on the Pets.com site 7. HTML pages on the Pets.com site 3 Schedule 2 Assets A. Pets related domain names (see below) P-e-t-s.com Pets.com Pets.net Pets.org EX-10.6 12 OFFER LETTER W/JULIA L. WAINWRIGHT 1 EXHIBIT 10.6 PETS.COM, INC. 87 N. Raymond Avenue, Suite 850 Pasadena, California 91103 March 4, 1999 Julie Wainwright 2 South Park 2nd Floor San Francisco, CA 94107 Dear Julie: Pets.com, Inc. (the "Company") is pleased to offer you employment on the following terms: 1. POSITION. You will serve in a full-time capacity as the Chief Executive Officer (CEO) of the Company commencing upon the closing of the Series A financing, which is expected to occur in early March 1999. By signing this letter agreement, you represent and warrant to the Company that you are under no contractual commitments inconsistent with your obligations to the Company. 2. SALARY AND BENEFITS. You will be paid a salary at the annual rate of $l85,000, payable in semi-monthly installments in accordance with the Company's standard payroll practices for salaried employees. All other benefits, such as vacation time, health and medical benefits will be in accordance with the Company's benefits policies, which you will help to define, and which will be approved by the Company's Board of Directors. 3. STOCK OPTIONS. You will receive an option to purchase shares of Common Stock representing 9.2% of the fully diluted capitalization of the Company, after taking into account the Company's Series A Preferred Stock financing. The exercise price per share will be equal to the fair market value per share on the date the option is granted or on your first day of employment, whichever is later. The option will be immediately exercisable, but the purchased shares will be subject to repurchase by the Company at the exercise price in the event that your service as an employee terminates before you vest in the shares. You will vest in 25% of the option shares after 12 months of service, and the balance will vest in monthly installments over the next 36 months of service, as described in the applicable stock option agreement. In the event of a sale or merger of the Company, in which more than 51% of the voting power of the Company is transferred to a third party, 50% of your remaining unvested shares will accelerate and become fully vested. The option grant will be subject to the Company's Stock Plan and the execution by you of the form of Option Agreement under such plan. 4. PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. Like all Company employees, you will be required, as a condition to your employment with the Company, to sign the Company's standard Proprietary Information and Inventions Agreement. -1- 2 5. PERIOD OF EMPLOYMENT. Your employment with the Company will be "at will," meaning that either you or the Company will be entitled to terminate your employment at any time and for any reason, with or without cause. Any contrary representations which may have been made to you are superseded by this offer. This is the full and complete agreement between you and the Company on this term. Should the Company be acquired, you agree that upon request of the acquiring company you will assist the Company with post-acquisition transitional matters for a period of up to six months. 6. OUTSIDE ACTIVITIES. While you render services to the Company, you will not engage in any other gainful employment, business or activity without the written consent of the Company. While you render services to the Company, you also will not assist any person or organization in competing with the Company, in preparing to compete with the Company or in hiring any employees of the Company. 7. WITHHOLDING TAXES. All forms of compensation referred to in this letter are subject to reduction to reflect applicable withholding and payroll taxes. 8. ENTIRE AGREEMENT. Except for the Company's standard Optional Agreement and Proprietary Inventions and Assignment Agreement, this letter contains all of the terms of your employment with the Company and supersedes any prior understandings or agreements, whether oral or written, between you and the Company. 9. AMENDMENT AND GOVERNING LAW. This letter agreement may not be amended or modified except by an express written agreement signed by you and a duly authorized officer of the Company. The terms of this letter agreement and the resolution of any disputes will be governed by California law. We hope that you find the foregoing terms acceptable. We are excited to have you join the Company and value your role in helping make Pets.com a great success. You may indicate your agreement with these terms and accept this offer by signing and dating the enclosed duplicate original of this letter and returning it to me. As required by law, your employment with the Company is also contingent upon your providing legal proof of your identity and authorization to work in the United States. -2- 3 We look forward to having you join us as soon as possible. Very truly yours, GREG McLEMORE ANN WINBLAD By: /s/ Greg McLemore By: /s/ Ann Winblad --------------------------------- --------------------------------- I have read and accept this employment offer: /s/ Julie Wainwright - --------------------------------- Signature of Julie Wainwright Dated: March 4, 1999 -3- EX-10.7 13 OFFER LETTER W/KATHRYN C. RINGEWALD 1 EXHIBIT 10.7 Ms. KC Ringewald Larkspur, CA March 19, 1999 Dear KC, I am pleased to offer you the position of Vice President of Human Resources for Pets.com. In this position you will be responsible for creating a great working environment, for recruiting, for recommending and implementing a benefits package, for ensuring that Pets.com meets all local and national laws for its employees and for contributing to the strategy and tactics directed by the senior management team. In this position you will be reporting to the CEO. As you know, Pets.com is a cross-functional team environment, therefore, you will be expected to work with all departments to effectively maximize company goals. Your salary is $120,000 per year with stock of 125,763 shares (1% of outstanding shares). Your salary will be paid in accordance with company pay periods and your stock will vest over four years with a one year cliff and then monthly vesting. You will also be eligible for two weeks vacation the first year of employment and three weeks thereafter. Your start date will be April 5, 1999. KC, I look forward to working with you once again. I believe that this is going to be a fun, challenging and rewarding experience. This offer expires at 5 pm on March 22, 1999. Please sign this letter and return it to me to signify your acceptance. Warm regards, /s/ Julie Wainwright - --------------------- Julie L. Wainwright CEO Pets.com I accept /s/ KC Ringewald March 19th, 1999 - ----------------- ---------------- KC Ringewald Date -1- EX-10.8 14 OFFER LETTER W/CHRISTOPHER E. DEYO 1 EXHIBIT 10.8 PETS.COM, INC. 87 N. Raymond Avenue, Suite 850 Pasadena, California 91103 March 24, 1999 Chris Deyo 224 Upper Terrace San Francisco, CA 94117 Dear Chris Pets.com, Inc. (the "Company") is pleased to offer you employment on the following terms: 1. POSITION. You will serve in a full-time capacity as the President of the Company commencing upon the closing of the Series A financing, which is expected to occur in late March 1999. By signing this letter agreement, you represent and warrant to the Company that you are under no contractual commitments inconsistent with your obligations to the Company. 2. SALARY AND BENEFITS. You will be paid a salary at the annual rate of $185,000, payable in semi-monthly installments in accordance with the Company's standard payroll practices for salaried employees. All other benefits, such as vacation time, health and medical benefits will be in accordance with the Company's benefits policies, which you will help to define, and which will be approved by the Company's Board of Directors. 3. STOCK OPTIONS. You will receive an option to purchase shares of Common Stock representing 5.2% of the fully diluted capitalization of the Company, after taking into account the Company's Series A Preferred Stock financing. The exercise price per share will be equal to the fair market value per share on the date the option is granted or on your first day of employment whichever is later. The option will be immediately exercisable, but the purchased shares will be subject to repurchase by the Company at the exercise price in the event that your service as an employee terminates before you vest in the shares. You will vest in 25% of the option shares after 12 months of service, and the balance will vest in monthly installments over the next 36 months of service, as described in the applicable stock option agreement. In the event of a sale or merger of the Company, in which more than 51% of the voting power of the Company is transferred to a third party, 50% of your remaining unvested shares will accelerate and become fully vested. The option grant wilt be subject to the Company's Stock Plan and the execution by you of the form of Option Agreement under such plan. 4. PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. Like all Company employees, you will be required, as a condition to your employment with the Company, to sign the Company's standard Proprietary Information and Inventions Agreement. 5. PERIOD OF EMPLOYMENT. Your employment with the Company will be "at will," meaning that either you or the Company will be entitled to terminate your employment at any time and for any reason, with or without cause. Any contrary representations which may have been made to you are superseded by this offer. This is the full and complete agreement between -1- 2 you and the Company on this term. Should the Company be acquired, you agree that upon request of the acquiring company you will assist the Company with post-acquisition transitional matters for a period of up to six months. 6. OUTSIDE ACTIVITIES. While you render services to the Company, you will not engage in any other gainful employment, business or activity without the written consent of the Company. While you tender services to the Company, you also will not assist any person or organization in competing with the Company, in preparing to compete with the Company or in hiring any employees of the Company. 7. WITHHOLDING TAXES. All forms of compensation referred to in this letter are subject to reduction to reflect applicable withholding and payroll taxes. 8. ENTIRE AGREEMENT. Except for the Company's standard Option Agreement and Proprietary Inventions and Assignment Agreement, this letter contains all of the terms of your employment with the Company and supersedes any prior understandings or agreements, whether oral or written, between you and the Company. 9. AMENDMENT AND GOVERNING LAW. This letter agreement may not be amended or modified except by an express written agreement signed by you and a duly authorized officer of the Company. The terms of this letter agreement and the resolution of any dispute will be governed by California law. We hope that you find the foregoing terms acceptable. We are excited to have you join the Company and value your role in helping make Pets.com a great success. You may indicate your agreement with these terms and accept this offer by signing and dating the enclosed duplicate original of this letter and returning it to me. As required by law, your employment with the Company is also contingent upon your providing legal proof of your identity and authorization to work in the United States. We look forward to having you join us as soon as possible. Very truly yours, /s/ Julie Wainwright ------------------------------------ Julie Wainwright CEO -2- 3 I have read and accept this employment offer: /s/ Chris Deyo - -------------------------------- Signature of Chris Deyo -3- EX-10.9 15 OFFER LETTER W/JOHN M. HOLLON 1 EXHIBIT 10.9 Mr. John Hollon March 26, 1999 Dear John, I am pleased to offer you the position of Vice President of Editorial for Pets.com pending successful completion of your reference checks. In this position you will be responsible for building a team, recommending and implementing an editorial plan and directing the content of the site to maximize consumer retention and generally provide superior content to pet owners. In this position you will be reporting to the President. As you know, Pets.com is a cross-functional team environment, therefore, you will be expected to work with all departments to effectively maximize company goals. Your salary is $100,000 per year with stock of 125,000 shares. Your salary will be paid in accordance with company pay periods and your stock will vest over four years with a one year cliff and then monthly vesting. You will also be eligible for two weeks vacation the first year of employment and three weeks thereafter. You will also receive a signing bonus of $10,000 payable within the first thirty days of your employment. Pets.com will also be providing you with a relocation package to be negotiated. You will be considered an "at will" employee. Your start date will be no later than April 19, 1999. John, I look forward to working with you. I believe that this is going to be a fun, challenging and rewarding experience. Please sign this letter and return it to me to signify your acceptance. This offer expires on April 8, 1999 at 5pm PST. Warm regards, Julie L Wainwright CEO Pets.com -1- 2 I accept /s/ John W. Hollon 5-5-99 - ------------------------ ------------- John Hollon Date -2- EX-10.10 16 OFFER LETTER W/PAUL G. HELMON 1 EXHIBIT 10.10 April 7, 1999 Paul Melmon 1408 Cordilleras Avenue San Carlos, CA 94070 Dear Paul, On behalf of Pets.com, Inc. (the "Company"), I am pleased to offer you the position of Vice President of Engineering of the Company. Speaking for myself, as well as the other members of the Company's management team, we are all very impressed with your background and experience and look forward to working with you. The terms of your new position with the Company are as set forth below: 1. POSITION. a. You will become the Vice President of Engineering of the Company, working out of the Company's headquarters which will be located in San Francisco. As Vice President of Engineering you will have overall responsibility for hiring and leading the teams in Engineering and Development, Network Operations and Quality Assurance. As a member of the senior management team you will participate in setting strategy for the Company and you will set technology strategy and be responsible for the successful and timely implementation of the Company's technology roadmaps. This includes building a world class team. In this position you will report to the Company's Chief Executive Officer, Julie Wainwright b. You agree to the best of your ability and experience that you will at all times loyally and conscientiously perform all of the duties and obligations required of and from you pursuant to the express and implicit terms hereof, and to the reasonable satisfaction of the Company. During the term of your employment, you further agree that you will devote all of your business time and attention to the business of the Company, the Company will be entitled to all of the benefits and profits arising from or incident to all such work services and advice, you will not render commercial or professional services of any nature to any person or organization, whether or not for compensation, without the prior written consent of the Company's Board of Directors, and you will not directly or indirectly engage or participate in any business that is competitive in any manner with the business of the Company. Nothing in this letter agreement will prevent you from -accepting speaking or presentation engagements in exchange for honoraria or from serving on 2 boards of charitable organizations, or from owning no more than one percent (1%) of the outstanding equity securities of a corporation whose stock is listed on a national stock exchange. 2. START DATE. Subject to fulfillment of any conditions imposed by this letter agreement, you will commence this new position with the Company on April 26, 1999. 3. PROOF OF RIGHT TO WORK. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated. 4. COMPENSATION. a. BASE SALARY. You will be paid a monthly salary of $13,333.33, which is equivalent to $160,000.00 on an annualized basis. Your salary will be payable pursuant to the Company's regular payroll policy. 5. STOCK OPTIONS. [a. INITIAL GRANT. In connection with the commencement of your employment, the Company will recommend that the Board of Directors grant you an option to purchase 238,950 (1.9%) shares of the Company's Common Stock ("Shares") with an exercise price equal to the fair market value on the date of the grant. These option shares will vest at the rate of 25% one year after your hire date and 1/48th per month thereafter. Vesting will, of course, depend on your continued employment with the Company. The option will be an incentive stock option to the maximum extent allowed by the tax code and will be subject to the terms of the Company's 1999 Stock Plan and the Stock Option Agreement between you and the Company. b. PERSONAL TIME OFF. You will be entitled to 10 days paid personal time off (PTO) per year, pro-rated for the remainder of this calendar year. Vacation accrues from your first day of employment. 6. CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENT. Your acceptance of this offer and commencement of employment with the Company is contingent upon the execution, and delivery to an officer of the Company, of the Company's Confidential Information and Invention Assignment Agreement, a copy of which is enclosed for your review and execution (the "Confidentiality Agreement"), prior to or on your Start Date. 7. CONFIDENTIALITY OF TERMS. You agree to follow the Company's strict policy that employees must not disclose, either directly or indirectly, any information, including any of the terms of this agreement, regarding salary, bonuses, or stock purchase or option allocations to any person, including other employees of the Company; provided, however, that you may discuss such terms with members of your immediate family and any legal, tax or accounting specialists who provide you with individual legal, tax or accounting advice. -2- 3 8. AT-WILL EMPLOYMENT. Notwithstanding the Company's obligation described in Section 8 above, your employment with the Company will be on an "at will" basis, meaning that either you or the Company may terminate your employment at any time for any reason or no reason, without further obligation or liability. We are all delighted to be able to extend you this offer and look forward to working with you. To indicate your acceptance of the Company's offer, please sign and date this letter in the space provided below and return it to me, along with a signed and dated copy of the Confidentiality Agreement. This letter, together with the Confidentiality Agreement, set forth the terms of your employment with the Company and supersede any prior representations or agreements, whether written or oral. This letter may not be modified or amended except by a written agreement, signed by the Company and by you. This offer expires April 8, 1999 at 5 PM PST. Very truly yours, PETS.COM, INC. /s/ Julie Wainwright ------------------------------------ Julie Wainwright, Chief Executive Officer ACCEPTED AND AGREED: Paul MelmOn /s/ Paul Melmon - --------------------------------- Signature 4/8/99 - --------------------------------- Date -3- EX-10.11 17 OFFER LETTER W/JOHN R. BENJAMIN 1 EXHIBIT 10.11 PETS.COM, INC. 5903 Christie Avenue Emeryville, CA 94608 April 21, 1999 John Benjamin 2016 Troy Place Vista, CA 92084 Dear John, On behalf of Pets.com, Inc. (the "Company"), I am pleased to offer you the position of Vice President of Merchandising of the Company. Speaking for myself, as well as the other members of the Company's management team, we are all very impressed with your experience and we look forward to working with you. The terms of your new position with the Company are as set forth below: 1. POSITION. a. You will become Vice President of Merchandising of the Company, working out of the Company's headquarters office in San Francisco. As Vice President of Merchandising you will have overall responsibility for hiring and leading a world class team. You will report to the Company's Chief Executive Officer. b. You agree to the best of your ability and experience that you will at all times loyally and conscientiously perform all of the duties and obligations required of and from you pursuant to the express and implicit terms hereof, and to the reasonable satisfaction of the Company. During the term of your employment, you further agree that you will devote all of your business time and attention to the business of the Company, the Company will be entitled to all of the benefits and profits arising from or incident to all such work services and advice, you will not render commercial or professional services of any nature to any person or organization, whether or not for compensation, without the prior written consent of the Company's Board of Directors, and you will not directly or indirectly engage or participate in any business that is competitive in any manner with the business of the Company. Nothing in this letter agreement will prevent you from accepting speaking or presentation engagements in exchange for honoraria or from serving on boards of charitable organizations, or from owning no more than one percent (1%) of the outstanding equity securities of a corporation whose stock is listed on a national stock exchange. 2. START DATE. Subject to fulfillment of any conditions imposed by this letter agreement, you will commence this new position with the Company on May 17, 1999. 3. PROOF OF RIGHT TO WORK. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for -1- 2 employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated. 4. COMPENSATION. a. BASE SALARY. You will be paid a monthly salary of $10,416.66, which is equivalent to $125,000. on an annualized basis. Your salary will be payable pursuant to the Company's regular payroll policy. b. RELOCATION EXPENSES. In connection with your relocation from Vista to San Francisco, the Company will provide you with a $25,000. Relocation allowance. In the unlikely event that you voluntarily terminate your employment with the Company before the end of six months of employment, you agree to repay the Company the relocation allowance amount, pro-rated for months of service with the Company. Any amounts received by you for relocation expense reimbursement will be reported as taxable income to you in the year received as required by applicable tax law. 5. STOCK OPTIONS. a. INITIAL GRANT. In connection with the commencement of your employment, the Company will recommend that the Board of Directors grant you an option to purchase 90,000 shares of the Company's Common Stock ("Shares") with an exercise price equal to the fair market value on the date of the grant. These option shares will vest at the rate of 25% one year after your hire date and 1/48th per month thereafter. Vesting will, of course, depend on your continued employment with the Company. The option will be an incentive stock option to the maximum extent allowed by the tax code and will be subject to the terms of the Company's 1999 Stock Plan and the Stock Option Agreement between you and the Company. 6. BENEFITS. a. EMPLOYEE BENEFITS. You will be eligible for employee medical, dental and 401(k) benefits, once established by the Company. Prior to that time, the Company will reimburse you for your COBRA payments. b. PERSONAL TIME OFF(PTO). You will be entitled to 10 days paid time off per year, pro-rated for the remainder of this calendar year. You will begin accruing PTO from your first day of employment. After your first year, your accrual rate will increase to 15 days paid time off. c. COMPANY HOLIDAYS. You will be eligible for all Company holidays, once established by the Company. 7. CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENT. Your acceptance of this offer and commencement of employment with the Company is contingent upon the execution, and delivery to an officer of the Company, of the Company's Confidential -2- 3 Information and Invention Assignment Agreement, a copy of which is enclosed for your review and execution (the "Confidentiality Agreement"), prior to or on your Start Date. 8. CONFIDENTIALITY OF TERMS. You agree to follow the Company's strict policy that employees must not disclose, either directly or indirectly, any information, including any of the terms of this agreement, regarding salary, bonuses, or stock purchase or option allocations to any person, including other employees of the Company; provided, however, that you may discuss such terms with members of your immediate family and any legal, tax or accounting specialists who provide you with individual legal, tax or accounting advice. 9. AT-WILL EMPLOYMENT. Your employment with the Company will be on an "at will" basis, meaning that either you or the Company may terminate your employment at any time for any reason or no reason, without further obligation or liability. John, we are all delighted to be able to extend you this offer and look forward to working with you. To indicate your acceptance of the Company's offer, please sign and date this letter in the space provided below and return it to me, along with a signed and dated copy of the Confidentiality Agreement. This letter, together with the Confidentiality Agreement, set forth the terms of your employment with the Company and supersede any prior representations or agreements, whether written or oral. This letter may not be modified or amended except by a written agreement, signed by the Company and by you. This offer of employment expires at 5:00 PM (PST) on Wednesday, April 21, 1999. Very truly yours, PETS.COM, INC. /s/ Julie Wainwright ----------------------------------- Julie Wainwright, Chief Executive Officer ACCEPTED AND AGREED: /s/ John Benjamin - ---------------------------------- John Benjamin Date: April 21, 1999 -3- EX-10.12 18 OFFER LETTER W/DIANE R. HOURANY 1 EXHIBIT 10.12 PETS.COM, INC. 5903 Christie Avenue Emeryville, CA 94608 April 22, 1999 Diane Hourany 870 Florida Street San Francisco, CA 94110 Dear Diane, On behalf of Pets.com, Inc. (the "Company"), I am pleased to offer you the position of Vice President of Operations. Speaking for myself, as well as the other members of the Company's management team, we are all very excited about you joining the team and we look forward to working with you. The terms of your new position with the Company are as set forth below: 1. POSITION. a. You will become Vice President of Operations, working out of the Company's headquarters office in San Francisco. As Vice President of Operations you will have overall responsibility for hiring, training and leading a world class Operations team. You will report to the Chief Executive Officer. b. You agree to the best of your ability and experience that you will at all times loyally and conscientiously perform all of the duties and obligations required of and from you pursuant to the express and implicit terms hereof, and to the reasonable satisfaction of the Company. During the term of your employment, you further agree that you will devote all of your business time and attention to the business of the Company, the Company will be entitled to all of the benefits and profits arising from or incident to all such work services and advice, you will not render commercial or professional services of any nature to any person or organization, whether or not for compensation, without the prior written consent of the Company's Board of Directors, and you will not directly or indirectly engage or participate in any business that is competitive in any manner with the business of the Company. Nothing in this letter agreement will prevent you from accepting speaking or presentation engagements in exchange for honoraria or from serving on boards of charitable organizations, or from owning no more than one percent (1%) of the outstanding equity securities of a corporation whose stock is listed on a national stock exchange. 2. START DATE. Subject to fulfillment of any conditions imposed by this letter agreement, you will commence this new position with the Company on or before April 28, 1999. 3. PROOF OF RIGHT TO WORK. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for -1- 2 employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated. 4. COMPENSATION. a. BASE SALARY. You will be paid a monthly salary of $12,500 which is equivalent to $150,000. on an annualized basis. Your salary will be payable pursuant to the Company's regular payroll policy. b. BONUS. You will be eligible to receive a one time bonus of $10,000 payable with your first eligible payroll. In the unlikely event that you voluntarily terminate your employment with the Company before the end of six months of employment, you agree to repay the Company the bonus amount, pro-rated for months of service with the Company. 5. STOCK OPTIONS. a. INITIAL GRANT. In connection with the commencement of your employment, the Company will recommend that the Board of Directors grant you an option to purchase 157,204 shares of the Company's Common Stock ("Shares") with an exercise price equal to the fair market value on the date of the grant. These option shares will vest at the rate of 25% one year after your hire date and 1/48th per month thereafter. Vesting will, of course, depend on your continued employment with the Company. The option will be an incentive stock option to the maximum extent allowed by the tax code and will be subject to the terms of the Company's 1999 Stock Plan and the Stock Option Agreement between you and the Company. 6. BENEFITS. a. EMPLOYEE BENEFITS. You will be eligible for employee medical, dental and 401(k) benefits, once established by the Company. Prior to that time, the Company will reimburse you for your COBRA payments. b. PERSONAL TIME OFF(PTO). You will be entitled to 10 days paid time off per year, pro-rated for the remainder of this calendar year. You will begin accruing PTO from your first day of employment. After your first year, your accrual rate will increase to 15 days paid time off. c. COMPANY HOLIDAYS. You will be eligible for all Company holidays, once established by the Company. 7. CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENT. Your acceptance of this offer and commencement of employment with the Company is contingent upon the execution, and delivery to an officer of the Company, of the Company's Confidential Information and Invention Assignment Agreement, a copy of which is enclosed for your review and execution (the "Confidentiality Agreement"), prior to or on your Start Date. -2- 3 8. CONFIDENTIALITY OF TERMS. You agree to follow the Company's strict policy that employees must not disclose, either directly or indirectly, any information, including any of the terms of this agreement, regarding salary, bonuses, or stock purchase or option allocations to any person, including other employees of the Company; provided, however, that you may discuss such terms with members of your immediate family and any legal, tax or accounting specialists who provide you with individual legal, tax or accounting advice. 9. AT-WILL EMPLOYMENT. Your employment with the Company will be on an "at will" basis, meaning that either you or the Company may terminate your employment at any time for any reason or no reason, without further obligation or liability. 10. STOCK ACCELERATION. In the event of a sale or merger of the Company, in which more than 51% of the voting power of the Company is transferred to a third party, 25% of your remaining unvested shares will accelerate and become fully vested. 11. TERMINATION. In the event of a sale or merger of the Company, in which more than 51% of the voting power of the Company is transferred to a third party and your employment is terminated with or without cause within one year after the acquisition or the office is moved within 50 miles of its San Francisco location you will receive a severance equal to three months of your current monthly salary. Diane, we are all delighted to be able to extend you this offer and look forward to working with you. To indicate your acceptance of the Company's offer, please sign and date this letter in the space provided below and return it to me, along with a signed and dated copy of the Confidentiality Agreement. This letter, together with the Confidentiality Agreement, set forth the terms of your employment with the Company and supersede any prior representations or agreements, whether written or oral. This letter may not be modified or amended except by a written agreement, signed by the Company and by you. This offer of employment expires at 5:00 PM (PST) on Monday, April 26, 1999. Very truly yours, PETS.COM, INC. /s/ Julie Wainwright ----------------------------------- Julie Wainwright, Chief Executive Officer ACCEPTED AND AGREED: /s/ Diane Hourany - --------------------------------- Diane Hourany Date: April 23, 1999 -3- EX-10.13 19 OFFER LETTER W/SUE ANN LATTERMAN 1 EXHIBIT 10.13 PETS.COM, INC. May 1, 1999 Sue Ann Latterman VMD 860 Murchison Drive Millbrae, CA 94030 Dear Sue Ann, On behalf of Pets.com, Inc. (the "Company"), I am pleased to offer you the position of Vice President of Business Development. Speaking for myself, as well as the other members of the Company's management team, we continue to be impressed with your experience and we look forward to your future success with the Company. The terms of your new position with the Company are as set forth below: 1. POSITION. a. You will become the Vice President of Business Development of the Company, working out of the Company's headquarters office in San Francisco, California. As Vice President of Business Development you will be a key member of the Company's senior management team and will have overall responsibility for building strategic relationships with companies in the Internet and pet segment. You will report to the Company's President. b. You agree to the best of your ability and experience that you will at all times loyally and conscientiously perform all of the duties and obligations required of and from you pursuant to the express and implicit terms hereof, and to the reasonable satisfaction of the Company. During the term of your employment, you further agree that you will devote all of your business time and attention to the business of the Company, the Company will be entitled to all of the benefits and profits arising from or incident to all such work services and advice, you will not render commercial or professional services of any nature to any person or organization, whether or not for compensation, without the prior written consent of the Company's Board of Directors, and you will not directly or indirectly engage or participate in any business that is competitive in any manner with the business of the Company. Nothing in this letter agreement will prevent you from accepting speaking or presentation engagements in exchange for honoraria or from serving on boards of charitable organizations, or from owning no more than one percent (1%) of the outstanding equity securities of a corporation whose stock is listed on a national stock exchange. -1- 2 2. START DATE. Subject to fulfillment of any conditions imposed by this letter agreement, you will commence this new position with the Company on May 17, 1999. 3. PROOF OF RIGHT TO WORK. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated. 4. COMPENSATION. a. BASE SALARY. You will be paid a monthly salary of $12,500.00 which is equivalent to $150,000 on an annualized basis. Your salary will be payable pursuant to the Company's regular payroll policy. b. BONUS. You will be eligible to receive a one time bonus of $10,000 payable with your first eligible payroll. In the unlikely event that you voluntarily terminate your employment with the Company before the end of six months of employment, you agree to repay the Company the bonus amount, pro-rated for months of service with the Company. 5. STOCK OPTIONS. a. INITIAL GRANT. In connection with the commencement of your employment, the Company will recommend that the Board of Directors grant you an option to purchase 150,000 shares of the Company's Common Stock ("Shares") with an exercise price equal to the fair market value on the date of the grant. These option shares will vest at the rate of 25% one year after your hire date and 1/48th per month thereafter. Vesting will, of course, depend on your continued employment with the Company. The option will be an incentive stock option to the maximum extent allowed by the tax code and will be subject to the terms of the Company's 1999 Stock Plan and the Stock Option Agreement between you and the Company. 6. BENEFITS. a. EMPLOYEE BENEFITS. You will be eligible for employee medical, dental and 401(k) benefits, once established by the Company. Prior to that time, the Company will reimburse you for your COBRA payments. b. PERSONAL TIME OFF(PTO). You will be entitled to 10 days paid time off per year, pro-rated for the remainder of this calendar year. You will begin accruing PTO from your first day of employment. c. COMPANY HOLIDAYS. You will be eligible for all Company holidays, once established by the Company. 7. CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENT. Your acceptance of this offer and commencement of employment with the Company is contingent upon the execution, and delivery to an officer of the Company, of the Company's Confidential -2- 3 Information and Invention Assignment Agreement, a copy of which is enclosed for your review and execution (the "Confidentiality Agreement"), prior to or on your Start Date. 8. CONFIDENTIALITY OF TERMS. You agree to follow the Company's strict policy that employees must not disclose, either directly or indirectly, any information, including any of the terms of this agreement, regarding salary, bonuses, or stock purchase or option allocations to any person, including other employees of the Company; provided, however, that you may discuss such terms with members of your immediate family and any legal, tax or accounting specialists who provide you with individual legal, tax or accounting advice. 9. AT-WILL EMPLOYMENT. Your employment with the Company will be on an "at will" basis, meaning that either you or the Company may terminate your employment at any time for any reason or no reason, without further obligation or liability. Sue Ann, we are all delighted to be able to extend you this offer and look forward to working with you. To indicate your acceptance of the Company's offer, please sign and date this letter in the space provided below and return it to me, along with a signed and dated copy of the Confidentiality Agreement. This letter, together with the Confidentiality Agreement, set forth the terms of your employment with the Company and supersede any prior representations or agreements, whether written or oral. This letter may not be modified or amended except by a written agreement, signed by the Company and by you. This offer of employment expires at 5:00 PM PST on May 4, 1999. Very truly yours, PETS.COM, INC. /s/ Chris Deyo ------------------------------------ President, Chris Deyo ACCEPTED AND AGREED: /s/ Sue Ann Latterman VMD - --------------------------------- Sue Ann Latterman VMD Date: May 4, 1999 ---------------------------- -3- EX-10.14 20 OFFER LETTER W/JOHN A. HOMMEYER 1 EXHIBIT 10.14 PETS.COM, INC. May 5, 1999 John Hommeyer 111 Terrace Place Terrace Park, OH 45174 Dear John, On behalf of Pets.com, Inc. (the "Company"), I am pleased to offer you the position of Vice President of Marketing. Speaking for myself, as well as the other members of the Company's management team, we continue to be impressed with your experience and we look forward to your future success with the Company. The terms of your new position with the Company are as set forth below: 1. POSITION. a. You will become the Vice President of Marketing of the Company, working out of the Company's headquarters office in San Francisco, California. As Vice President of Marketing you will be a key member of the Company's senior management team and will have overall responsibility for hiring, training and managing a world class team. You will report to the Company's President. b. You agree to the best of your ability and experience that you will at all times loyally and conscientiously perform all of the duties and obligations required of and from you pursuant to the express and implicit terms hereof, and to the reasonable satisfaction of the Company. During the term of your employment, you further agree that you will devote all of your business time and attention to the business of the Company, the Company will be entitled to all of the benefits and profits arising from or incident to all such work services and advice, you will not render commercial or professional services of any nature to any person or organization, whether or not for compensation, without the prior written consent of the Company's Board of Directors, and you will not directly or indirectly engage or participate in any business that is competitive in any manner with the business of the Company. Nothing in this letter agreement will prevent you from accepting speaking or presentation engagements in exchange for honoraria or from serving on boards of charitable organizations, or from owning no more than one percent (1%) of the outstanding equity securities of a corporation whose stock is listed on a national stock exchange. -1- 2 2. START DATE. Subject to fulfillment of any conditions imposed by this letter agreement, you will commence this new position with the Company on May 19, 1999. 3. PROOF OF RIGHT TO WORK. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated. 4. COMPENSATION. a. BASE SALARY. You will be paid a monthly salary of $13,750 which is equivalent to $165,000 on an annualized basis. Your salary will be payable pursuant to the Company's regular payroll policy. b. BONUS. You will be eligible to receive a one time bonus of $20,000.00 payable with your first eligible payroll. In the unlikely event that you voluntarily terminate your employment with the Company before the end of six (6) months of employment, you agree to repay the Company the bonus amount, pro-rated for months of service with the Company. c. RELOCATION EXPENSE. In connection with your relocation from Ohio to San Francisco, the Company will provide you with a $25,000 Relocation allowance. In the unlikely event that you voluntarily terminate your employment with the Company before the end of six months of employment, you agree to repay the Company the relocation allowance amount, pro-rated for months of service with the Company. Any amounts received by you for relocation expense reimbursement will be reported as taxable income to you in the year received as required by applicable tax law. 5. STOCK OPTIONS. a. INITIAL GRANT. In connection with the commencement of your employment, the Company will recommend that the Board of Directors grant you an option to purchase 150,000 shares of the Company's Common Stock ("Shares") with an exercise price equal to the fair market value on the date of the grant. These option shares will vest at the rate of 25% one year after your hire date and 1/48th per month thereafter. Vesting will, of course, depend on your continued employment with the Company. The option will be an incentive stock option to the maximum extent allowed by the tax code and will be subject to the terms of the Company's 1999 Stock Plan and the Stock Option Agreement between you and the Company. 6. BENEFITS. a. EMPLOYEE BENEFITS. You will be eligible for employee medical, dental and 401(k) benefits, once established by the Company. Prior to that time, the Company will reimburse you for your COBRA payments. -2- 3 b. PERSONAL TIME OFF(PTO). You will be entitled to 10 days paid time off per year, pro-rated for the remainder of this calendar year. You will begin accruing PTO from your first day of employment. c. COMPANY HOLIDAYS. You will be eligible for all Company holidays, once established by the Company. 7. CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENT. Your acceptance of this offer and commencement of employment with the Company is contingent upon the execution, and delivery to an officer of the Company, of the Company's Confidential Information and Invention Assignment Agreement, a copy of which is enclosed for your review and execution (the "Confidentiality Agreement"), prior to or on your Start Date. 8. CONFIDENTIALITY OF TERMS. You agree to follow the Company's strict policy that employees must not disclose, either directly or indirectly, any information, including any of the terms of this agreement, regarding salary, bonuses, or stock purchase or option allocations to any person, including other employees of the Company; provided, however, that you may discuss such terms with members of your immediate family and any legal, tax or accounting specialists who provide you with individual legal, tax or accounting advice. 9. AT-WILL EMPLOYMENT. Your employment with the Company will be on an "at will" basis, meaning that either you or the Company may terminate your employment at any time for any reason or no reason. 10. TERMINATION. In the event of a sale or merger of the Company, in which more than fifty-one percent (51%) of the voting power of the Company is transferred to a third party and your employment is terminated with or without cause within one (1) year after the acquisition or the office is moved more than fifty (50) miles of its San Francisco location, you will receive a severance equal to three (3) months of your current monthly salary. John, we are all delighted to be able to extend you this offer and look forward to working with you. To indicate your acceptance of the Company's offer, please sign and date this letter in the space provided below and return it to me, along with a signed and dated copy of the Confidentiality Agreement. This letter, together with the Confidentiality Agreement, set forth the terms of your employment with the Company and supersede any prior representations or agreements, whether written or oral. This letter may not be modified or amended except by a written agreement, signed by the Company and by you. This offer of employment expires at 5:00 PM PST on May 6, 1999. Very truly yours, PETS.COM, INC. -3- 4 /s/ Chris Deyo ------------------------------------ President, Chris Deyo ACCEPTED AND AGREED: /s/ John Hommeyer - --------------------------------- John Hommeyer Date: May 6, 1999 ---------------------------- -4- EX-10.15 21 OFFER LETTER W/PAUL G. MANCA 1 EXHIBIT 10.15 August 20, 1999 Paul G. Manca 6654 Pineneedle Drive Oakland, CA 94611 Dear Paul, On behalf of Pets.com, Inc. (the "Company"), I am pleased to offer you the position of Chief Financial Officer. Speaking for myself, as well as the other members of the Company's management team, we continue to be impressed with your experience and we look forward to your future success with the Company. The terms of your new position with the Company are as set forth below: 1. POSITION. a. You will become our Chief Financial Officer, working out of the Company's headquarters office in San Francisco, California. As a member of the Company's senior management team you will report to the Chief Executive Officer of the Company. b. You agree to the best of your ability and experience that you will at all times loyally and conscientiously perform all of the duties and obligations required of and from you pursuant to the express and implicit terms hereof, and to the reasonable satisfaction of the Company. During the term of your employment, you further agree that you will devote all of your business time and attention to the business of the Company, the Company will be entitled to all of the benefits and profits arising from or incident to all such work services and advice, you will not render commercial or professional services of any nature to any person or organization, whether or not for compensation, without the prior written consent of the Company's Board of Directors, and you will not directly or indirectly engage or participate in any business that is competitive in any manner with the business of the Company. Nothing in this letter agreement will prevent you from accepting speaking or presentation engagements in exchange for honoraria or from serving on boards of charitable organizations, or from owning no more than one percent (1%) of the outstanding equity securities of a corporation whose stock is listed on a national stock exchange. 2. START DATE. Subject to fulfillment of any conditions imposed by this letter agreement, you will commence this new position with the Company on or before August 30, 1999. 3. PROOF OF RIGHT TO WORK. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated. -1- 2 4. COMPENSATION. a. BASE SALARY. You will be paid a monthly salary of $14,583.33, which is equivalent to $175,000.00 on an annualized basis. Your salary will be payable pursuant to the Company's regular payroll policy. 5. STOCK OPTIONS. a. INITIAL GRANT. In connection with the commencement of your employment, the Company will recommend that the Board of Directors grant you an option to purchase 250,000 shares of the Company's Common Stock ("Shares") with an exercise price equal to the fair market value on the date of the grant. These option shares will vest at the rate of 25% one year after your hire date and l/48th per month thereafter. Vesting will, of course, depend on your continued employment with the Company. The option will be an incentive stock option to the maximum extent allowed by the tax code and will be subject to the terms of the Company's 1999 Stock Plan and the Stock Option Agreement between you and the Company. 6. BENEFITS. a. EMPLOYEE BENEFITS On the first of the month following your hire date, you will be eligible to participate in employee medical, dental and vision benefits. b. PERSONAL TIME OFF (PTO) You will be entitled to 10 days paid time off per year, pro-rated for the remainder of this calendar year. You will begin accruing PTO from your first day of employment. c. COMPANY HOLIDAYS You will be eligible for all Company holidays. 7. CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENT. Your acceptance of this offer and commencement of employment with the Company is contingent upon the execution, and delivery to an officer of the Company, of the Company's Confidential Information and Invention Assignment Agreement, a copy of which is enclosed for your review and execution (the "Confidentiality Agreement"), prior to or on your Start Date. 8. CONFIDENTIALITY OF TERMS. You agree to follow the Company's strict policy that employees must not disclose, either directly or indirectly, any information, including any of the terms of this agreement, regarding salary, bonuses, or stock purchase or option allocations to any person, including other employees of the Company; provided, however, that you may discuss such terms with members of your immediate family and any legal, tax or accounting specialists who provide you with individual legal, tax or accounting advice. 9. AT-WILL EMPLOYMENT. Your employment with the Company will be on an "at will" basis, meaning that either you or the Company may terminate your employment at any time for any reason or no reason. Paul, we are all delighted to be able to extend you this offer and look forward to working with you. You indicate your acceptance of the Company's offer please sign and date this letter in the space provided below and return it to me, along with a signed and dated copy of the -2- 3 Confidentiality Agreement. This letter, together with the Confidentiality Agreement, set forth the terms of your employment with the Company and supersede any prior representations or agreements, whether written or oral. This letter may not be modified or amended except by a written agreement, signed by the Company and by you. THIS OFFER EXPIRES MONDAY, AUGUST 23, 1999, 9:00 AM (PST). Very truly yours, PETS.COM, INC. /s/ Julie Waninwright Julie Wainwright, Chief Executive Officer ACCEPTED AND AGREED: /s/ Paul Manca - ------------------------------- Paul G. Manca Date: 8/21/99 -3- EX-10.16 22 OFFER LETTER W/RALPH E. LEWIS 1 EXHIBIT 10.16 November 15, 1999 REVISED OFFER LETTER Ralph E. Lewis 1479 Brookfield Road Yardley PA 19067 Dear Ralph, I am pleased to offer you the position of Vice President, Distribution and Logistics. Speaking for myself, as well as the other members of the Company's management team, we continue to be impressed with your experience and we look forward to your future success with the Company. The terms of your new position with the Company are as set forth below: 1. POSITION. a. You will become Vice President, Distribution and Logistics, working out of the Company's headquarters office in San Francisco, California. As a member of the Company's management team you will report to the Chief Executive Officer. b. You agree to the best of your ability and experience that you will at all times loyally and conscientiously perform all of the duties and obligations required of and from you pursuant to the express and implicit terms hereof, and to the reasonable satisfaction of the Company. During the term of your employment, you further agree that you will devote all of your business time and attention to the business of the Company, the Company will be entitled to all of the benefits and profits arising from or incident to all such work services and advice, you will not render commercial or professional services of any nature to any person or organization, whether or not for compensation, without the prior written consent of the Company's Board of Directors, and you will not directly or indirectly engage or participate in any business that is competitive in any manner with the business of the Company. Nothing in this letter agreement will prevent you from accepting speaking or presentation engagements in exchange for honoraria or from serving on boards of charitable organizations, or from owning no more than one percent (1%) of the outstanding equity securities of a corporation whose stock is listed on a national stock exchange. -1- 2 2. START DATE. Subject to fulfillment of any conditions imposed by this letter agreement, you will commence this new position with the Company on or before November 18, 1999. 3. PROOF OF RIGHT TO WORK. For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated. 4. COMPENSATION. a. BASE SALARY. You will be paid a monthly salary of $16,666.66, which is equivalent to $200,000.00 on an annualized basis. Your salary will be payable pursuant to the Company's regular payroll policy. b. BONUS. You will be eligible to receive a one time bonus of $20,000.00 and an additional option to purchase 25,000 shares of the Company's Common Stock if you begin employment with the Company on or before December 1, 1999. In the unlikely event that you voluntarily terminate your employment with the Company before the end of six (6) months of employment, you agree to repay the Company the bonus. c. RELOCATION BONUS. In connection with your relocation from Pennsylvania to California, the Company will provide you with a $50,000.00 Relocation allowance, grossed up to cover taxes you would be expected to pay on the $50,000.00 allowance. In the unlikely event that you voluntarily terminate your employment with the Company before the end of one year of employment, you agree to repay the Company the relocation allowance amount, pro-rated for months of service with the Company. Any amounts received by you for relocation expense reimbursement will be reported as taxable income to you in the year received as required by applicable tax law. 5. STOCK OPTIONS. a. INITIAL GRANT. In connection with the commencement of your employment, the Company will recommend that the Board of Directors grant you an option to purchase 150,000 shares of the Company's Common Stock ("Shares") with an exercise price equal to the fair market value on the date of the grant. These option shares will vest at the rate of 25% one year after your hire date and 1/48th per month thereafter. Vesting will, of course, depend on your continued employment with the Company. The option will be an incentive stock option to the maximum extent allowed by the tax code and will be subject to the terms of the Company's 1999 Stock Plan and the Stock Option Agreement between you and the Company. 6. BENEFITS. -2- 3 a. EMPLOYEE BENEFITS On the first of the month following your hire date, you will be eligible to participate in employee medical, dental and vision benefits. b. PERSONAL TIME OFF (PTO) You will be entitled to 10 days paid time off per year, pro-rated for the remainder of this calendar year. You will begin accruing PTO from your first day of employment. Your accrual amount will increase to 15 days in the next calendar year. c. COMPANY HOLIDAYS You will be eligible for all Company holidays. 7. CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENT. Your acceptance of this offer and commencement of employment with the Company is contingent upon the execution, and delivery to an officer of the Company, of the Company's Confidential Information and Invention Assignment Agreement, a copy of which is enclosed for your review and execution (the "Confidentiality Agreement"), prior to or on your Start Date. 8. CONFIDENTIALITY OF TERMS. You agree to follow the Company's strict policy that employees must not disclose, either directly or indirectly, any information, including any of the terms of this agreement, regarding salary, bonuses, or stock purchase or option allocations to any person, including other employees of the Company; provided, however, that you may discuss such terms with members of your immediate family and any legal, tax or accounting specialists who provide you with individual legal, tax or accounting advice. 9. AT-WILL EMPLOYMENT. Your employment with the Company will be on an "at will" basis, meaning that either you or the Company may terminate your employment at any time for any reason or no reason. 10. TERMINATION. In the event of a sale or merger of the Company, in which more than fifty-one percent (51%) of the voting power of the Company is transferred to a third party and your employment is terminated with or without cause within one (1) year after the acquisition or the office is moved more than fifty (50) miles of its San Francisco location, you will receive a severance equal to three (3) months of your current monthly salary. If you are terminated from the company with or without cause, you will receive a severance equal to three (3) months of your current monthly salary. Ralph, we are all delighted to be able to extend you this offer and look forward to working with you. To indicate your acceptance of the Company's offer, please sign and date this letter in the space provided below and return it to me, along with a signed and dated copy of the Confidentiality Agreement. This letter, together with the Confidentiality Agreement, set forth the terms of your employment with the Company and supersede any prior representations or agreements, whether written or oral. This letter may not be modified or amended except by a written agreement, signed by the Company and by you. -3- 4 THIS OFFER EXPIRES MONDAY NOVEMBER 15, 1999, 6:00 PM (PST). Very truly yours, PETS.COM, INC. /s/ Julie Wainwright Julie Wainwright, Chief Executive Officer ACCEPTED AND AGREED: /s/ Ralph Lewis - ------------------------ Ralph Lewis Date: 11-15-99 -4- EX-10.17 23 SERIES A PREFERRED STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.17 PETS.COM, INC. SERIES A PREFERRED STOCK PURCHASE AGREEMENT This Series A Preferred Stock Purchase Agreement (the "Agreement") is made as of the 22nd of April, 1999 by and between Pets.com, Inc., a California corporation (the "Company") and the investors listed on Exhibit A attached hereto (each a "Purchaser" and together the "Purchasers"). The parties hereby agree as follows: 1. PURCHASE AND SALE OF PREFERRED STOCK. 1.1 SALE AND ISSUANCE OF SERIES A PREFERRED STOCK. (a) The Company shall adopt and file with the Secretary of State of the State of California on or before the Closing (as defined below) the First Amended and Restated Articles of Incorporation in the form attached hereto as Exhibit B (the "Restated Articles"). (b) Subject to the terms and conditions of this Agreement, each Purchaser agrees, severally and not jointly, to purchase at the Closing and the Company agrees to sell and issue to each Purchaser at the Closing that number of shares of Series A Preferred Stock set forth opposite each such Purchaser's name on Exhibit A attached hereto at a purchase price of $1.45 per share. The shares of Series A Preferred Stock issued to the Purchaser pursuant to this Agreement shall be hereinafter referred to as the "Stock." 1.2 CLOSING; DELIVERY. (a) The purchase and sale of the Stock shall take place at the offices of Venture Law Group, 2800 Sand Hill Road, Menlo Park, California, at 10:00 a.m., on April 22, 99, or at such other time and place as the Company and the Purchasers mutually agree upon, orally or in writing (which time and place are designated as the "Closing"). (b) At the Closing, the Company shall deliver to each Purchaser a certificate representing the Stock being purchased thereby against payment of the purchase price therefor by check payable to the Company or by wire transfer to the Company's bank account or by cancellation of indebtedness, or any combination thereof. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to each Purchaser that, except as set forth on a Schedule of Exceptions attached hereto as Exhibit C, which exceptions shall be deemed to be representations and warranties as if made hereunder: 2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all requisite corporate power and authority to carry on its business as now 2 conducted and as proposed to be conducted in the future. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business or properties. 2.2 CAPITALIZATION. The authorized capital of the Company consists, or will consist, immediately prior to the Closing, of: (a) 7,500,000 shares of Preferred Stock, all of which shares have been designated Series A Preferred Stock, none of which are issued and outstanding immediately prior to the Closing. The rights, privileges and preferences of the Preferred Stock are as stated in the Restated Articles. (b) 25,000,000 shares of Common Stock, 2,968,860 shares of which are issued and outstanding immediately prior to the Closing. All of the outstanding shares of Common Stock have been duly authorized, fully paid and are nonassessable and issued in compliance with all applicable federal and state securities laws. (c) The Company has reserved 3,537,167 shares of Common Stock for issuance to officers, directors, employees and consultants of the Company pursuant to its 1999 Stock Plan duly adopted by the Board of Directors and approved by the Company shareholders (the "Stock Plan"). Of such reserved shares of Common Stock, 1,157,023 shares have been issued pursuant to restricted stock purchase agreements, no options to purchase shares have been granted or are currently outstanding, and 2,380,144 shares of Common Stock remain available for issuance to officers, directors, employees and consultants pursuant to the Stock Plan. (d) Except for (a) the conversion privileges of the Series A Preferred Stock to be issued pursuant to this Agreement, (b) the Right of First Offer set forth in Section 2.3 of the Investors Rights Agreement to be entered into by the Company, Greg McLemore and the Purchasers at the Closing, and (c) outstanding options issued pursuant to the Stock Plan, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal or similar rights) or agreements, orally or in writing, for the purchase or acquisition from the Company of any shares of its capital stock. The Company is not a party or subject to any agreement or understanding, and to the best of its knowledge, there is no agreement or understanding between any persons and/or entities, that affects or relates to the voting or giving of written consents with respect to any security or by a director of the Company. 2.3 SUBSIDIARIES. The Company does not currently own or control, directly or indirectly, any interest in any other corporation, association, or other business entity. The Company is not a participant in any joint venture, partnership or similar arrangement. 2.4 AUTHORIZATION. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the Investors' Rights Agreement, in the form attached hereto as Exhibit D (the "Investors' Rights Agreement") and the Right of First Offer and Co-Sale Agreement in the form attached hereto as Exhibit E (the "Co-Sale Agreement" and collectively with this Agreement and the Investors' Rights Agreement, the "Agreements"), the performance of all obligations of the 3 Company hereunder and thereunder and the authorization, issuance (or reservation for issuance), sale and delivery of the Stock and the Common Stock issuable upon conversion of the Stock (together, the "Securities") has been taken or will be taken prior to the Closing, and the Agreements, when executed and delivered by the Company, shall constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and other laws of general application affecting enforcement of creditors' rights generally, as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, or (ii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 2.5 VALID ISSUANCE OF SECURITIES. The Stock that is being issued to the Purchasers hereunder, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement, the Investors' Rights Agreement and applicable state and federal securities laws. Based in part upon the representations of the Purchasers in this Agreement and subject to the provisions of Section 2.6 below, the Stock will be issued in compliance with all applicable federal and state securities laws. The Common Stock issuable upon conversion of the Stock has been duly and validly reserved for issuance, and upon issuance in accordance with the terms of the Restated Articles, shall be duly and validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement, the Investors' Rights Agreement and applicable federal and state securities laws and will be issued in compliance with all applicable federal and state securities laws. 2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement, except for filings pursuant to Section 25102(f) of the California Corporate Securities Law of 1968, as amended, and the rules thereunder, other applicable state securities laws and Regulation D of the Securities Act of 1933, as amended (the "Securities Act"). 2.7 OFFERING. Subject in part to the truth and accuracy of each Purchaser's representations set forth in Section 3 of this Agreement, the offer, sale and issuance of the Series A Preferred Stock as contemplated by this Agreement are, to the Company's knowledge, exempt from the registration requirements of any applicable state and federal securities laws, and neither the Company nor any authorized agent acting on its behalf will knowingly take any action hereafter that would cause the loss of such exemption. 2.8 LITIGATION. There is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company that questions the validity of the Agreements or the right of the Company to enter into them, or to consummate the transactions contemplated hereby or thereby, or that might result, either individually or in the aggregate, in any material adverse changes in the assets, condition or affairs of the Company, 4 financially or otherwise, or any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for the foregoing. The foregoing includes, without limitation, actions, suits or proceedings or investigations pending or threatened involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with former employers. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company or any of its subsidiaries currently pending or which the Company or any of its subsidiaries intends to initiate. 2.9 INTELLECTUAL PROPERTY. To its knowledge, the Company owns or possesses sufficient legal rights to all patents, trademarks, service marks, tradenames, copyrights, trade secrets, licenses, information and proprietary rights and processes necessary for its business as now conducted and as proposed to be conducted in the future without any conflict with, or infringement of, the rights of others and believes it can obtain, on commercially reasonable terms, any additional rights necessary for the conduct of its business as proposed to be conducted. The Company has not received any communications alleging that the Company has violated or, by conducting its business, would violate any of the patents, trademarks, service marks, tradenames, copyrights, trade secrets or other proprietary rights or processes of any other person or entity. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of such employee's best efforts to promote the interest of the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution or delivery of the Agreements, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed, will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions, or provisions of, or constitute a default under, any contract, covenant or instrument under which any such employee is now obligated. The Company does not believe it is or will be necessary to use any inventions of any of its employees (or persons it currently intends to hire) made prior to their employment by the Company. The Schedule of Exceptions includes a list of all patents, copyrights, trademarks and domain names claimed or owned by the Company and all licenses by the Company of any intellectual property or technology from third parties. 2.10 COMPLIANCE WITH OTHER INSTRUMENTS. (a) The Company is not in violation or default of any provisions of its Restated Articles or Bylaws or of any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound or, to its knowledge, of any provision of federal or state statute, rule or regulation applicable to the Company. The execution, delivery and performance of the Agreements and the consummation of the transactions contemplated hereby or thereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, 5 instrument, judgment, order, writ, decree or contract or an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company. (b) To its knowledge, the Company has avoided every condition, and has not performed any act, the occurrence of which would result in the Company's loss of any right granted under any license, permit, authorization, distribution agreement or other agreement. 2.11 AGREEMENTS; ACTION. (a) Except for agreements explicitly contemplated by the Agreements, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, affiliates, or any affiliate thereof. (b) Except for agreements explicitly contemplated by the Agreements, there are no agreements, understandings, instruments, contracts or proposed transactions to which the Company is a party or by which it is bound that involve (i) obligations (contingent or otherwise) of, or payments to, the Company in excess of $15,000, (ii) the license of any patent, copyright, trade secret or other proprietary right to or from the Company, (iii) the grant of rights to manufacture, produce, assemble, license, market, or sell its products to any other person or affect the Company's exclusive right to develop, manufacture, assemble, distribute, market or sell its products or services, or (iv) indemnification by the Company with respect to infringement of proprietary rights. (c) The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or incurred any other liabilities individually in excess of $15,000 or, in the case of indebtedness and/or liabilities individually less than $15,000, in excess of $50,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. (d) For purposes of subsections (b) and (c) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. (e) The Company is not a party to and is not bound by any contract, agreement or instrument, or subject to any restriction under its Restated Articles or Bylaws that, to its knowledge, adversely affects its business as now conducted and as proposed to be conducted in the future, its properties or its financial condition. (f) The Company has not engaged in the past three (3) months in any discussion (i) with any representative of any corporation or corporations regarding the merger of the Company with or into any such corporation or corporations, (ii) with any representative of 6 any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company or a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company would be disposed of, or (iii) regarding any other form of liquidation, dissolution or winding up of the Company. 2.12 DISCLOSURE. The Company has fully provided the Purchasers with all the information that the Purchasers have requested for deciding whether to acquire the Stock and all information that the Company believes is reasonably necessary to enable the Purchasers to make such a decision. No representation or warranty of the Company contained in this Agreement and the exhibits attached hereto, any certificate furnished or to be furnished to Purchasers at the Closing, or other information furnished to the Purchasers (when read together) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. 2.13 NO CONFLICT OF INTEREST. The Company is not indebted (or committed to make loans or extend or guarantee credit), directly or indirectly, to any of its employees, officers or directors or to their respective spouses or children, in any amount whatsoever other than in connection with expenses or advances of expenses incurred in the ordinary course of business or relocation expenses of employees. None of the Company's employees, officers or directors, or any members of their immediate families, are, directly or indirectly, indebted to the Company (other than in connection with purchases of the Company's stock) or, to the Company's knowledge, have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation which competes with the Company except that employees, officers, directors and/or shareholders of the Company may own stock in (but not exceeding two percent of the outstanding capital stock of) any publicly traded company that may compete with the Company. To the Company's knowledge, none of the Company's officers or directors or any members of their immediate families are, directly or indirectly, interested in any material contract with the Company. The Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 2.14 RIGHTS OF REGISTRATION AND VOTING RIGHTS. Except as contemplated in the Investors' Rights Agreement, the Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. To the Company's knowledge, no shareholder of the Company has entered into any agreements with respect to the voting of capital shares of the Company. 2.15 TITLE TO PROPERTY AND ASSETS. The Company owns its property and assets free and clear of all mortgages, liens, loans and encumbrances, except such encumbrances and liens which arise in the ordinary course of business and do not materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and, to its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances. 7 2.16 BALANCE SHEET. The Company has delivered to each Purchaser that has requested a copy its unaudited balance sheet as of March 31, 1999 (the "Balance Sheet"). The Balance Sheet has been prepared in accordance with generally accepted accounting principles and fairly presents the financial condition of the Company as of the date indicated therein, subject to normal year-end audit adjustments. Except as set forth in the Balance Sheet, the Company has no material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to March 31, 1999 that are not material, individually or in the aggregate, and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Balance Sheet, which, in both cases, individually or in the aggregate are not material to the financial condition of the Company. Except as disclosed to the Purchasers, the Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. The Company maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles. 2.17 EMPLOYEE BENEFIT PLANS. The Company does not have any Employee Benefit Plan as defined in the Employee Retirement Income Security Act of 1974. 2.18 LABOR AGREEMENTS AND ACTIONS. The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending, or to the knowledge of the Company threatened, which could have a material adverse effect on the assets, properties, financial condition, operating results, or business of the Company (as is presently conducted and as it is proposed to be conducted), nor is the Company aware of any labor organization activity involving its employees. The Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company, nor does the Company have the present intention to terminate the employment of any of the foregoing. The employment of each officer and employee of the Company is terminable at the will of the Company. To its knowledge, the Company has complied in all material respects with all applicable state and federal equal employment opportunity laws and with other laws related to employment. The Company is not a party to or bound by any currently effective employment contract, deferred compensation agreement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation agreement. 2.19 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AND EMPLOYEE STOCK PURCHASE AGREEMENTS. Each employee, consultant and officer of the Company has executed agreements with the Company regarding confidentiality and proprietary information and any stock purchases substantially in the form or forms delivered to the counsel for the Purchasers. The Company is not aware that any of its employees or consultants is in violation thereof, and the Company will use its best efforts to prevent any such violation. 8 2.20 PERMITS. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business, the lack of which could materially and adversely affect the business, properties, prospects, or financial condition of the Company. The Company believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. The Company is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. 2.21 CORPORATE DOCUMENTS. The Restated Articles and Bylaws of the Company are in the form provided to counsel for the Purchasers. The copy of the minute books of the Company provided to the Purchasers' counsel contains minutes of all meetings of directors and shareholders and all actions by written consent without a meeting by the directors and shareholders since the date of incorporation and reflects all actions by the directors (and any committee of directors) and shareholders with respect to all transactions referred to in such minutes accurately in all material respects. 2.22 QUALIFIED SMALL BUSINESS STOCK. As of the Closing: (i) the Company will not have made any purchases of its own stock during the one-year period proceeding the Closing having an aggregate value exceeding 5% of the aggregate value of all its stock as of the beginning of such period and (ii) the Company's aggregate gross assets, as defined by Code Section 1202(d)(2), at no time between October 7, 1998, and through the Closing have exceeded or will exceed $50 million, taking into account the assets of any corporations required to be aggregated with the Company in accordance with Code Section 1202(d)(3). 2.23 MANUFACTURING AND MARKETING RIGHTS. The Company has not granted exclusive rights to manufacture, produce, assemble, license, market, or sell its products or services to any other person and is not bound by any agreement that affects the Company's exclusive right to develop, manufacture, assemble, distribute, market or sell its products or services. 2.24 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company has filed all tax returns and reports (including information returns and reports) as required by law. These returns and reports are true and correct in all material respects. The Company has paid all taxes and other assessments due. The Company has not elected pursuant to the Code to be treated as a Subchapter S corporation or a collapsible corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor has it made any other elections pursuant to the Code (other than elections that relate solely to methods of accounting, depreciation or amortization) that would have a material adverse effect on the Company, its financial condition, its business as presently conducted or proposed to be conducted or any of its properties or material assets. The Company has never had any tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge. None of the Company's federal income tax returns and none of its state income or franchise tax or sales or use tax returns has ever been audited by governmental authorities. Since the date of the Balance Sheet, the Company has not incurred any taxes, assessments or governmental charges other than in the ordinary course of business and the Company has made adequate provisions on its books of account for all taxes, assessments and governmental charges with 9 respect to its business, properties and operations for such period. The Company has withheld or collected from each payment made to each of its employees, the amount of all taxes (including, but not limited to, federal income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositories. 2.25 SECTION 83(b) ELECTIONS. To the best of the Company's knowledge, all individuals who have purchased unvested shares of the Company's Common Stock have timely filed elections under Section 83(b) of the Code and any analogous provisions of applicable state tax laws. 2.26 BROKERS. The Company has no contract, arrangement or understanding with any broker, finder or similar agent with respect to the transactions contemplated by this Agreement. 2.27 INSURANCE. The Company has in full force and effect fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed. 2.28 YEAR 2000. To the Company's knowledge, each hardware and software product used by the Company in its business (collectively, the "Software") will accurately process date data (including, but not limited to, calculating, comparing and sequencing) from, into and between the twentieth and twenty-first centuries, including, without limitation, leap year calculations, without a decrease in the functionality of the Software. To the Company's knowledge, the Software is designed to be used prior to, during and after the calendar year 2000 A.D. and will operate during each such time period without error relating to date data, specifically including any error relating to, or the product of, date data which represents or references different centuries or more than one century. Without limiting the generality of the foregoing, to the Company's knowledge, the Software (a) will not abnormally end or provide invalid or incorrect results as a result of date data, specifically including date data which represents or references different centuries or more than one century, (b) has been designed to ensure year 2000 compatibility, including, but not limited to, date data century recognition, calculations which accommodate same century and multi-century formulas and date values, and date data interface values that reflect the century, and (c) includes "Year 2000 Capabilities," meaning that the Software (i) will manage and manipulate data involving dates, including single century formulas and multi-century formulas, and will not cause an abnormally ending scenario within the application or generate incorrect values or invalid results involving such dates, (ii) provides that all date-related user interface functionalities and data fields include the indication of century, and (iii) provides that all date-related data interface functionalities include the indication of century. 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser hereby represents and warrants to the Company that: 3.1 AUTHORIZATION. Such Purchaser has full power and authority to enter into the Agreements. The Agreements, when executed and delivered by the Purchaser, will constitute 10 valid and legally binding obligations of the Purchaser, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and any other laws of general application affecting enforcement of creditors' rights generally, and as limited by laws relating to the availability of a specific performance, injunctive relief, or other equitable remedies, and (b) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with the Purchaser in reliance upon the Purchaser's representation to the Company, which by the Purchaser's execution of this Agreement, the Purchaser hereby confirms, that the Securities to be acquired by the Purchaser will be acquired for investment for the Purchaser's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Purchaser further represents that the Purchaser does not presently have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. The Purchaser has not been formed for the specific purpose of acquiring the Securities. 3.3 DISCLOSURE OF INFORMATION. The Purchaser has had an opportunity to discuss the Company's business, management, financial affairs and the terms and conditions of the offering of the Stock with the Company's management and has had an opportunity to review the Company's facilities. The Purchaser understands that such discussions, as well as any other written information delivered by the Company to the Purchaser, were intended to describe the aspects of the Company's business which it believes to be material. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the investors to rely thereon. 3.4 RESTRICTED SECURITIES. The Purchaser understands that the Securities have not been, and will not be, registered under the Securities Act, by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Purchaser's representations as expressed herein. The Purchaser understands that the Securities are "restricted securities" under applicable U.S. federal and state securities laws and that, pursuant to these laws, the Purchaser must hold the Securities indefinitely unless they are registered with the Securities and Exchange Commission and qualified by state authorities, or an exemption from such registration and qualification requirements is available. The Purchaser acknowledges that the Company has no obligation to register or qualify the Securities for resale except as set forth in the Investors' Rights Agreement. The Purchaser further acknowledges that if an exemption from registration or qualification is available, it may be conditioned on various requirements including, but not limited to, the time and manner of sale, the holding period for the Securities, and on requirements relating to the Company which are outside of the Purchaser's control, and which the Company is under no obligation and may not be able to satisfy. 11 3.5 NO PUBLIC MARKET. The Purchaser understands that no public market now exists for any of the securities issued by the Company, and that the Company has made no assurances that a public market will ever exist for the Securities. 3.6 LEGENDS. The Purchaser understands that the Securities, and any securities issued in respect of or exchange for the Securities, may bear one or all of the following legends: (a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933." (b) Any legend set forth in the other Agreements. (c) Any legend required by the Blue Sky laws of any state to the extent such laws are applicable to the shares represented by the certificate so legended. 3.7 ACCREDITED INVESTOR. The Purchaser is an accredited investor as defined in Rule 501(a) of Regulation D promulgated under the Securities Act, as presently in effect. 4. CONDITIONS OF THE PURCHASERS' OBLIGATIONS AT CLOSING. The obligations of each Purchaser to the Company under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived: 4.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in Section 2 shall be true and correct on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. 4.2 PERFORMANCE. The Company shall have performed and complied with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. 4.3 COMPLIANCE CERTIFICATE. The President of the Company shall deliver to the Purchasers at the Closing a certificate certifying that the conditions specified in Sections 4.1 and 4.2 have been fulfilled, and stating that there shall have been no adverse change in the business, affairs, prospects, operations, properties, assets or condition of the Company since the date of the Balance Sheet. 4.4 QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in 12 connection with the lawful issuance and sale of the Stock pursuant to this Agreement shall be obtained and effective as of the Closing. 4.5 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to Purchasers' special counsel, which shall have received all such counterpart original and certified or other copies of such documents as it has reasonably requested. This may include, without limitation, good standing certificates and certification by the Company's Secretary regarding the Company's Restated Articles and Bylaws and Board of Director and shareholder resolutions relating to this transaction. 4.6 OPINION OF COMPANY COUNSEL. The Purchasers shall have received from Venture Law Group, counsel for the Company, an opinion, dated as of the Closing, in substantially the form of Exhibit F. 4.7 BYLAWS. The Bylaws of the Company shall provide that the Board of Directors of the Company shall consist of four (4) persons, which number shall not be changed by an amendment to the Restated Articles or the Bylaws without consent of holders of two-thirds (2/3rds) of the Preferred Stock. 4.8 BOARD OF DIRECTORS. As of the Closing, the Board shall be comprised of four (4) directors: Greg McLemore, one representative to be designated by Hummer Winblad Venture Partners, one director to be designated by Amazon.com, Inc. ("Amazon.com"), and the Company's Chief Executive Officer. 4.9 INVESTORS' RIGHTS AGREEMENT. The Company, each Purchaser and Greg McLemore shall have executed and delivered the Investors' Rights Agreement in substantially the form attached as Exhibit D. 4.10 RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT. The Company, each Purchaser, and all holders of more than 100,000 shares of the Company's Common Stock shall have executed and delivered the Right of First Refusal and Co-Sale Agreement in substantially the form attached as Exhibit E. 4.11 RESTATED ARTICLES. The Company shall have filed the Restated Articles with the Secretary of State of California on or prior to the Closing Date, which shall continue to be in full force and effect as of the Closing Date. 4.12 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AND EMPLOYEE STOCK PURCHASE AGREEMENTS. The Company and each of its employees and consultants shall have entered into the Company's standard form Confidential Information and Invention Assignment Agreement, in substantially the form provided to the Purchasers' legal counsel. Each holder of Common Stock of the Company shall have entered into an Employee Stock Purchase Agreement, in substantially the form provided to the Purchasers' legal counsel. 13 4.13 VOTING AGREEMENT. The Company, each Purchaser, Greg McLemore, and Julie Wainwright shall have executed and delivered the Voting Agreement in substantially the form attached hereto as Exhibit G. 5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of the Company to each Purchaser under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived: 5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of each Purchaser contained in Section 3 shall be true and correct in all material respects on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 5.2 PERFORMANCE. All covenants, agreements and conditions contained in this Agreement to be performed by the Purchasers on or prior to the Closing shall have been performed or complied with in all material respects. 5.3 QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Stock pursuant to this Agreement shall be obtained and effective as of the Closing. 6. MISCELLANEOUS. 6.1 SURVIVAL OF WARRANTIES. Unless otherwise set forth in this Agreement, the warranties, representations and covenants of the Company and the Purchasers contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing for a period of one (1) year following the Closing, and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Purchasers or the Company. 6.2 TRANSFER; SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any securities). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 6.3 GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. 6.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. 14 6.5 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. 6.6 NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon delivery, when delivered personally or by overnight courier or sent by telegram or fax, or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, addressed to the party to be notified at such party's address as set forth on the signature page or Exhibit A hereto, or as subsequently modified by written notice, and (a) if to the Company, with a copy to: Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Attn: John V. Bautista Tel: 650-854-4488 Fax: 650-854-1121 (b) if to the Purchasers (other than Amazon.com), with a copy to: Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP 155 Constitution Drive Menlo Park, CA 94025 Attn: Steven M. Spurlock Tel: 650-321-2400 Fax: 650-321-2800 or (c) if to Amazon.com, with a copy to: Perkins Coie LLP 1201 Third Avenue, Suite 4800 Seattle, WA 98101-3099 Attn: Scott L. Gelband Tel: 206-583-8888 Fax: 206-583-8500 6.7 FINDER'S FEE. Each party represents that it neither is nor will be obligated for any finder's fee or commission in connection with this transaction. Each Purchaser agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finder's fee (and the costs and expenses of defending against such liability or asserted liability) for which each Purchaser or any of its officers, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless each Purchaser from any liability for any commission or compensation in the nature of a finder's fee 15 (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 6.8 FEES AND EXPENSES. Upon the Closing, the Company shall pay the reasonable fees and expenses of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, the counsel for Hummer Winblad Venture Partners and its affiliated funds, incurred with respect to this Agreement, the documents referred to herein and the transactions contemplated hereby and thereby, provided such fees and expenses do not exceed $15,000. The remaining Purchasers shall pay their own legal fees and expenses incurred with respect to the foregoing. 6.9 ATTORNEY'S FEES. If any action at law or in equity (including arbitration) is necessary to enforce or interpret the terms of any of the Agreements, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 6.10 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended or waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the holders of at least two-thirds (2/3rds) of the Common Stock issued or issuable upon conversion of the Stock. Any amendment or waiver effected in accordance with this Section 6.10 shall be binding upon the Purchasers and each transferee of the Stock (or the Common Stock issuable upon conversion thereof), each future holder of all such securities, and the Company. 6.11 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms. 6.12 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power or remedy of such non-breaching or non-defaulting party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative. 6.13 ENTIRE AGREEMENT. This Agreement, and the documents referred to herein constitute the entire agreement between the parties hereto pertaining to the subject matter 16 hereof, and any and all other written or oral agreements relating to the subject matter hereof existing between the parties hereto are expressly canceled. 6.14 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT. 6.15 CONFIDENTIALITY. Each party hereto agrees that, except with the prior written permission of the other party, it shall at all times keep confidential and not divulge, furnish or make accessible to anyone any confidential information, knowledge or data concerning or relating to the business or financial affairs of the other parties to which such party has been or shall become privy by reason of this Agreement, discussions or negotiations relating to this Agreement, the performance of its obligations hereunder or the ownership of Stock purchased hereunder, provided however, that Hummer Winblad Venture Partners III, L.P. and Hummer Winblad Technology Fund III, L.P. may distribute information concerning the Company to their respective limited partners. The provisions of this Section 6.15 shall be in addition to, and not in substitution for, the provisions of any separate nondisclosure agreement executed by the parties hereto with respect to the transactions contemplated hereby. 6.16 EXCULPATION AMONG PURCHASERS. Each Purchaser acknowledges that it is not relying upon any person, firm or corporation, other than the Company and its officers and directors, in making its investment or decision to invest in the Company. Each Purchaser agrees that no Purchaser nor the respective controlling persons, officers, directors, partners, agents, or employees of any Purchaser shall be liable to any other Purchaser for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the purchase of the Securities. 6.17 WAIVER OF CONFLICTS. Each party to this Agreement acknowledges that Venture Law Group, counsel for the Company, has in the past performed and may continue to perform legal services for certain of the Purchasers in matters unrelated to the transactions described in this Agreement, including the representation of such Purchasers in venture capital financings and other matters. Accordingly, each party to this Agreement hereby (a) acknowledges that they have had an opportunity to ask for information relevant to this disclosure; and (b) gives its informed consent to Venture Law Group's representation of certain of the Purchasers in such unrelated matters and to Venture Law Group's representation of the Company in connection with this Agreement and the transactions contemplated hereby. 17 6.18 AGGREGATION OF STOCK. All shares of stock held or acquired by affiliated entities or persons hereunder shall be aggregated together for the purpose of determining the availability of rights under this Agreement. The parties have executed this Series A Preferred Stock Purchase Agreement as of the date first written above. COMPANY: PETS.COM, INC. By: /s/ Greg McLemore --------------------------------- Name: Greg McLemore ------------------------------- (print) Title: ------------------------------ Address: 87 N. Raymond Avenue Suite 850 Pasadena, CA 91103 Tel: 626-794-5000 Fax: 626-794-8500 PURCHASERS: Amazon.com Inc. ------------------------------------ (Print Name of Purchaser) By: /s/ Randy Tinsley --------------------------------- Name: Randy Tinsley ------------------------------- (print) Title: Treasurer ------------------------------ Address: 1516 Second Avenue Seattle, WA 98101 Hummer Winblad Venture Partners III, L.P. ------------------------------------ (Print Name of Purchaser) By: /s/ John Hummer --------------------------------- SIGNATURE PAGE TO PURCHASE AGREEMENT 18 Name: John Hummer --------------------------------- (print) Title: Partner ------------------------------ Address: Hummr Winblad Technology Fund, III, L.P. ------------------------------------ (Print Name of Purchaser) By: /s/ John Hummer --------------------------------- Name: John Hummer ------------------------------- (print) Title: Partner ------------------------------ Address: Greg McLemore ------------------------------------ (Print Name of Purchaser) By: /s/ Greg McLemore --------------------------------- Name: Greg McLemore ------------------------------- (print) Title: ------------------------------ Address: 1581 E. Mendocino St. Altadena, CA 91001 VLG Investments 1999 ------------------------------------ (Print Name of Purchaser) By: /s/ Elis J. Blawie --------------------------------- Name: Elias J. Blawie ------------------------------- (print) Title: Managing Partner ------------------------------ Address: 19 CNA Trust, TTEE, FBO Venture Law Group 401(k), John V. Bautista ------------------------------------ (Print Name of Purchaser) By: /s/ John V. Bautista --------------------------------- Name: John V. Bautista ------------------------------- (print) Title: ------------------------------ Address: Glen R. Van Ligten ------------------------------------ (Print Name of Purchaser) By: /s/ Glen Van Ligten --------------------------------- Name: --------------------------------- (print) Title: ------------------------------ Address: ------------------------------------ (Print Name of Purchaser) By: /s/ Frances Johnston --------------------------------- Name: Frances Johnston ------------------------------- (print) Title: ------------------------------ Address: c/o Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 20 EXHIBITS Exhibit A - Schedule of Purchasers Exhibit B - Form of First Amended and Restated Articles of Incorporation Exhibit C - Schedule of Exceptions to Representations and Warranties Exhibit D - Form of Investors' Rights Agreement Exhibit E - Form of Right of First Refusal and Co-Sale Agreement Exhibit F - Form of Legal Opinion of Venture Law Group Exhibit G - Form of Voting Agreement
21 EXHIBIT A SCHEDULE OF PURCHASERS
Number of Shares Name/Address/Tel/Fax of Series A Purchase Price -------------------- ----------- -------------- Amazon.com, Inc. 4,401,716 $6,382,488.20 1516 2nd Avenue, Floor 2 Seattle, WA 98101 Tel: 206-622-2335 Fax: 206-834-7010 Attn: General Counsel Hummer Winblad Venture 2,389,503 $3,464,779.35 Partners III, L.P.1 2 South Park, 2nd Floor San Francisco, CA 94107 Tel: 415-979-9600 Fax: 415-979-9601 Attn: John Hummer Hummer Winblad Technology 2 125,763 $ 182,356.35 Fund III, L.P. 2 South Park, 2nd Floor San Francisco, CA 94107 Tel: 415-979-9600 Fax: 415-979-9601 Attn: John Hummer Greg McLemore 275,863 $ 400,001.35 87 N. Raymond Avenue, Suite 850 Pasadena, CA 91103 Tel: 626-794-5000 Fax: 626-794-8500 VLG Investments 1999 17,241 $ 24,999.45 Venture Law Group
- -------- 1 Payment includes conversion of $380,000 principal amount and $1,743.17 accrued interest from Promissory Notes (canceled as of the Closing) that were originally issued by the Company to Hummer Winblad Venture Partners III, L.P. on March 10, 1999 and March 19, 1999. 2 Payment includes conversion of $20,000 principal amount and $91.58 accrued interest from Promissory Notes (canceled as of the Closing) that were originally issued by the Company to Hummer Winblad Technology Fund III, L.P. on March 10, 1999 and March 19, 1999. 22
Number of Shares Name/Address/Tel/Fax of Series A Purchase Price -------------------- ----------- -------------- 2800 Sand Hill Road Menlo Park, CA 94025 Tel: 650-854-4488 Fax: 650-854-1121 Attn: Elias J. Blawie CNA Trust, TTEE, FBO Venture Law Group 12,413 $ 17,998.85 401(k), John V. Bautista Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Tel: 650-854-4488 Fax: 650-854-1121 Glen Van Ligten 3,449 $ 5,001.05 Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Tel: 650-854-4488 Fax: 650-854-1121 Frances Johnston 1,380 $ 2,001.00 Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Tel: 650-854-4488 Fax: 650-854-1121
-2- EX-10.18 24 ADVERTISING AGREEMENT W/AMAZON.COM 1 EXHIBIT 10.18 ADVERTISING AGREEMENT This Agreement, dated as of April 22, 1999, is made and entered into by and between Amazon.com. Inc. ("Amazon.com"), and Pets.com. Inc. ("Company"), Amazon.com and Company sometimes are referred to collectively as the "Parties" and individually as a "Party." Amazon.com and Company agree as follows: SECTION 1. DEFINITIONS "ADVERTISING PLACEMENT" means, [*] or other [*] provided for in Section 2 or Section 3. "AFFILIATE" means, with respect to either Party, any individual or entity that directly or indirectly controls, is controlled by or is under common control with that Party, or which Party beneficially owns at least [*] of the equity interests therein. "AMAZON.COM SITE" means the Web Site identified by the URL www.amazon.com (and any successors or replacements). "COMPANY SITE" means the Web Site identified by the URL www.Pets.com (and any successors or replacements). "CONFIDENTIAL INFORMATION" means non-public information and know-how of the Disclosing Party which, by the nature of the circumstances surrounding disclosure, ought in good faith to be treated as proprietary and/or confidential, or which has been or is designated as proprietary and/or confidential, including without limitation any information exchanged between the Parties under Sections 5.2 and 5.3 of this Agreement. Confidential Information does not include information that the Receiving Party can show: (a) was known by the Receiving Party prior to disclosure thereof by the Disclosing Party; (b) was in or entered the public domain through no fault of the Receiving Party; (c) is disclosed to the Receiving Party by a third party legally entitled to make such disclosure without violation of any obligation of confidentiality; or (d) is independently developed by the Receiving Party without reference to any Confidential Information of the Disclosing Party. "DISCLOSING PARTY" means a Party that discloses Confidential Information to the other Party in connection with this Agreement. "HOME PAGE" means, with respect to a Web Site, the Web page designated by the operator of the Web Site as the initial and primary end user interface for the Web Site. "INTELLECTUAL PROPERTY RIGHT" means any patent, copyright, trademark, trade dress, trade name or trade secret right and any other intellectual property or proprietary right. "JUMP PAGE" means the Web page maintained on the Amazon.com Site, by or for Amazon.com. in accordance with Section 2.1.1. * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 2 "NEW COMPANY CUSTOMER" means any individual or entity that accesses the Company site via a hypertext link embedded in any Advertisement Placement on the Amazon.com Site and that either (a) [*] from Company or any or its Affiliates before leaving the Company Site by any means, or (b) places at least one product or service [*] or on a shopping list (or similar data construct) or otherwise identifies, selects or takes other affirmative steps [*] in a manner that is recorded and maintained on the Company Site, then [*] by any means, and subsequently [*] and purchases any such identified product or service. "NEW AMAZON.COM CUSTOMER" means any individual or entity that accesses the Amazon.com Site via a hypertext link embedded in any Advertising Placement on the Company Site and that either (a) [*] from Amazon.com or any of its Affiliates before leaving the Amazon.com Site by any means, or (b) places at least one product or service [*] or on a shopping list (or similar data construct) or otherwise identifies, selects or takes other affirmative steps to order a product or service in a manner that is recorded and maintained on the Company Site, then leaves [*] by any means, and subsequently returns to [*] such identified product or service. "RECEIVING PARTY" means a Party that receives Confidential Information from the other Party in connection with this Agreement. "TERM" means the term of this Agreement as defined in Section 9. "WEB SITE" means any point of presence maintained on the Internet or on any other public data network. With respect to any Web Site maintained on the World Wide Web or any successor public data network, such Web Site includes all HTML pages (or similar unit of information presented in any relevant data protocol) that either (a) are identified by the same second-level domain (such as http://www.amazon.com) or by the same equivalent level identifier in any relevant address scheme, or (b) contain branding, graphics, navigation or other characteristics such that a user reasonably would conclude that the pages are part of an integrated information or service offering. SECTION 2. [*] 2.1 [*] 2.1.1 During the Term, Amazon.com will create and maintain a Web page within the Amazon.com Site that contains (a) [*] Amazon.com users [*], and (b) a hypertext link that [*] Amazon.com [*] to the [*] of the [*]. The content, [*] and the [*]-related text and/or graphics contained in the Jump Page will be solely determined by Amazon.com after [*], subject to the implementation process outlined in Section 4 and the requirements of Section 6.3. 2.1.2 During the Term, Amazon.com [*] on the Amazon.com Site [*] from [*] of the [*] to the * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. -2- 3 Jump Page, in accordance with and subject to the terms and conditions of this Agreement. The [*] links will be determined by Amazon.com after [*], subject to the implementation process outlined in Section 4, and will be limited by, among other things, the impact on user experience, availability of space and other business considerations. Notwithstanding anything to the contrary contained in this Agreement, [*] to place a [*] on the Home Page of the Amazon.com Site. 2.1.3 Subject to Amazon.com's specific approval, and by way of example only, [*] (a) certain order confirmation and (b) relevant [*]. 2.1.4 If, during the Term, Amazon.com creates and maintains an area within the Amazon.com Site that [*] for the Web Sites [*]. Amazon.com will include a [*] in such area of the Amazon.com Site. The [*] will be determined by Amazon.com in [*]. 2.2 LAUNCH-RELATED PROMOTIONS 2.2.1 Promptly after the execution of this Agreement, Amazon.com and Company will (a) prepare and distribute a press release announcing the transaction, and (b) [*]. If mutually agreed, [*]. The contents and timing of the release (or releases) [*], if any, will be mutually agreed by the Parties. Neither Party will [*], make any other disclosures regarding this Agreement or its terms [*] without the other Party's prior written consent. 2.2.2 For a period of [*] following the date of this Agreement, Amazon.com will [*] to Company (as established by the Parties based on their reasonable determination as to [*] and subject to Amazon.com's [*]) to assist Company in the [*] of the [*] contemplated herein and the Company Site. SECTION 3. OBLIGATIONS OF COMPANY During the Term, Company will place and maintain [*] of the Company Site such [*] as Amazon.com may [*] to Company, in accordance with and subject to the implementation process outlined in Section 4 and the other terms and conditions of this Agreement. The [*] will include a [*] on the Amazon.com Site as is [*]. The placement and size [*] will be determined by Company [*], subject to the implementation process outlined in Section 4, and will be * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. -3- 4 limited by, among other things, the impact on user experience, availability of space and other business considerations. SECTION 4. IMPLEMENTATION 4.1 ACCOUNT MANAGERS. Each Party will assign an account manager (which manager shall be subject to change from time to time by the assigning Party upon written notice to the other Party) to facilitate coordination of the Parties' performance of their obligations hereunder (including, without limitation, in the creation and monitoring of the Advertising Placements). 4.2 COOPERATION. During the Term, the Parties will cooperate in good faith and use commercially reasonable efforts to (a) establish and implement procedures and processes for [*] under this Agreement, and (b) [*] in accordance with such procedures and processes and the terms and conditions of this Agreement. 4.3 APPROVAL. [*] placed on a [*] will be subject to such [*] prior to the time the same go live [*]. No such approval will be unreasonably withheld or delayed. SECTION 5. [*] 5.1 GENERAL. Except as expressly provided for elsewhere in this Agreement, each Party will be responsible for all [*] by such Party in [*] under this Agreement, and the [*] under this Agreement will be provided and undertaken by the Parties [*]. 5.2 [*]. Beginning with the [*] of the Term and for each [*] of the Term thereafter ("Quarter"), Company will, within [*] after the end of such Quarter, [*] for each [*] by the Company during the Quarter. Each [*] will be accompanied by a written statement setting forth the [*] and the Company's calculation of the [*] for such Quarter. Any [*] by Company [*] under this Section 5.2 will be [*] equal to [*] for [*] that Amazon.com acquires during the Quarter covered by such [*]. Any [*] when [*] will be subject to a [*] equal [*] per month or the [*] allowable by [*], [*] is less, determined and [*] from the date due until the date [*]. Payment of such [*] will not excuse or cure any breach or default for [*]. In no event will the Company be required to make more [*] to Amazon.com, nor Amazon.com be required to [*] made by the Company, during the Term with respect to any individual or entity that constitutes a [*] or a [*] Amazon.com [*], respectively. 5.3 RECORDS AND AUDIT. Company will maintain complete and accurate records of [*]. Amazon.com will maintain complete and accurate records of [*]. Each Party may, at its expense, [*] no more than once every twelve months in order to [*] under this * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. -4- 5 Agreement. Any such [*] be conducted, to the extent possible, in a manner that does not unreasonably [*] with the [*] operations. To the extent a Party uses an [*] to conduct such [*], the [*] shall agree in writing to maintain the confidentiality of information obtained during [*]. If any [*] an [*] of more than [*] of the [*] for any month, Company will [*] for the [*]. SECTION 6. PROPRIETARY RIGHTS 6.1 [*]. Subject to the [*] to Company under Section 6.2, Amazon.com hereby reserves all of its right, title and interest in its Intellectual Property Rights including, without limitation, all right, title and interest in and to all trademarks, trade dress, logos, insignia and copyrightable materials supplied by Amazon.com to Company hereunder. Subject to the foregoing and [*] under Section 6.3. Company reserves all of its right, title and interest in its Intellectual Property Rights, including, without limitation, all right, title and interest in and to all trademarks, trade dress, logos, insignia and copyrightable materials supplied by the Company to Amazon.com. 6.2 AMAZON.COM LICENSE. Arnazon.com hereby [*], during the Term, a [*] to use the [*], trademarks, service names and other proprietary marks [*] as [*] to perform its obligations under this Agreement; provided, however, that any [*] containing any of [*] will be subject to Amazon.com's prior written approval. All [*] out of any use of any of [*] by, through or under Company will inure solely to the benefit of [*]. 6.3 COMPANY LICENSE. Company [*] during the Term, a non-exclusive, [*] to use the [*] trademarks, service names and other proprietary marks and/or copyrightable materials supplied by Company as is reasonably necessary to perform its obligations under this Agreement; provided, however, that any [*] any of Company's marks will be subject to Company's prior written approval. All goodwill arising out of any use of any of Company's marks by, through or under Amazon.com will inure solely to the [*]. 6.4 NON-DISPARAGEMENT. Neither Company nor Amazon.com will use the other Party's [*] in a manner that disparages the other Party or its products or services, and/or portrays the other Party or its products or services in a false, competitively adverse or poor light. Each of Company and Amazon.com will comply with the other Party's requests as to the use of the other Party's proprietary marks and will avoid knowingly taking any action that diminishes the value of such marks. Either Party's use of the other [*] except as [*] is strictly prohibited. 6.5 [*]. Each Party expressly acknowledges and agrees that the rights granted to the other Party in this Agreement [*] and that, without limiting the generality of the foregoing, nothing in this Agreement shall be deemed to [*] links, banner ads or other material, serving content, links, banner ads or other materials [*] or hosting or permitting [*] * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. -5- 6 place links, content, banner ads or other material on [*] whether or not, in each such case, such content, links, banner ads or other materials [*] with the products, services, content or banner ads of [*]. SECTION 7. INDEMNITY 7.1 AMAZON.COM. Amazon.com will defend and indemnify Company and its Affiliates against any claim or action brought by a third party, to the extent it is based on (a) the operation of the Amazon.com Site or (b) infringement of such third-party's Intellectual Property Rights by any materials provided by Amazon.com for display on the Company Site. Subject to Section 7.3, Amazon.com will pay any award against Company and its Affiliates, or their respective employees, directors or representatives and any costs and attorneys' fees reasonably incurred by them resulting from any such claim or action. 7.2 COMPANY. Company will defend and indemnify Amazon.com and its Affiliates (and their respective employees, directors and representatives) against any claim or action brought by a third party, to the extent it is based on (a) the operation of the Company Site or (b) infringement of such third-party's Intellectual Property Rights by any materials provided by Company for display on any the Amazon.com Site. Subject to Section 7.3, Company will pay any award against Amazon.com or its Affiliates (or their respective employees, directors or representatives) and any costs and attorneys' fees reasonably incurred by Amazon.com and its Affiliates resulting from any such claim or action. 7.3 PROCEDURE. In connection with any claim or action described in this Section 7, the Party seeking indemnification will (a) give the indemnifying Party prompt written notice of the claim, (b) cooperate with the indemnifying Party (at the indemnifying Party's expense) in connection with the defense and settlement of the claim, and (c) permit the indemnifying Party to control the defense and settlement of the claim, provided that the indemnifying Party may not settle the claim without the indemnified Party's prior written consent (which will not be unreasonably withheld). Further, the indemnified Party (at its cost) may participate in the defense and settlement of the claim. SECTION 8. DISCLAIMERS, LIMITATIONS AND RESERVATIONS 8.1 COMPANY. COMPANY DOES NOT MAKE, AND HEREBY DISCLAIMS, ANY REPRESENTATIONS OR WARRANTIES REGARDING THE COMPANY SITE OR ANY PORTION THEREOF, INCLUDING (WITHOUT LIMITATION) IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, COMPANY SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY REGARDING (A) THE AMOUNT OF SALES REVENUE THAT AMAZON.COM MAY RECEIVE DURING THE TERM, AND (B) ANY ECONOMIC OR OTHER BENEFIT THAT AMAZON.COM MIGHT OBTAIN THROUGH ITS PARTICIPATION IN THIS AGREEMENT. 8.2 AMAZON.COM. AMAZON.COM DOES NOT MAKE, AND HEREBY DISCLAIMS, ANY REPRESENTATIONS OR WARRANTIES REGARDING THE * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. -6- 7 AMAZON.COM SITE OR ANY PORTION THEREOF, INCLUDING (WITHOUT LIMITATION) IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, AMAZON.COM SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY REGARDING (A) THE AMOUNT OF SALES REVENUES THAT MAY OCCUR DURING THE TERM, AND (B) ANY ECONOMIC OR OTHER BENEFIT THAT COMPANY MIGHT OBTAIN THROUGH ITS PARTICIPATION IN THIS AGREEMENT. 8.3 NO CONSEQUENTIAL DAMAGES. NEITHER PARTY WILL BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT LIMITATION, LOST PROFITS OR LOST DATA) ARISING OUT OF THIS AGREEMENT. EACH PARTY'S ENTIRE LIABILITY ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT (EXCEPT FOR LIABILITIES ARISING UNDER SECTION 6, RESULTING FROM THE PARTY'S WILLFUL MISCONDUCT OR GROSS NEGLIGENCE, OR CONCERNING LIABILITY FOR DEATH OR PERSONAL INJURY), WHETHER IN CONTRACT OR TORT (INCLUDING NEGLIGENCE), WILL NOT EXCEED THE AMOUNTS TO BE PAID TO AMAZON.COM UNDER SECTION 5, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING THE FAILURE OF THE ESSENTIAL PURPOSE OF ANY REMEDY. 8.4 RESPONSIBILITY FOR WEB SITES. Amazon.com will remain solely responsible for the operation of the Amazon.com Site, and Company will remain solely responsible for the operation of the Company Site. Each Party (a) acknowledges that the Amazon.com Site and the Company Site may be subject to temporary shutdowns due to causes beyond the operating Party's reasonable control, and (b) subject to the specific terms of this Agreement, retains sole right and control over the programming, content and conduct of transactions over its respective site or service. SECTION 9. TERM AND TERMINATION 9.1 TERM. The Term of this Agreement will begin as of the date of this Agreement and, unless earlier terminated as provided elsewhere in this Agreement, will end automatically [*] of the date of this Agreement; provided that, not less than [*] days prior to the end of the Term, the Parties will negotiate in good faith in an attempt to agree on the terms and conditions of an extension of the Term (including, without limitation, [*] for [*] provided during such [*]). If, after using reasonable efforts, the Parties are unable to agree upon such terms and conditions, neither Party will have any obligation to continue its participation in the negotiations. 9.2 TERMINATION FOR BREACH. Without limiting any other rights or remedies (including, without limitation, any right to seek damages and other monetary relief) that either Party may have in law or otherwise, either Party may terminate this Agreement if the other Party materially breaches its obligations hereunder, provided that (a) the non-breaching Party sends written notice to the breaching Party describing the breach, and (b) the breaching Party does not cure the breach within thirty (30) days following its receipt of such notice. * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. -7- 8 9.3 OTHER TERMINATION RIGHTS. Either Party may terminate this Agreement if the other Party (a) has a receiver or administrative receiver appointed for it or over its undertakings or assets, (b) passes a resolution for winding up or a court of competent jurisdiction makes an order to that effect and such order is not discharged within ninety (90) days, (c) enters into any voluntary arrangement with its creditors for the benefit of its creditors, (d) becomes subject to an administration order, or (e) ceases to carry on business. 9.4 EFFECT OF TERMINATION. On termination of this Agreement: (a) each Party in receipt, possession or control of the other Party's intellectual or proprietary property, information and materials pursuant to this Agreement must return to the other Party (or at the other Party's written request, destroy) such property, information and materials, (b) each Party must, subject to receiving written consent to the contrary from the other Party, immediately remove all links to the other Party's Web Site from its own Web Site, and (c) each Party must cease use of, and remove from its Web Site, all of the trademarks, trade dress, logos, insignia and copyrightable materials supplied by the other Party hereunder. Sections 5, 6, 7, 8, 9 and 10 (together with all other provisions that reasonably may be interpreted as surviving termination or expiration of this Agreement) will survive the termination or expiration of this Agreement. SECTION 10. MISCELLANEOUS 10.1 INDEPENDENT CONTRACTORS. The Parties are entering this Agreement as independent contractors, and this Agreement will not be construed to create a partnership, joint venture or employment relationship between them. Neither Party will represent itself to be an employee or agent of the other or enter into any agreement or legally binding commitment or statement on the other's behalf of or in the other's name. 10.2 NONDISCLOSURE. Each Party will protect the Confidential Information of the other Party from misappropriation and unauthorized use or disclosure, and at a minimum, will take precautions at least as great as those taken to protect its own confidential information of a similar nature. Without limiting the foregoing, the Receiving Party will: (a) use such Confidential Information solely for the purposes for which it has been disclosed; and (b) disclose such Confidential Information only to those of its employees, agents, consultants, and others who have a need to know the same for the purpose of performing this Agreement and who are informed of and agree to a duty of nondisclosure. The Receiving Party may also disclose Confidential Information of the Disclosing Party to the extent necessary to comply with applicable law or legal process, provided that the Receiving Party uses reasonable efforts to give the Disclosing Party prompt advance notice thereof. Upon request of the other Party, or in any event upon any termination or expiration of the Term, each Party shall return to the other all-materials, in any medium, which contain, embody, reflect or reference all or any part of any Confidential Information of the other Party. 10.3 COMPLIANCE WITH LAWS. In its performance of this Agreement, each Party will comply with all applicable laws, regulations, orders and other requirements, now or hereafter in effect, of governmental authorities having jurisdiction. Without limiting the generality of the foregoing, each Party will pay, collect, remit and otherwise be responsible such taxes as may be imposed upon such Party in the first instance with respect to any compensation, royalties or transactions under this Agreement. Except as expressly provided herein, each Party will be -8- 9 responsible for all costs and expenses incurred by it in connection with the negotiation, execution and performance of this Agreement. 10.4 NOTICES. Any notice or other communication under this Agreement given by either Party to the other Party will be in writing and will be deemed properly given when sent to the intended recipient by registered letter, receipted commercial courier, or electronically receipted facsimile transmission (acknowledged in like manner by the intended recipient) at its address specified below its signature at the end of this Agreement, and in the case of Amazon.com. with a copy to Amazon.com. Inc., 1516 Second Avenue, Seattle, WA 98101, USA, Facsimile: 206-834-7010, Attn: General Counsel; provided, that no notice of termination of this Agreement shall be deemed properly given unless sent by registered mail to such address(es) and to the attention of such officer(s). Either Party may from time to time change such address or individual by giving the other Party notice of such change in accordance with this Section 10.4. 10.5 ASSIGNMENT. Neither Amazon.com nor Company may assign this Agreement, in whole or in part, without the other Party's prior written consent (which will not be withheld unreasonably), except to (a) any corporation resulting from any merger, consolidation, or other reorganization involving the assigning Party, (b) any of its Affiliates, or (c) any person or entity to which the assigning Party may transfer substantially all of its assets; provided that the assignee agrees in writing to be bound by all the terms and conditions of this Agreement. Subject to the foregoing, this Agreement will be binding on and enforceable by the Parties and their respective successors and permitted assigns. 10.6 NONWAIVER. The failure of either Party to enforce any provision of this Agreement will not constitute a waiver of the Party's rights to subsequently enforce the provision. The remedies specified in this Agreement are in addition to any other remedies that may be available in law. 10.7 ENTIRE AGREEMENT. This Agreement (a) represents the entire agreement between the Parties with respect to the subject matter hereof and supersedes any previous or contemporaneous oral or written agreements regarding such subject matter, (b) may be amended or modified only by a written instrument signed by a duly authorized agent of each Party, and (c) will be interpreted, construed and enforced in all respects in accordance with the laws of the laws of the State of Washington, without reference to its choice of law rules. If any provision of this Agreement is held to be invalid, such invalidity will not effect the remaining provisions. No breach of this Agreement by either Party shall affect the rights or obligations of either Party under any other Agreement between the Parties; rather, the same will remain in full force and effect. -9- 10 amended or modified only by a written instrument signed by a duly authorized agent of each Party, and (c) will be interpreted, construed and enforced in all respects in accordance with the laws of the laws of the State of Washington, without reference to its choice of law rules. If any provision of this Agreement is held to be invalid, such invalidity will not effect the remaining provisions. No breach of this Agreement by either Party shall affect the rights or obligations of either Party under any other Agreement between the Parties; rather, the same will remain in full force and effect. Amazon: Company: AMAZON.COM, INC. PETS.COM, INC. By: /s/ RAM SHRIRAM By: /s/ JULIE WAINWRIGHT ------------------------------- --------------------------------- Title: V.P. Business Development Title: CEO ---------------------------- ------------------------------ Date: April 20, 1999 Date: 4/22/99 ---------------------------- ------------------------------- Notice Address: Notice Address Amazon.com Incorporated Pets.com, Inc. 1516 Second Ave., Floor 2 87 N. Raymond Avenue, Suite 850 Seattle, WA 98101 Pasadena, CA 91103 Facsimile: 206.834.7010 Facsimile: 626.794.8500 -10- EX-10.19 25 SOFTWARE LICENSE AGREEMENT 1 EXHIBIT 10.19 SOFTWARE LICENSE AND SERVICES AGREEMENT This Software License and Services Agreement ("Agreement") is made and entered into as of this 21st day of May, 1999, between BroadVision, Inc. ("BroadVision") and Company Pets.com ------------------------------------- ("Customer") Address 5903 Christie Ave. ------------------------------------- Emeryville, CA 94608 ------------------------------------- In consideration of the mutual covenants and conditions contained in this Agreement, the parties agree as stated herein. The following attachments, required when applicable, are also part of this Agreement: A. Current Licensing Practices B. Required Provisions of Sublicenses C. Professional Services Terms & Conditions 1. LICENSE. A. BroadVision hereby grants to Customer a perpetual (unless terminated as set forth herein), [*] , subject to the terms and conditions of this Agreement, to use the object code for the Software. For the purpose of this Agreement, "Software" shall mean all versions, including current, previous, and subsequent versions, of all software products, together with operating instructions, user manuals, training material, and other documentation as may, in BroadVision's sole discretion, be supplied to Customer. B. Customer may use the Software in accordance with [*] in force at the time of delivery of the applicable Software products. BroadVision's current licensing practices are [*] A. C. Customer [*] (a) [*] the Software; (b) electronically transmit the Software over a network except as necessary for Customer's licensed use of the Software; (c) use run-time versions of third-party products embedded in the Software, if any, for any use other than the intended use of the Software, (d) modify, disassemble, decompile, or reverse engineer the Software; (e) transfer possession of any copy of the Software to another party, except as expressly permitted herein; or (f) use the Software in any way not expressly provided for in this Agreement. There are no implied licenses. Customer agrees not to exceed the scope of the licenses granted herein. D. BroadVision also grants to Customer the right to grant nontransferable sublicenses to portions of the Software, where such grants are explicitly permitted by BroadVision's licensing practices. Customer shall require each such sublicensee, before it may use or install the sublicensed Software, to execute a written license agreement containing, at a minimum, the required provisions specified in Attachment B. Customer shall indemnify BroadVision for all losses, costs, damages, expenses, and liabilities caused by Customer's failure to include required terms in its sublicense agreements with its sublicensees. 2. PAYMENT, PRICES. A. Invoices shall be issued upon delivery of the products or services, unless specified herein to the contrary, and shall be due and payable in United States currency upon receipt by Customer. Payment shall be overdue thirty (30) days after the delivery date specified on the invoice. Overdue payments shall be subject to a finance charge of one and one-half percent (1 1/2%) for each month or fraction thereof that the invoice is overdue, or the highest interest rate permitted by applicable law, whichever is lower. BroadVision shall also be reimbursed for its collection costs in the event of late payments, including reasonable attorney's fees. B. Software will be shipped FOB BroadVision's facility in Redwood City, California, U.S.A., by commercial surface transportation. Transportation charges in excess of such rates will be billed to Customer. Software shall be deemed accepted upon delivery. C. The prices stated in BroadVision quotations are exclusive of any federal, state, municipal, value-added, foreign withholding or other governmental taxes, duties, fees, excises, or tariffs now or hereafter imposed on the production, storage, licensing, sale, transportation, import, export, or use of the Software or any improvements, alterations, or amendments to the Software. Customer shall be responsible for, and if necessary reimburse, BroadVision for all such taxes, duties, fees, excises, or tariffs, except for governmental or local taxes imposed on BroadVision's corporate net income. * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. SLSA 1/98 BroadVision, Inc. Page 1 of 5 2 3. SOFTWARE MAINTENANCE. A. BroadVision agrees to provide Customer with software maintenance subject to the following provisions and conditions: i. At Customer's request, BroadVision shall provide software maintenance at prices to be quoted to Customer. Software maintenance shall include (i) telephone and electronic mail support provided during BroadVision's normal working hours, and (ii) standard releases containing improvements or modifications to the Software, where such improvements or modifications are not priced as separate new products or options ("Standard Release"). ii. BroadVision shall provide software maintenance for any Standard Release until 180 days after shipment of the subsequent Standard Release. iii. Customer shall designate one or, with BroadVision's prior written approval, more than one Support Contact Person, who shall be responsible for communicating support issues to BroadVision. Customer agrees to provide BroadVision with timely written notification containing all details of software problems necessary for BroadVision to diagnose such problems. Customer agrees to cooperate fully in providing BroadVision with Customer's source code, in machine-readable form, and other materials necessary to reproduce a reported software problem. Subject to Customer's security requirements, Customer agrees to provide BroadVision reasonable direct or remote access and test time on Customer's BroadVision system, for the purpose of diagnosing reported software problems. If BroadVision provides on-site services at Customer's request in connection with software maintenance, Customer shall reimburse BroadVision for all travel and other reasonable out-of-pocket expenses incurred with respect to such services. iv. Software maintenance may also include any patch releases ("Patch Releases") that BroadVision, in its sole discretion, makes available. Patch Releases are intended to address material deviations between the Software and its published specifications until a Standard Release can be made available. Customer may install Patch Releases at its option. v. BroadVision shall not be responsible for maintaining Software that fails to comply with its published specifications if such non-compliance is the result of modification of the Software by Customer or third parties. If BroadVision expends its time on a noncompliance found to be the result of any of the preceding, Customer shall pay BroadVision for such time at BroadVision's then-current hourly consulting rate. B. Unless terminated by either party with at least ninety days notice, software maintenance will automatically be renewed for successive one-year periods at BroadVision's then-current prices for software maintenance. In the event of termination for Customer's breach or Customer's convenience, all maintenance fees shall be immediately due and payable without notice; in the event of termination for any other reason, Customer shall be entitled to a refund of maintenance fees already paid, prorated for the unused portion of such fees. C. Annual software maintenance fees are due and payable in advance; in all other respects payments are subject to the terms and conditions of the Agreement. D. If Customer initially declines software maintenance and then subsequently elects to commence maintenance, or if maintenance for an item of Software is discontinued at Customer's request and then subsequently renewed, Customer shall pay the maintenance fees that would have been due for the period during which maintenance was not provided. 4. TITLE TO SOFTWARE. A. Customer shall include BroadVision's copyright or proprietary rights notice on any copies of the Software or associated documentation, including copyright or proprietary rights notices of third parties that are included on media or in documentation provided by BroadVision. Customer acknowledges that the Software is the property of BroadVision or its licensors. B. Unless otherwise requested by BroadVision, Customer shall ensure that the phrase, "Personalized by BroadVision One-To-One" shall appear prominently on the logon screen, splash screen, or other first view of the Customer's application seen by consumers or other end-users when they enter such application. The above phrase shall be a hypertext link to a URL specified by BroadVision. Customer's use of the phrase SLSA 1/98 BroadVision, Inc. Page 2 of 5 3 shall be in accordance with BroadVision's guidelines for use of the mark. 5. WARRANTY. BroadVision warrants that the Software will conform in all material respects to its written specifications when installed and for 90 days thereafter. For purposes of this Agreement, the sole source of such specifications shall be BroadVision's written user documentation. Customer will notify BroadVision within 10 days after the expiration of the warranty period of any nonconformity. Where a material nonconformity exists within the warranty period, and proper notice has been given to BroadVision, BroadVision will, as its sole and exclusive liability to Customer, use due diligence to correct the nonconformity and provide Customer with one copy of any such corrected version of the Software, or, if BroadVision is unable to correct such nonconformances within a reasonable period of time, refund all license fees paid to it for the Software, or the most recent software maintenance fee paid for the Software, if the nonconformity relates to a Standard Release delivered pursuant to Section 3 herein. THIS WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES AND CONDITIONS, EXPRESSED OR IMPLIED, AND BROADVISION EXPRESSLY DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE, OR NONINFRINGEMENT. 6. LIMITATION OF LIABILITY. BroadVision's liability to Customer under this Agreement or for any other reason relating to the products and services provided under this Agreement, including claims for contribution or indemnity, shall be limited to the amount paid to BroadVision under this Agreement. NOTWITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE OF ANY REMEDY UNDER THIS AGREEMENT, THE PARTIES AGREE THAT IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES, INCLUDING LOST PROFITS OR LOSS OF USE, PROVIDED THAT FOR PURPOSES OF THIS SECTION 6 LOST REVENUES RELATED TO UNAUTHORIZED USE OR DISCLOSURE OF THE SOFTWARE SHALL BE DEEMED A DIRECT DAMAGE. 7. INTELLECTUAL PROPERTY RIGHTS INDEMNITY. BroadVision will defend and hold harmless Customer against any claim that the Software constitutes infringement of a patent, copyright, trademark, or trade secret. BroadVision shall also indemnify Customer for any reasonable expense incurred by Customer in connection with the foregoing. BroadVision's obligations under this section are conditioned upon BroadVision having sole control of any such action, and upon Customer notifying BroadVision immediately in writing of the claim and giving authority, information, and assistance necessary to settle or defend such claim. If the use of the Software infringes or is enjoined, or BroadVision believes it is likely to infringe or be enjoined, BroadVision may, at its sole option, (i) procure for Customer the right to continue use of the licensed Software as furnished; (ii) replace the licensed Software; (iii) modify the licensed Software to make it non-infringing, provided that the Software still substantially conforms to the applicable specifications; or (iv) if BroadVision, after using all commercially reasonable efforts, is unable to accomplish the foregoing remedies, terminate the license and refund the license fee for the Software, less a proportional adjustment for the time the Software was used by Customer, equal to the ratio of the time elapsed since the delivery date to five (5) years. The indemnity provided herein shall not apply if the alleged infringement arises from: (a) the use of other than a currently supported, unaltered release of the licensed Software; (b) the use of Software that has been modified or merged with other programs by Customer; or (c) the use of the licensed Software in combination with software or hardware not provided under this Agreement. The foregoing states BroadVision's sole and exclusive liability for patent, copyright, or other proprietary rights infringement. 8. CONFIDENTIALITY OF SOFTWARE AND DOCUMENTS. A. Customer shall not reproduce, duplicate, copy, sell, or otherwise disclose, or disseminate the Software, including operating instructions, user manuals, and training materials, in any medium except as authorized herein. Customer may make copies of the Software, in machine readable form, only as is reasonably necessary for archival and backup purposes. B. Customer expressly undertakes, using reasonable efforts not less than it exercises for its own confidential materials, to retain in confidence, and to require its employees or consultants to retain the Software in confidence, and will make no use of such information, except under the terms and during the existence of this Agreement, and only to the extent that such use is necessary to Customer's employees or consultants in the course of their employment. SLSA 1/98 BroadVision, Inc. Page 3 of 5 4 C. The provisions of this section shall survive the termination of this Agreement for a period of five (5) years. D. Customer shall not release the results of any benchmark of the Software, or of any third party products embedded in the Software, without BroadVision's prior written approval. 9. AUDIT RIGHTS. At BroadVision's request, but in no event more than twice annually, Customer shall provide BroadVision with a report detailing its use of the Software. No more than once annually, BroadVision may audit Customer's records to ensure that license and other fees have been properly paid in compliance with this Agreement. Any such audit will be conducted during regular business hours at Customer's offices and shall not interfere unreasonably with Customer's business activities. If an audit reveals that Customer has underpaid its total fees by more than five percent (5%), then Customer shall pay BroadVision's reasonable costs of conducting the audit, in addition to the underpaid amount. 10. TERM/TERMINATION. This Agreement is effective on the earlier of (i) the date of shipment of the Software or (ii) the date set forth above, and continues until terminated as provided herein, or by agreement of both parties. BroadVision may terminate this Agreement upon: (a) any material breach of this Agreement by Customer that is not cured within 30 days following written notice thereof; or (b) failure by Customer to pay license fees for Software under the payment terms specified in this Agreement or as stated on BroadVision's invoice for such Software, which failure remains uncured after thirty (30) days written notice thereof. Upon termination of this Agreement for any of the above reasons, all licenses granted hereunder terminate and Customer will immediately destroy the Software and all copies in any form. Upon termination for any other reason, Customer may continue to use the Software, provided that Sections 1, 2 (to the extent that any amounts are owed to BroadVision as of the termination date), 4, 6, 7, 8, 9, and 11 shall survive the termination of this Agreement, and BroadVision may terminate Customer's use of the Software upon a material breach of any of the surviving sections. 11. GENERAL. A. WAIVER/AMENDMENT. No waiver, amendment, or modification of any provision of this Agreement shall be effective unless in writing and signed by the party against whom such waiver, amendment, or modification is sought to be enforced. No failure or delay by either party in exercising any right, power or remedy under this Agreement, except as specifically provided herein, shall be deemed as a waiver of any such right, power, or remedy. B. ASSIGNMENT. Either party may assign this Agreement to an entity acquiring substantially all of its assets or merging with it, provided that such assignee agree in writing to assume all obligations under this Agreement. Except as set forth above, neither party may assign any of its rights or delegate any of its obligations under this Agreement to any third party without the express written consent of the other. Any attempted assignment in violation of the foregoing shall be void and of no effect. Subject to the above, this Agreement shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto. C. DISPUTES. The rights of the parties hereunder shall be governed by the laws of the State of California without giving effect to principles of conflicts of laws. Any suits brought hereunder may be brought in the federal or state courts in Santa Clara County, California, and Customer submits to the jurisdiction thereof. The parties expressly exclude the application of the 1980 United Nations Convention on Contracts for the International Sale of Goods, if applicable. Customer acknowledges that the Software contains trade secrets, the disclosure of which would cause substantial harm to BroadVision that could not be remedied by the payment of damages alone. Accordingly, BroadVision will be entitled to preliminary and permanent injunctive relief and other equitable relief for any breach of BroadVision's intellectual property rights in the Software. D. SEVERABILITY. If any provision of this Agreement shall be held by a court of competent jurisdiction to be contrary to law, the remaining provisions of this Agreement shall remain in full force and effect. E. EXPORT. Customer acknowledges that the laws and regulations of the United States restrict the export of the Software. Customer agrees that it will not export or re-export the Software in any form without first obtaining the appropriate United States and foreign government approvals. SLSA 1/98 BroadVision, Inc. Page 4 of 5 5 F. NOTICE. Any notice, consent, or other communication hereunder shall be in writing, and shall be given personally, by confirmed fax or express delivery to either party at their respective addresses: (i) to BroadVision at: BroadVision, Inc. 585 Broadway Redwood City, CA 94063, USA Attn: Chief Financial Officer (ii) to Customer at: Pets.com 435 Brannan St. San Francisco, CA Attn: Julie Wainwright or such other address as may be designated by written notice of either party. Notices shall be deemed given when delivered or transmitted, or seven days after deposit in the mail. G. INDEPENDENT CONTRACTORS. The parties' relationship shall be solely that of independent contractor and nothing contained in this Agreement shall be construed to make either party an agent, partner, joint venturer, or representative of the other for any purpose. H. FORCE MAJEURE. If the performance of this Agreement, or any obligation hereunder, except the making of payments, is prevented, restricted, or interfered with by reason of any act or condition beyond the reasonable control of the affected party, the party so affected will be excused from performance to the extent of such prevention, restriction, or interference. I. ENTIRE AGREEMENT. This Agreement, including all Attachments hereto, constitutes the complete and exclusive agreement between the parties with respect to the subject matter hereof and supersedes all proposals, oral, or written, all previous negotiations, and all other communications between the parties with respect to the subject matter hereof. The terms of this Agreement shall prevail notwithstanding any different, conflicting, or additional terms that may appear in any purchase order or other Customer document. All products and services delivered by BroadVision to Customer are subject to the terms of this Agreement, unless specifically addressed in a separate agreement. AGREED TO BY: BROADVISION, INC. /s/ Randall Bolten -------------------------------- Signature Randall Bolten -------------------------------- Printed Name CFO -------------------------------- Title CUSTOMER: Pets.com -------------------------------- Company Name /s/ Paul Melmon -------------------------------- Signature Paul Melmon -------------------------------- Printed Name Vice President, Engineering -------------------------------- Title SLSA 1/98 BroadVision, Inc. Page 5 of 5 EX-10.20 26 SERIES B PREFERRED STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.20 PETS.COM, INC. SERIES B PREFERRED STOCK PURCHASE AGREEMENT This Series B Preferred Stock Purchase Agreement (the "Agreement") is made as of the 18th of June, 1999 by and between Pets.com, Inc., a California corporation (the "Company"), and the investors listed on Exhibit A attached hereto (each a "Purchaser" and together the "Purchasers"). The parties hereby agree as follows: 1. PURCHASE AND SALE OF PREFERRED STOCK. 1.1 SALE AND ISSUANCE OF SERIES B PREFERRED STOCK. (a) The Company shall adopt and file with the Secretary of State of the State of California on or before the Closing (as defined below) the Second Amended and Restated Articles of Incorporation in the form attached hereto as Exhibit B (the "Restated Articles"). (b) Subject to the terms and conditions of this Agreement, each Purchaser agrees, severally and not jointly, to purchase at the Closing and the Company agrees to sell and issue to each Purchaser at the Closing that number of shares of Series B Preferred Stock set forth opposite each such Purchaser's name on Exhibit A attached hereto at a purchase price of $7.55 per share. The shares of Series B Preferred Stock issued to the Purchaser pursuant to this Agreement shall be hereinafter referred to as the "Stock." 1.2 CLOSING; DELIVERY. (a) The purchase and sale of the Stock shall take place at the offices of Venture Law Group, 2800 Sand Hill Road, Menlo Park, California, at 10:00 a.m., on June 18, 1999, or at such other time and place as the Company and the Purchasers mutually agree upon, orally or in writing (which time and place are designated as the "Closing"). (b) At the Closing, the Company shall deliver to each Purchaser a certificate representing the Stock being purchased thereby against payment of the purchase price therefor by check payable to the Company or by wire transfer to the Company's bank account or by cancellation of indebtedness, or any combination thereof. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to each Purchaser that, except as set forth on a Schedule of Exceptions attached hereto as Exhibit C, which exceptions shall be deemed to be representations and warranties as if made hereunder: 2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of -1- 2 California and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted in the future. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business or properties. 2.2 CAPITALIZATION. The authorized capital of the Company consists, or will consist, immediately prior to the Closing, of: (a) 14,127,328 shares of Preferred Stock, 7,227,328 of which shares have been designated Series A Preferred Stock, all of which are issued and outstanding immediately prior to the Closing, and 6,900,000 of which shares have been designated Series B Preferred Stock, none of which are issued and outstanding immediately prior to the Closing. The rights, privileges and preferences of the Preferred Stock are as stated in the Restated Articles. All of the outstanding shares of Preferred Stock have been duly authorized, fully paid and are nonassessable and issued in compliance with all applicable federal and state securities laws. (b) 30,000,000 shares of Common Stock, 2,973,860 shares of which are issued and outstanding immediately prior to the Closing. All of the outstanding shares of Common Stock have been duly authorized, fully paid and are nonassessable and issued in compliance with all applicable federal and state securities laws. (c) The Company has reserved 4,187,167 shares of Common Stock for issuance to officers, directors, employees and consultants of the Company pursuant to its 1999 Stock Plan duly adopted by the Board of Directors and approved by the Company shareholders (the "Stock Plan"). Of such reserved shares of Common Stock, 1,162,023 shares have been issued pursuant to restricted stock purchase agreements, options to purchase 2,145,636 shares have been granted or are currently outstanding, and 879,508 shares of Common Stock remain available for issuance to officers, directors, employees and consultants pursuant to the Stock Plan. Except as set forth on the Schedule of Exceptions, options and Common Stock granted to employees by the Company pursuant to the Stock Plan are subject to the following vesting schedule: 25% of the shares comprising each grant to employees shall vest on the one-year anniversary of the vesting commencement date for such grant, and thereafter 1/48th of the shares comprising the grant shall vest on each monthly anniversary of the vesting commencement date for such grant over the following 36 months. Unvested shares of Common Stock issued to employees pursuant to the Stock Plan are subject to the Company's right of repurchase at the original grantee's purchase price. (d) Except for (a) the conversion privileges of the outstanding Series A Preferred Stock and the Series B Preferred Stock to be issued pursuant to this Agreement, (b) the Right of First Offer set forth in Section 2.3 of the Amended and Restated Investors Rights Agreement to be entered into by the Company, Greg McLemore, the Purchasers and the holders of Series A Preferred Stock at the Closing, and (c) outstanding options issued pursuant to the Stock Plan, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal or similar rights) or agreements, orally or in writing, for the purchase or acquisition from the Company of any shares of its capital stock. Other than -2- 3 the Amended and Restated Voting Agreement of even date herewith by and among the Company, Greg McLemore, Julie Wainwright, the holders of Series A Preferred Stock and the Purchasers hereunder, the Company is not a party or subject to any agreement or understanding, and to the best of its knowledge, there is no agreement or understanding between any persons and/or entities, that affects or relates to the voting or giving of written consents with respect to any security or by a director of the Company. 2.3 SUBSIDIARIES. The Company does not currently own or control, directly or indirectly, any interest in any other corporation, association, or other business entity. The Company is not a participant in any joint venture, partnership or similar arrangement. 2.4 AUTHORIZATION. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the Amended and Restated Investors' Rights Agreement, in the form attached hereto as Exhibit D (the "Investors' Rights Agreement"), the Amended and Restated Right of First Refusal and Co-Sale Agreement in the form attached hereto as Exhibit E (the "Co-Sale Agreement") and the Amended and Restated Voting Agreement in the form attached hereto as Exhibit F (the "Voting Agreement" and collectively with this Agreement, the Investors' Rights Agreement and the Co-Sale Agreement, the "Agreements"), the performance of all obligations of the Company hereunder and thereunder and the authorization, issuance (or reservation for issuance), sale and delivery of the Stock and the Common Stock issuable upon conversion of the Stock (together, the "Securities") has been taken or will be taken prior to the Closing, and the Agreements, when executed and delivered by the Company, shall constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and other laws of general application affecting enforcement of creditors' rights generally, as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, or (ii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. The sale of the Securities is not and will not be subject to any preemptive rights or rights of first refusal, except for those rights waived or exercised by certain Purchasers purchasing the Stock set forth on Exhibit A. 2.5 VALID ISSUANCE OF SECURITIES. The Stock that is being issued to the Purchasers hereunder, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement, the Investors' Rights Agreement and applicable state and federal securities laws. Based in part upon the representations of the Purchasers in this Agreement and subject to the provisions of Section 2.6 below, the Stock will be issued in compliance with all applicable federal and state securities laws. The Common Stock issuable upon conversion of the Stock has been duly and validly reserved for issuance, and upon issuance in accordance with the terms of the Restated Articles, shall be duly and validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement, the Investors' Rights Agreement -3- 4 and applicable federal and state securities laws and will be issued in compliance with all applicable federal and state securities laws. 2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement, except for the filing of the Restated Articles and filings pursuant to Section 25102(f) of the California Corporate Securities Law of 1968, as amended, and the rules thereunder, other applicable state securities laws and Regulation D of the Securities Act of 1933, as amended (the "Securities Act"). 2.7 OFFERING. Subject in part to the truth and accuracy of each Purchaser's representations set forth in Section 3 of this Agreement, the offer, sale and issuance of the Series B Preferred Stock as contemplated by this Agreement are, to the Company's knowledge, exempt from the registration requirements of any applicable state and federal securities laws, and neither the Company nor any authorized agent acting on its behalf will knowingly take any action hereafter that would cause the loss of such exemption. 2.8 LITIGATION. There is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company that questions the validity of the Agreements or the right of the Company to enter into them, or to consummate the transactions contemplated hereby or thereby, or that might result, either individually or in the aggregate, in any material adverse changes in the assets, condition or affairs of the Company, financially or otherwise, or any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for the foregoing. The foregoing includes, without limitation, actions, suits, proceedings or investigations pending or threatened involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with former employers. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality nor has the Company received any notice thereof. There is no action, suit, proceeding or investigation by the Company or any of its subsidiaries currently pending or which the Company or any of its subsidiaries intends to initiate. 2.9 INTELLECTUAL PROPERTY. To its knowledge, the Company owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes necessary for its business as now conducted and as proposed to be conducted in the future without any conflict with, or infringement of, the rights of others and believes it can obtain, on commercially reasonable terms, any additional rights necessary for the conduct of its business as proposed to be conducted. The Company has not received any communications alleging that the Company has violated or, by conducting its business as currently conducted or as presently proposed, would violate any of the patents, trademarks, service marks, tradenames, copyrights, trade secrets or other proprietary rights or processes of any other person or entity. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or -4- 5 commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of such employee's best efforts to promote the interest of the Company or that would conflict with the Company's business as currently conducted or as proposed to be conducted. Neither the execution or delivery of the Agreements, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed, will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any such employee is now obligated. The Company does not believe it is or will be necessary to use any inventions, trade secrets or proprietary information of any of its employees (or persons it currently intends to hire) made prior to their employment by the Company. The Schedule of Exceptions includes a list of all patents, copyrights, trademarks and domain names claimed or owned by the Company and all licenses by the Company of any intellectual property or technology from third parties. 2.10 COMPLIANCE WITH OTHER INSTRUMENTS. (a) The Company is not in violation or default of any provisions of its Restated Articles or Bylaws or of any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound or, to its knowledge, of any provision of federal or state statute, rule or regulation applicable to the Company. The execution, delivery and performance of the Agreements and the consummation of the transactions contemplated hereby or thereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract or an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company or nonrenewal of any permit, license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties. (b) To its knowledge, the Company has avoided every condition, and has not performed any act, the occurrence of which would result in the Company's loss of any right granted under any license, permit, authorization, distribution agreement or other agreement. 2.11 AGREEMENTS; ACTION. (a) Except for agreements explicitly contemplated by the Agreements, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, members of their immediate families, affiliates, or any affiliate thereof. (b) Except for agreements explicitly contemplated by the Agreements, there are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs, or decrees to which the Company is a party or by which it is bound that involve (i) obligations (contingent or otherwise) of, or payments to, the Company in excess of $15,000, (ii) the license of any patent, copyright, trade secret or other proprietary right to or from the Company, (iii) the grant of rights to manufacture, produce, assemble, license, market, or sell its products to any other person or affect the Company's exclusive right to develop, manufacture, -5- 6 assemble, distribute, market or sell its products or services, or (iv) indemnification by the Company with respect to infringement of proprietary rights. (c) The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or Series of its capital stock, (ii) incurred any indebtedness for money borrowed or incurred any other liabilities individually in excess of $15,000 nor, in the case of indebtedness and/or liabilities individually less than $15,000, in excess of $50,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. (d) For purposes of subsections (b) and (c) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. (e) The Company is not a party to and is not bound by any contract, agreement or instrument, or subject to any restriction under its Restated Articles or Bylaws that, to its knowledge, adversely affects its business as now conducted and as proposed to be conducted in the future, its properties or its financial condition. (f) The Company has not engaged in the past three (3) months in any discussion (i) with any representative of any corporation or corporations regarding the merger of the Company with or into any such corporation or corporations, (ii) with any representative of any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company or a transaction or Series of related transactions in which more than fifty percent (50%) of the voting power of the Company would be disposed of, or (iii) regarding any other form of liquidation, dissolution or winding up of the Company. 2.12 DISCLOSURE. The Company has fully provided the Purchasers with all the information that the Purchasers have requested for deciding whether to acquire the Stock and all information that the Company believes is reasonably necessary to enable the Purchasers to make such a decision, including certain financial projections. No representation or warranty of the Company contained in this Agreement and the exhibits attached hereto, any certificate furnished or to be furnished to Purchasers at the Closing, or other information furnished to the Purchasers (when read together) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. To the extent the financial projections were prepared by management of the Company, such financial projections were prepared in good faith. The assumptions applied in preparing such projections appeared reasonable to management as of the date thereof and as of the date hereof. The Purchasers understand that actual results may differ substantially from those projections. -6- 7 2.13 NO CONFLICT OF INTEREST. The Company is not indebted (or committed to make loans or extend or guarantee credit), directly or indirectly, to any of its employees, officers or directors or to their respective spouses or children, in any amount whatsoever other than in connection with expenses or advances of expenses incurred in the ordinary course of business or relocation expenses of employees nor is the Company contemplating such indebtedness as of the date of this Agreement. None of the Company's employees, officers or directors, or any members of their immediate families, are, directly or indirectly, indebted to the Company (other than in connection with purchases of the Company's stock) or, to the Company's knowledge, have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation which competes with the Company nor is the Company contemplating such indebtedness as of the date of this Agreement, except that employees, officers, directors and/or shareholders of the Company may own stock in (but not exceeding two percent of the outstanding capital stock of) any publicly traded company that may compete with the Company. To the Company's knowledge, none of the Company's officers, directors or shareholders or any members of their immediate families are, directly or indirectly, interested in any material contract with the Company, nor does any such person own, directly or indirectly, in whole or in part, any material tangible or intangible property that the Company uses or contemplates using in the conduct of its business. The Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 2.14 RIGHTS OF REGISTRATION AND VOTING RIGHTS. Except as contemplated in the Investors' Rights Agreement, the Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. Except as contemplated in the Voting Agreement, to the Company's knowledge, no shareholder of the Company has entered into any agreements with respect to the voting of capital shares of the Company. 2.15 TITLE TO PROPERTY AND ASSETS. The Company owns its property and assets free and clear of all mortgages, liens, loans and encumbrances, except such encumbrances and liens which arise in the ordinary course of business and do not materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and, to its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances. 2.16 BALANCE SHEET. The Company has delivered to each Purchaser that has requested it a copy of its unaudited balance sheet as of May 31, 1999 (the "Balance Sheet"), attached hereto as Exhibit G. The Balance Sheet has been prepared in accordance with generally accepted accounting principles and fairly presents the financial condition of the Company as of the date indicated therein, subject to normal year-end audit adjustments. Except as set forth in the Balance Sheet, the Company has no material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to May 31, 1999 that are not material, individually or in the aggregate, and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Balance Sheet, which, in both cases, individually or in the aggregate are not material to the financial condition or operating results of the Company. Except -7- 8 as disclosed to the Purchasers, the Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. The Company maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles. 2.17 EMPLOYEE BENEFIT PLANS. The Company does not have any Employee Benefit Plan as defined in the Employee Retirement Income Security Act of 1974. 2.18 LABOR AGREEMENTS AND ACTIONS. The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending, or to the knowledge of the Company threatened, which could have a material adverse effect on the assets, properties, financial condition, operating results, or business of the Company (as is presently conducted and as it is proposed to be conducted), nor is the Company aware of any labor organization activity involving its employees. The Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company, nor does the Company have the present intention to terminate the employment of any of the foregoing. The employment of each officer and employee of the Company is terminable at the will of the Company. To its knowledge, the Company has complied in all material respects with all applicable state and federal equal employment opportunity laws and with other laws related to employment. The Company is not a party to or bound by any currently effective employment contract, deferred compensation agreement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation plan or agreement. 2.19 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AND EMPLOYEE STOCK PURCHASE AGREEMENTS. Each current and former employee, consultant and officer of the Company has executed agreements with the Company regarding confidentiality and proprietary information (the "Confidential Information and Invention Assignment Agreement") and any stock purchases substantially in the form or forms delivered to the counsel for the Purchasers. No current employee, officer or consultant of the Company has excluded works or inventions made prior to his or her employment with the Company from his or her assignment of inventions pursuant to such employee, officer or consultant's Confidential Information and Invention Assignment Agreement. The Company is not aware that any of its employees or consultants is in violation thereof, and the Company will use its best efforts to prevent any such violation. The Company as taken reasonable security measures to maintain the confidentiality of the Company's proprietary information. 2.20 PERMITS. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business, the lack of which could materially and adversely affect the business, properties, prospects, or financial condition of the Company. The Company believes it can obtain, without undue burden or expense, any similar authority for the -8- 9 conduct of its business as planned to be conducted. The Company is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. 2.21 CORPORATE DOCUMENTS. The Restated Articles and Bylaws of the Company are in the form provided to counsel for the Purchasers. The copy of the minute books of the Company provided to the Purchasers' counsel contains minutes of all meetings of directors and shareholders and all actions by written consent without a meeting by the directors and shareholders since the date of incorporation and reflects all actions by the directors (and any committee of directors) and shareholders with respect to all transactions referred to in such minutes accurately in all material respects. 2.22 QUALIFIED SMALL BUSINESS STOCK. As of the Closing: (i) the Company will not have made any purchases of its own stock during the one-year period proceeding the Closing having an aggregate value exceeding 5% of the aggregate value of all its stock as of the beginning of such period and (ii) the Company's aggregate gross assets, as defined by Code Section 1202(d)(2), at no time between October 7, 1998, and through the Closing have exceeded or will exceed $50 million, taking into account the assets of any corporations required to be aggregated with the Company in accordance with Code Section 1202(d)(3). 2.23 MANUFACTURING AND MARKETING RIGHTS. The Company has not granted exclusive rights to develop, manufacture, produce, assemble, license, market, distribute or sell its products or services to any other person or entity and is not bound by any agreement that affects the Company's exclusive right to develop, manufacture, produce, assemble, license, distribute, market or sell its products, services or any other products that use its proprietary information. 2.24 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company has filed all tax returns and reports (including information returns and reports) as required by law. These returns and reports are true and correct in all material respects. The Company has paid all taxes and other assessments due. The Company has not elected pursuant to the Code to be treated as a Subchapter S corporation or a collapsible corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor has it made any other elections pursuant to the Code (other than elections that relate solely to methods of accounting, depreciation or amortization) that would have a material adverse effect on the Company, its financial condition, its business as presently conducted or proposed to be conducted or any of its properties or material assets. The Company has never had any tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge. None of the Company's federal income tax returns and none of its state income or franchise tax or sales or use tax returns has ever been audited by governmental authorities. Since the date of the Balance Sheet, the Company has not incurred any taxes, assessments or governmental charges other than in the ordinary course of business and the Company has made adequate provisions on its books of account for all taxes, assessments and governmental charges with respect to its business, properties and operations for such period. The Company has withheld or collected from each payment made to each of its employees, the amount of all taxes (including, but not limited to, federal income taxes, Federal Insurance Contribution Act taxes and Federal -9- 10 Unemployment Tax Act taxes) required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositories. 2.25 SECTION 83(b) ELECTIONS. To the best of the Company's knowledge, all individuals who have purchased unvested shares of the Company's Common Stock have timely filed elections under Section 83(b) of the Code and any analogous provisions of applicable state tax laws. 2.26 BROKERS. The Company has no contract, arrangement or understanding with any broker, finder or similar agent with respect to the transactions contemplated by this Agreement. 2.27 INSURANCE. The Company has in full force and effect fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed and to satisfy its contractual obligations. The Company has in full force and effect products liability and errors and omissions insurance in amounts customary for companies similarly situated. 2.28 YEAR 2000. To the Company's knowledge, each hardware and software product and other computer and information technology used by the Company in its business (collectively, the "Software") will accurately receive, provide and process date and time data (including, but not limited to, calculating, comparing and sequencing) from, into and between the twentieth and twenty-first centuries, including, without limitation, leap year calculations, without a decrease in the functionality of the Software so that the Software will not malfunction, cease to function or provide invalid or incorrect results as a result of date or time data, to the extent that other information technology, used in combination with the information technology being acquired, properly exchanges date and/or time data with it. To the Company's knowledge, the Software is designed to be used prior to, during and after the calendar year 2000 A.D. and will operate during each such time period without error relating to date or time data, specifically including any error relating to, or the product of, date data which represents or references different centuries or more than one century. Without limiting the generality of the foregoing, to the Company's knowledge, the Software (a) will not abnormally end or provide invalid or incorrect results as a result of date or time data, specifically including date or time data which represents or references different centuries or more than one century, (b) has been designed to ensure year 2000 compatibility, including, but not limited to, date and time data century recognition, calculations which accommodate same century and multi-century formulas and date values, and date data interface values that reflect the century, and (c) includes "Year 2000 Capabilities," meaning that the Software (i) will manage and manipulate data involving dates or time, including single century formulas and multi-century formulas, and will not cause an abnormally ending scenario within the application or generate incorrect values or invalid results involving such dates, (ii) provides that all date-related user interface functionalities and data fields include the indication of century, and (iii) provides that all date-related data interface functionalities include the indication of century. -10- 11 2.29 COMPLIANCE WITH LAWS. To its knowledge, the Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties which violation would materially and adversely affect the business, assets, liabilities, financial condition operations or prospects of the Company. To the best of the Company's knowledge, the Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and to the best of the Company's knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 2.30 OBLIGATIONS OF MANAGEMENT. To the best of the Company's knowledge, each of the Company's Chief Executive Officer, President and Chief Financial Officer is currently devoting one hundred percent (100%) of his or her business time to the conduct of the business of the Company. The Company is not aware that any such officer or key employee of the Company is planning to work less than full time at the Company in the future. 2.31 USE OF PROCEEDS. The Company will use proceeds from the sale of the Stock for working capital purposes. Such proceeds shall not be used to repay indebtedness to any stockholders of the Company. 2.32 CHANGES. Since May 31, 1999, there has not been: (a) any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Balance Sheet, except changes in the ordinary course of business that have not been or are expected to be, in the aggregate, materially adverse; (b) any waiver or compromise by the Company of a valuable right or of a material debt owed to it; (c) any material change in any compensation arrangement or agreement (including salary, bonus, insurance or pension benefits) with any employee, officer, director or shareholder; (d) any change or amendment to any of the governing documents of the Company (including the Restated Articles and Bylaws of the Company), except as contemplated hereunder; or (e) any arrangement or commitment by the Company to do any of the things described in this Section 2.32. 2.33 SIGNIFICANT CUSTOMERS AND SUPPLIERS. No customer or supplier that was significant to the Company during the period from February 17, 1999 to the date hereof has terminated, materially reduced or threatened to terminate or materially reduce its purchases from, or provision of products or services to, the Company, as the case may be. -11- 12 2.34 SERIES A PREFERRED STOCK. The holders of Series A Preferred Stock, as of the Closing, will not have any rights or privileges other than as reflected in the Series A Preferred Stock Purchase Agreement, the Restated Articles, and the Agreements. 2.35 ALL TERMS. The Agreements, together with the Restated Articles and Series A Preferred Stock Purchase Agreement dated as of April 22, 1999, contain all terms relating to the issuances of Series A Preferred Stock and Series B Preferred Stock and the relationships among the holders of such stock, except as set forth in the Schedule of Exceptions. 2.36 ASSETS. The Company is its own "ultimate parent entity" as such term is defined in 16 C.F.R. Section 801.1(a)(3). The Company, on a consolidated basis, does not engage in manufacturing within the meaning of 16 C.F.R. Section 801.1(j). The Company, on a consolidated basis, does not have assets with an aggregate book value of $10 million or more based on its most recent regularly prepared balance sheet. This representation is made solely for the purpose of determining the applicability to the transactions contemplated by this Agreement of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser, severally and not jointly, hereby represents and warrants to the Company that: 3.1 AUTHORIZATION. Such Purchaser has full power and authority to enter into the Agreements. The Agreements, when executed and delivered by the Purchaser and the other parties hereto and thereto that are required to enter into the Agreements, will constitute valid and legally binding obligations of the Purchaser, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and any other laws of general application affecting enforcement of creditors' rights generally, and as limited by laws relating to the availability of a specific performance, injunctive relief, or other equitable remedies, and (b) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with the Purchaser in reliance upon the Purchaser's representation to the Company, which by the Purchaser's execution of this Agreement, the Purchaser hereby confirms, that the Securities to be acquired by the Purchaser will be acquired for investment for the Purchaser's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Purchaser further represents that the Purchaser does not presently have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. The Purchaser has not been formed for the specific purpose of acquiring the Securities. 3.3 DISCLOSURE OF INFORMATION. The Purchaser has had an opportunity to discuss the Company's business, management, financial affairs and the terms and conditions of the offering of the Stock with the Company's management and has had an opportunity to review the Company's facilities. The Purchaser understands that such discussions, as well as any other -12- 13 written information delivered by the Company to the Purchaser, were intended to describe the aspects of the Company's business which it believes to be material. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the investors to rely thereon. 3.4 RESTRICTED SECURITIES. The Purchaser understands that the Securities have not been, and will not be, registered under the Securities Act, by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Purchaser's representations as expressed herein. The Purchaser understands that the Securities are "restricted securities" under applicable U.S. federal and state securities laws and that, pursuant to these laws, the Purchaser must hold the Securities indefinitely unless they are registered with the Securities and Exchange Commission and qualified by state authorities, or an exemption from such registration and qualification requirements is available. The Purchaser acknowledges that the Company has no obligation to register or qualify the Securities for resale except as set forth in the Investors' Rights Agreement. The Purchaser further acknowledges that if an exemption from registration or qualification is available, it may be conditioned on various requirements including, but not limited to, the time and manner of sale, the holding period for the Securities, and on requirements relating to the Company which are outside of the Purchaser's control, and which the Company is under no obligation and may not be able to satisfy. 3.5 NO PUBLIC MARKET. The Purchaser understands that no public market now exists for any of the securities issued by the Company, and that the Company has made no assurances that a public market will ever exist for the Securities. 3.6 LEGENDS. The Purchaser understands that the Securities, and any securities issued in respect of or exchange for the Securities, may bear one or all of the following legends: (a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933." (b) Any legend set forth in the other Agreements. (c) Any legend required by the Blue Sky laws of any state to the extent such laws are applicable to the shares represented by the certificate so legended. 3.7 ACCREDITED INVESTOR. The Purchaser is an accredited investor as defined in Rule 501(a) of Regulation D promulgated under the Securities Act, as presently in effect. -13- 14 4. CONDITIONS OF THE PURCHASERS' OBLIGATIONS AT CLOSING. The obligations of each Purchaser to the Company under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived: 4.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in Section 2 shall be true and correct on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. 4.2 PERFORMANCE. The Company shall have performed and complied with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. 4.3 COMPLIANCE CERTIFICATE. The President of the Company shall deliver to the Purchasers at the Closing a certificate certifying that the conditions specified in Sections 4.1 and 4.2 have been fulfilled, and stating that there shall have been no adverse change in the business, affairs, prospects, operations, properties, assets or condition of the Company since the date of the Balance Sheet. 4.4 QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Stock pursuant to this Agreement shall be obtained and effective as of the Closing. 4.5 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to Purchasers' special counsel, which shall have received all such counterpart original and certified or other copies of such documents as it has reasonably requested. This may include, without limitation, good standing certificates and certification by the Company's Secretary regarding the Company's Restated Articles and Bylaws and Board of Director and shareholder resolutions relating to this transaction. 4.6 OPINION OF COMPANY COUNSEL. The Purchasers shall have received from Venture Law Group, counsel for the Company, an opinion, dated as of the Closing, in substantially the form of Exhibit H. 4.7 BYLAWS. The Bylaws of the Company shall provide that the Board of Directors of the Company shall consist of four (4) persons, which number shall not be changed by an amendment to the Restated Articles or the Bylaws without consent of holders of seventy percent (70%) of the outstanding shares of Preferred Stock. 4.8 BOARD OF DIRECTORS. As of the Closing, the Board shall be comprised of four (4) directors: one representative designated by Bowman Capital Management, one representative designated by Hummer Winblad Venture Partners, one director designated by Amazon.com, Inc. ("Amazon.com"), and the Company's Chief Executive Officer. -14- 15 4.9 INVESTORS' RIGHTS AGREEMENT. The Company, each Purchaser, the holders of Series A Preferred Stock and Greg McLemore shall have executed and delivered the Investors' Rights Agreement in substantially the form attached as Exhibit D. 4.10 RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT. The Company, Greg McLemore, Julie Wainwright, each Purchaser, the holders of Series A Preferred Stock and all holders of more than 100,000 shares of the Company's Common Stock shall have executed and delivered the Co-Sale Agreement in substantially the form attached as Exhibit E. 4.11 RESTATED ARTICLES. The Company shall have filed the Restated Articles with the Secretary of State of California on or prior to the Closing Date, which shall continue to be in full force and effect as of the Closing Date, and shall deliver a copy of such filed Restated Articles to each Purchaser at Closing. 4.12 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AND EMPLOYEE STOCK PURCHASE AGREEMENTS. The Company and each of its employees and consultants shall have entered into the Company's standard form Confidential Information and Invention Assignment Agreement, in substantially the form provided to the Purchasers' legal counsel. Each holder of Common Stock of the Company shall have entered into an Employee Stock Purchase Agreement, in substantially the form provided to the Purchasers' legal counsel. 4.13 VOTING AGREEMENT. The Company, each Purchaser, the holders of Series A Preferred Stock, Greg McLemore, and Julie Wainwright shall have executed and delivered the Voting Agreement in substantially the form attached hereto as Exhibit F. 4.14 SECURITIES COMPLIANCE. The Company shall have taken all actions necessary to comply with any federal or state securities laws applicable to the transactions contemplated hereunder that are required to be taken prior to the Closing. 4.15 STOCK CERTIFICATE. The Company shall have delivered to each Purchaser a duly executed stock certificate evidencing the Stock purchased by such Purchaser hereunder. 5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of the Company to each Purchaser under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived: 5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of each Purchaser contained in Section 3 shall be true and correct in all material respects on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 5.2 PERFORMANCE. All covenants, agreements and conditions contained in this Agreement to be performed by the Purchasers on or prior to the Closing shall have been performed or complied with in all material respects. -15- 16 5.3 QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Stock pursuant to this Agreement shall be obtained and effective as of the Closing. 6. MISCELLANEOUS. 6.1 SURVIVAL OF WARRANTIES. Unless otherwise set forth in this Agreement, the warranties, representations and covenants of the Company and the Purchasers contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Purchasers or the Company. 6.2 TRANSFER; SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any securities). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. The parties agree that the Purchaser may assign their rights and obligations under this Agreement to any of their affiliates (as defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended) or to any successors to the Purchasers or such affiliates. 6.3 GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. 6.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts and may be executed by facsimile, any of which shall be deemed an original and all of which together shall constitute one instrument. 6.5 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. 6.6 NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon delivery, when delivered personally or by overnight courier or sent by fax (with confirmation of successful electronic transmission), or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, addressed to the party to be notified at such party's address as set forth on the signature page or Exhibit A hereto, or as subsequently modified by written notice, and (a) if to the Company, with a copy to: -16- 17 Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Attn: John V. Bautista Tel: 650-854-4488 Fax: 650-854-1121 (b) if to the Purchasers (other than Amazon.com), with a copy to: Shartsis, Friese & Ginsburg LLP One Maritime Plaza, 18th Floor San Francisco, CA 94111 Attn: Eric Sippel Tel: 415-421-6500 Fax: 415-421-2922 or (c) if to Amazon.com, with a copy to: Perkins Coie LLP 1201 Third Avenue, Suite 4800 Seattle, WA 98101-3099 Attn: Scott L. Gelband Tel: 206-583-8888 Fax: 206-583-8500 6.7 FINDER'S FEE. Each party represents that it neither is nor will be obligated for any finder's fee or commission in connection with this transaction. Each Purchaser agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finder's fee (and the costs and expenses of defending against such liability or asserted liability) for which each Purchaser or any of its officers, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless each Purchaser from any liability for any commission or compensation in the nature of a finder's fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 6.8 FEES AND EXPENSES. Upon the Closing, the Company shall pay the reasonable fees and expenses of Shartsis, Friese & Ginsburg LLP, legal counsel to Bowman Capital Management and Hummer Winblad Venture Partners III, L.P., incurred with respect to this Agreement, the documents referred to herein and the transactions contemplated hereby and thereby, provided such fees and expenses do not exceed $15,000. The remaining Purchasers shall pay their own legal fees and expenses incurred with respect to the foregoing. 6.9 ATTORNEY'S FEES. If any action at law or in equity (including arbitration) is necessary to enforce or interpret the terms of any of the Agreements, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. -17- 18 6.10 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended or waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the holders of at least 70% of the Stock (or the Common Stock issuable upon conversion of the Stock). Any amendment or waiver effected in accordance with this Section 6.10 shall be binding upon the Purchasers and each transferee of the Stock (or the Common Stock issuable upon conversion thereof), each future holder of all such securities, and the Company. 6.11 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms. 6.12 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power or remedy of such non-breaching or non-defaulting party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative. 6.13 ENTIRE AGREEMENT. This Agreement, and the documents referred to herein constitute the entire agreement between the parties hereto pertaining to the subject matter hereof, and any and all other written or oral agreements relating to the subject matter hereof existing between the parties hereto are expressly canceled. 6.14 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT. 6.15 CONFIDENTIALITY. Each party hereto agrees that, except with the prior written permission of the other party, it shall at all times keep confidential and not divulge, -18- 19 furnish or make accessible to anyone any confidential information, knowledge or data concerning or relating to the business or financial affairs of the other parties to which such party has been or shall become privy by reason of this Agreement, discussions or negotiations relating to this Agreement, the performance of its obligations hereunder or the ownership of Stock purchased hereunder ("Confidential Information"); provided, however, that (a) Confidential Information shall not include (i) information that is or becomes available to the general public other than as a result of disclosure by any Purchaser, (ii) information known to any Purchaser prior to discussions or negotiations related to this Agreement as demonstrated by tangible evidence of such prior knowledge by such Purchaser, or (iii) general knowledge of the Company's industry not specifically related to the Company's business; and (b) Hummer Winblad Venture Partners III, L.P., Hummer Winblad Technology Fund III, L.P. and Bowman Capital Management may distribute Confidential Information concerning the Company to their respective limited partners. The provisions of this Section 6.15 shall be in addition to, and not in substitution for, the provisions of any separate nondisclosure agreement executed by the parties hereto with respect to the transactions contemplated hereby. 6.16 EXCULPATION AMONG PURCHASERS. Each Purchaser acknowledges that it is not relying upon any person, firm or corporation, other than the Company and its officers and directors, in making its investment or decision to invest in the Company. Each Purchaser agrees that no Purchaser nor the respective controlling persons, officers, directors, partners, agents, or employees of any Purchaser shall be liable to any other Purchaser for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the purchase of the Securities. 6.17 WAIVER OF CONFLICTS. Each party to this Agreement acknowledges that Venture Law Group, counsel for the Company, has in the past performed and may continue to perform legal services for certain of the Purchasers in matters unrelated to the transactions described in this Agreement, including the representation of such Purchasers in venture capital financings and other matters. Accordingly, each party to this Agreement hereby (a) acknowledges that they have had an opportunity to ask for information relevant to this disclosure; and (b) gives its informed consent to Venture Law Group's representation of certain of the Purchasers in such unrelated matters and to Venture Law Group's representation of the Company in connection with this Agreement and the transactions contemplated hereby. 6.18 AGGREGATION OF STOCK. All shares of stock held or acquired by affiliated entities or persons hereunder shall be aggregated together for the purpose of determining the availability of rights under this Agreement. [SIGNATURE PAGE FOLLOWS] -19- 20 The parties have executed this Series B Preferred Stock Purchase Agreement as of the date first written above. COMPANY: PETS.COM, INC. By: /s/ Julie Wainwright ---------------------------------- Name: J L Wainwright ------------------------------- (print) Title: CEO ------------------------------- Address: 435 Brannan Street San Francisco, CA 94107 Tel: (415) 222-9999 Fax: (415) 222-9998 PURCHASERS: SPINNAKER TECHNOLOGY FUND, L.P. By: Bowman Capital Management , LLC Its General Partner By: /s/ Eric Moore ---------------------------------- Name: Eric Moore ------------------------------- (print) Title: Controller ------------------------------- Address: 1875 South Grant Suite 600 San Mateo, CA 94402-7013 SIGNATURE PAGE TO PURCHASE AGREEMENT 21 SPINNAKER TECHNOLOGY OFFSHORE FUND LIMITED By: Bowman Capital Management , LLC its Investment Adviser and Attorney- in-Fact By: /s/ Eric Moore ---------------------------------- Name: Eric Moore ------------------------------- (print) Title: Controller ------------------------------- Address: 1875 South Grant Suite 600 San Mateo, CA 94402-7013 SPINNAKER FOUNDERS FUND, L.P. By: Bowman Capital Management , LLC its General Partner By: /s/ Eric Moore ---------------------------------- Name: Eric Moore ------------------------------- (print) Title: Controller ------------------------------- Address: 1875 South Grant Suite 600 San Mateo, CA 94402-7013 SPINNAKER OFFSHORE FOUNDERS FUND CAYMAN LIMITED By: Bowman Capital Management , LLC its Investment Adviser and Attorney- in-Fact By: /s/ Eric Moore ---------------------------------- Name: Eric Moore ------------------------------- (print) Title: Controller ------------------------------- Address: 1875 South Grant Suite 600 San Mateo, CA 94402-7013 -2- 22 SPINNAKER CLIPPER FUND, L.P. By: Bowman Capital Management , LLC its General Partner By: /s/ Eric Moore ---------------------------------- Name: Eric Moore ------------------------------- (print) Title: Controller ------------------------------- Address: 1875 South Grant Suite 600 San Mateo, CA 94402-7013 AMAZON.COM, INC. By: /s/ Randy Tinsley ---------------------------------- Name: Randy Tinsley ------------------------------- (print) Title: V.P. Corporate Development ------------------------------- Address: HUMMER WINBLAD VENTURE PARTNERS III, L.P. By: /s/ John Hummer ---------------------------------- Name: ------------------------------- (print) Title: ------------------------------- Address: -3- 23 HUMMER WINBLAD TECH. FUND III, L.P. By: /s/ John Hummer ------------------------------- Name: John Hummer ------------------------------- (print) Title: ------------------------------- Address: THE AVRAM MILLER TRUST By: /s/ Avram Miller, Trustee ------------------------------- Name: Avram Miller, Trustee ------------------------------- (print) Title: Trustee ------------------------------- Address: The Avram Miller Company 505 Montgomery Street, 20th Fl. San Francisco, CA 94111 -4- 24 EXHIBITS
Exhibit A - Schedule of Purchasers Exhibit B - Form of Second Amended and Restated Articles of Incorporation Exhibit C - Schedule of Exceptions to Representations and Warranties Exhibit D - Form of Amended and Restated Investors' Rights Agreement Exhibit E - Form of Amended and Restated Right of First Refusal and Co-Sale Agreement Exhibit F - Form of Amended and Restated Voting Agreement Exhibit G - Balance Sheet dated May 31, 1999 Exhibit H - Form of Legal Opinion of Venture Law Group
25 EXHIBIT A SCHEDULE OF PURCHASERS
Number of Shares Name/Address/Tel/Fax of Series B Purchase Price - ----------------------------------- ---------------- ---------------- Spinnaker Technology Fund, L.P. 324,339 $ 2,448,759.45 c/o Bowman Capital Management 1875 South Grant Street, Suite 600 San Mateo, CA 94402-7013 Tel: 650-287-2200 Fax: 650-572-1844 Attn: Matthew Cowan Spinnaker Technology Offshore 242,635 $ 1,831,894.25 Fund Limited c/o Bowman Capital Management 1875 South Grant Street, Suite 600 San Mateo, CA 94402-7013 Tel: 650-287-2200 Fax: 650-572-1844 Attn: Matthew Cowan Spinnaker Founders Fund, L.P. 218,041 $ 1,646,209.55 c/o Bowman Capital Management 1875 South Grant Street, Suite 600 San Mateo, CA 94402-7013 Tel: 650-287-2200 Fax: 650-572-1844 Attn: Matthew Cowan Spinnaker Offshore Founders Fund 123,859 $ 935,135.45 Cayman Limited c/o Bowman Capital Management 1875 South Grant Street, Suite 600 San Mateo, CA 94402-7013 Tel: 650-287-2200 Fax: 650-572-1844 Attn: Matthew Cowan
26
Number of Shares Name/Address/Tel/Fax of Series B Purchase Price - ----------------------------------- ---------------- ---------------- Spinnaker Clipper Fund, L.P. 24,901 $ 188,002.55 c/o Bowman Capital Management 1875 South Grant Street, Suite 600 San Mateo, CA 94402-7013 Tel: 650-287-2200 Fax: 650-572-1844 Attn: Matthew Cowan Amazon.com, Inc. 4,728,477 $ 35,700,001.35 1200 12th Avenue South, Suite 1200 Seattle, WA 91844 Tel: 206-266-1000 Fax: 206-834-7010 Attn: General Counsel Hummer Winblad Venture 899,669 $ 6,792,500.95 Partners III, L.P. 2 South Park, 2nd Floor San Francisco, CA 94107 Tel: 415-979-9600 Fax: 415-979-9601 Attn: John Hummer Hummer Winblad Technology 47,351 $ 357,500.05 Fund III, L.P. 2 South Park, 2nd Floor San Francisco, CA 94107 Tel: 415-979-9600 Fax: 415-979-9601 Attn: John Hummer The Avram Miller Trust 13,245 $ 99,999.75 c/o The Avram Miller Company 505 Montgomery Street, 20th Floor San Francisco, CA 94111 Tel: 415-835-7268 Fax: 603-710-6213 Attn: Avram Miller ------------ ----------------- Total: 6,622,517 $ 50,000,003.35 ============ =================
-2- EX-10.21 27 LICENSE AND INTEGRATION AGREEMENT 1 EXHIBIT 10.21 QUALITY SOFTWARE SYSTEMS, INC. LICENSE AND INTEGRATION AGREEMENT This AGREEMENT is made and entered into as of the 25th day of June 1999 by and between Quality Software Systems Inc., a New Jersey corporation with offices at 200 Centennial Avenue, Piscataway, New Jersey 08854 ("QSSI") and the Client identified below ("Client"). - ------------------------------------------- ------------------------------------ Client: Pets.com Inc. City: San Francisco - ------------------------------------------- ------------------------------------ Address: 435 Brannan St., Suite 100 State, Zip: CA 94107 - ------------------------------------------- ------------------------------------ TERMS AND CONDITIONS 1. DEFINITIONS 1.1 ACCEPTANCE "Acceptance" of a deliverable means completion of the process set forth in Paragraph 7.1 for Developed Software and Paragraph 7.2 for other deliverables. 1.2 ACCEPTANCE TEST "Acceptance Test" means the procedure set forth in Paragraph 7.1 hereto. 1.3 BASE SYSTEM Unmodified version of the current release of PowerHouse/WMS as identified by the documentation provided with each release. 1.4 CLIENT "Client" means the entity identified on the cover page to this Agreement, including any permitted successor or assignee of Client. 1.5 CONFIGURATION The use of tables and other user executable program options, by the Client or QSSI, in order to customize the Developed Software. 1.6 QSSI SERVICES "QSSI Services" means all of the professional services rendered to Client by QSSI pursuant to this Agreement. 1.7 DEVELOPED SOFTWARE "Developed Software" shall mean all software written by (i) QSSI hereunder, or (ii) by Client under the direction and direct supervision of QSSI and as to which QSSI has certified in writing that it meets QSSI's programming standards. Developed Software shall also include QSSI proprietary software which has previously been developed by QSSI and which is delivered to Client. 1.8 IMPLEMENTATION SCHEDULE "Implementation Schedule" means the schedule set forth on Schedule A, or any subsequently prepared schedules superseding Schedule A. 1.9 MAINTENANCE "Maintenance" consists of the ongoing Developed Software support services set forth in Schedule C. The Maintenance set forth in Schedule C will be provided pursuant to a separate executed Maintenance and/or Software Support agreement between the Parties. 2 1.10 MODIFICATIONS All software revisions made to the Base System written by (i) QSSI hereunder, or (ii) by Client under the direction and direct supervision of QSSI and as to which QSSI has certified in writing that it meets QSSI's programming standards. 1.11 PARTY The term "Party" shall mean Pets.com or QSSI, and the term "Parties" shall mean Pets.com and QSSI. 1.12 PHASE "Phase" means each summarized section of Schedule A. Any additional modifications requested after the initial design will each be treated as a separate Phase. 1.13 REQUIREMENTS DEFINITION STUDY "Requirements Definition Study" or "RDS" means the mutually agreed system design changes to the Base System, as such the RDS may be revised pursuant to Paragraph 6.1. Upon Acceptance of the RDS by Client, the RDS will supersede all other requirements and functionality documentation for all purposes hereunder. 1.14 SHELF VERSION "Shelf Version" means the version of each Phase of the Developed Software which is Accepted by Client pursuant to Paragraph 7.1. 1.15 SOFTWARE SYSTEM "Software System" means the set of computer programs and documentation developed by QSSI, the Client, and/or third parties in connection with the entire warehouse management implementation project. This system can include the Developed Software, Third Party Software, interfaces, and integration. 1.16 THIRD PARTY SOFTWARE "Third Party Software" is all software which is incorporated in, makes up or is to be accessed by the Software System which is not Developed Software and is identified on Schedule B. 2. SOFTWARE SYSTEM 2.1 Subject to the terms and conditions of this Agreement, QSSI agrees to implement the Software System in accordance with the Implementation Schedule and RDS, with the reasonable assistance of Client personnel and resources. 3. CONSULTING SERVICES 3.1 QSSI shall supply Client with any supporting documentation which QSSI has developed for the software system. 4. LICENSE AND PROPRIETARY RIGHTS 4.1 GRANT OF LICENSE Subject to the terms and conditions of the Agreement, QSSI hereby grants to Client a perpetual, irrevocable, non-exclusive and non-transferable (except as set forth in Paragraph 12.5) license (the "License") to use and modify the Developed Software and other QSSI developed deliverables which License Client hereby accepts. Any additional restrictions or limitations are set forth in Schedule D. -2- 3 4.1B EXCLUSIVITY For a period of three (3) years from the effective date of this Agreement, (i) QSSI shall not grant to any Competitor of Client any right to use any modification or integration software developed by QSSI for Client hereunder, or any portion thereof, without prior written consent of Client, (ii) QSSI shall not access or refer to any modification or integration software developed by QSSI for Client hereunder, or any portion thereof, when working with any competitor of Client and (iii) QSSI shall not provide to any Competitor of Client a more favorable price or delivery for similar modifications of the Base System than QSSI provides to Client hereunder. As used, herein, "Competitor of Client" means any web site or other Online service or entity that markets, sells, or allows end users to purchase pet care products, including without limitation food, health care products, toys, cages, and leashes for dogs, cats, fish, birds, ferrets, reptiles and other animals. 4.2 PROPRIETARY RIGHTS All financial data and all information related to Client's organizational structure ("Client Data") are and shall remain the exclusive property of client, and shall be kept confidential by QSSI pursuant to the provisions of Paragraphs 4.3 and 4.4. QSSI retains title to the Developed Software and related documentation and other deliverables developed hereunder, including all copies thereof and all rights to patents, copyrights, trademarks, trade secrets and other intellectual property rights inherent therein and appurtenant thereto. Except as set forth herein, Client shall not, by virtue of this Agreement or otherwise, acquire any proprietary rights whatsoever in the Developed Software or any other deliverables developed hereunder, which shall be the sole and exclusive property of QSSI. No identifying marks, copyright or proprietary right notices may be deleted from any copy of the Developed Software provided to or made by Client. 4.3 CONFIDENTIALITY Client shall only permit access to the Developed Software by its employees who have a need to know in connection with the license rights granted under this Agreement. Client shall not transfer, publish, disclose, display or otherwise make available any portion of the Developed Software to others. The Parties acknowledge that in the course of performing their responsibilities under this Agreement, they each may be exposed to or acquire information that is clearly identified as proprietary to or confidential to the other Party. The Parties agree to hold such information in strict confidence and not to copy, reproduce, sell, assign, license, market, transfer, give or otherwise disclose such information to third parties or to use such information for any purposes whatsoever, without the express written permission of the other Party, other than for the performance of obligations, or exercise of rights hereunder, and to advise each of their employees, agents and representatives of their obligations to keep such information confidential. All such confidential and proprietary information, Client data, finances, business plans and computer software are hereinafter collectively referred to as "Confidential Information." The Parties shall use their reasonable efforts to assist each other in identifying and preventing any unauthorized use or disclosure of any Confidential Information. Without limitations of the foregoing, the Parties shall advise each other immediately in the event that either learns or has reason to believe that any person who has had access to Confidential Information has violated or intends to violate the terms of this Agreement, and will reasonably cooperate in seeking injunctive relief against any such person. Each party shall be entitled to disclose the existence of this Agreement but agrees that the terms and conditions of this Agreement shall be treated as confidential information and shall not be disclosed to any third -3- 4 party; provided, however, that each party may disclose the terms and conditions of this Agreement; (i) as required by any court or other government body; (ii) as otherwise required by law; (iii) to legal counsel of the parties; (iv) to accountants, banks and financing sources and their advisors that are subject to confidentiality provisions at least as protective of the disclosing party's confidential information as those set forth herein; or (v) in connection with the enforcement of this Agreement or rights under the Agreement. 4.4 NON-CONFIDENTIAL INFORMATION Notwithstanding the obligations set forth in Paragraph 4.3, the confidentiality obligations of the Parties shall not extend to information that: a. is, as of the time of its disclosure, or thereafter becomes part of the public domain through a source other than the receiving Party; b. was known to the receiving Party as of the time of its disclosure; c. is independently developed by the receiving Party; d. is subsequently learned from a third party not under a confidentiality obligation to the providing party; or, e. is required to be disclosed pursuant to court order or government authority, whereupon the receiving Party shall provide notice to the other Party prior to such disclosure. 5.5 FEES AND PAYMENT 5.1 FEES The fees for QSSI Services are set forth in Schedule E. In the event the project is successfully launched according to the requirements set forth in the RDS on or before August 5, 1999, Client [*] to the greater of [*] of the [*] provided, however, [*] shall not exceed [*]. In the event the project is not successfully launched according to the requirements set forth in the RDS until after August 5, 1999, QSSI shall [*] and the [*] QSSI shall be [*] by an [*] of the [*] that would have [*] the project were [*], for each day the project launch is late up to a maximum of 7 days provided, however, that the penalty does not exceed [*]. QSSI shall not incur [*] or any reduced payment if delays are caused by Client, any third party vendor contracted by Client or act of God that befalls on Client. QSSI shall not receive the bonus but also shall not incur any reduced payments if the project launch is delayed by an act of God that befalls on QSSI. 5.2 PAYMENT Client shall pay QSSI in accordance with the Fee and Payment Schedule set forth in Schedule E. All invoices issued by QSSI hereunder are due upon receipt of invoice. Payments not received within thirty (30) days or their due date shall be subject to late charges of one and one-half percent (1-1/2%) per month, and having remained outstanding for sixty (60) days, shall give rise to a material breach of this Agreement justifying the suspension of the performance of services and/or immediate termination of this Agreement by QSSI. Client also agrees to pay all reasonable expenses incurred by QSSI in enforcing he provisions of this Agreement. No failure by QSSI to request any such payment or to demand any such performance shall be deemed a waiver by QSSI of Client's obligations hereunder or a waiver of QSSI's right to terminate this Agreement. * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. -4- 5 5.3 PROPOSALS FOR SERVICE Proposals for services to be rendered under this Agreement may be in writing. No estimates are guaranteed in any way or to any extent by QSSI and do not change this Agreement to a fixed price contract. This section is not intended to include proposals for hardware or license fees. 6. REVISIONS 6.1 DURING PREPARATION OF REQUIREMENTS DEFINITION STUDY ("RDS") During the preparation of the RDS, QSSI and Client shall review in greater detail Client's requirements for the Software System. Where client requests system functions or performance which vary from that set forth in the Base System, QSSI shall provide a written estimate of the impact on resources, time duration and costs which would be caused by implementation of any Modifications. QSSI and Client will review all such estimates during the preparation and presentation of the RDS. It is understood that such Modifications may increase or decrease required resources, time duration and costs. If Client fails to approve the RDS, QSSI or Client may terminate this Agreement upon thirty (30) days prior written notice and Client shall pay QSSI services to the date of termination at QSSI's standard time and materials rates, and the parties shall have no further performance obligations hereunder. 6.2 AFTER APPROVAL OF RDS After approval of the RDS and before Acceptance, any system functions or performance which vary in scope from those set forth in the RDS and which are requested by Client shall be reviewed by QSSI. Within twenty (5) days of receipt of such request, QSSI, with the cooperation of Client where reasonably required, shall provide a written estimate of the impact on resources, time duration and costs, which would be caused by the implementation of the revision. If the Client accepts the revision, then the resources, time duration and costs shall be modified as set forth in QSSI's estimate. If the client fails to Accept the revision, the scope of work as set forth in the RDS shall remain unchanged and QSSI shall have no further responsibility with respect to the proposed change. 7. ACCEPTANCE AND ACCEPTANCE TESTING 7.1 ACCEPTANCE OF DEVELOPED SOFTWARE Acceptance of each Phase of the Developed Software identified in Schedule A may occur upon the completion of the Acceptance Test performed by the Client. The Acceptance Test shall be to determine whether the Developed Software operates in accordance with the specifications as described in the RDS, and shall be conducted as follows: (a) upon receipt of notice from QSSI that the applicable Phase of the Developed Software has been developed and installed and is available for Acceptance Testing, Client shall conduct the Acceptance Test within four (4) calendar weeks; (b) upon the expiration of such test period, Client shall either certify that the Phase is accepted or deliver to QSSI a written description of specific claimed defects in the Developed Software which defects shall be limited to material failures to conform to the RDS; (c) upon receipt of such written description. QSSI shall use all reasonable efforts to promptly remedy those defects that are bona fide, whereupon the Acceptance Test shall be run as is necessary for determining whether all such identified defects have been remedied. The Parties shall repeat this cycle until all material defects are corrected. Certification by Client that the Phase of the Developed Software is accepted, or in the absence of -5- 6 such certification, the failure of Client to provide QSSI with a written description of defects during the review period shall constitute completion of the Acceptance Test and Acceptance of the Phase of the Developed Software. Acceptance, whether or not notice has been given shall also be deemed to have occurred if Client places in productive use, any portion of the Phase of Developed Software for a period of 14 days. In the event first productive use of the Developed Software occurs when it is not yet integrated with the Client's web site system, an additional 14 days of productive use will be extended for purposes of testing that portion of the system pertaining to the integration interfaces with the Client's web site system. Acceptance shall be deemed to have occurred within 60 days after the Developed Software is first placed in productive use regardless if, through no fault of QSSI, integration with the web site software has not been accomplished. The formal date of acceptance for purposes of the warranty as set forth in section 8, shall be retroactive to when the Developed Software was either certified as accepted by the Client or first placed in productive use. The version of the Phase so Accepted shall be deemed the Shelf version of the accepted Phase. Client and QSSI shall each maintain copies of the Shelf Version in addition to any modified versions that may occur over time and the Shelf Version shall not be accessed, altered, modified or otherwise used. In the event that a Phase is not Accepted Pursuant to his Paragraph, Client's sole remedy shall be to return the Phase to QSSI, along with the applicable documentation and all copies thereof, and receive a refund of fees paid to QSSI, for that Phase. This procedure is the exclusive means by which Client shall be entitled to reject the Developed Software or any Phase thereof, and the exclusive remedy for any such failure. 7.2 ACCEPTANCE OF OTHER DELIVERABLES For other work product deliverables requiring Acceptance by Client, Client shall, within twenty (20) days of receipt of QSSI's statement that the deliverable is complete, review the deliverable and Accept it or notify QSSI in writing of non-Acceptance, documenting in reasonable detail any and all material defects in the deliverable. QSSI shall, upon receipt of such notice, use all reasonable efforts to promptly correct any such material failures and shall notify Client of its completion of the correction. Client shall, after receipt of said notice, review the corrected deliverable and report to QSSI. Client shall do so promptly using diligent efforts, but in no event shall such process exceed ten (10) days. This cycle shall be repeated only as is reasonably necessary. A deliverable shall be deemed Accepted by Client if either: (a) Client notifies QSSI in writing of its Acceptance, in which event the Acceptance date shall then be the date of such notice; (b) Client fails to notify QSSI in writing within the applicable time period of any material defect in the deliverable, in which event the Acceptance date shall be the last day of said period; (c) client places in productive use under the terms defined in Paragraph 7.1, any portion of the deliverable. 8. WARRANTIES AND DISCLAIMER 8.1 QSSI WARRANTIES QSSI represents and warrants, subject to Paragraph 8.2, that the Base System shall conform in all material respects to the documentation, provided, and only to the extent, that Client notifies QSSI in writing within one year after the date of productive use of any portion of the Base System ("Base System Warranty Period") of any such material non-conformity. QSSI further represents and warrants, subject to Paragraph 8.2, that the modifications of each Phase of the Developed Software shall conform in all material respects to -6- 7 the documentation, provided, and only to the extent, that Client notifies QSSI in writing within one hundred and eighty (180) days after the date of Acceptance of the Phase of the Developed Software ("Modification Warranty Period") of any such material non-conformity. In the event that the Shelf Version of the Phase of the Developed Software is found to be defective in such respects, and that notice with respect to such defect has been given as provided above, QSSI's sole obligation under this warranty is to respond promptly and to use all reasonable efforts to promptly remedy such defect within a reasonable time. The Parties acknowledge that changes to the production version of the Developed Software are likely to be initiated by Client. Accordingly QSSI has no obligation under warranty or otherwise to support the changes made by Client to the Developed Software. QSSI's obligation under this warranty is solely with respect to the Shelf Version. 8.2 QSSI WARRANTY PROCEDURE If changes have been made to the Shelf Version resulting in variation between the shelf version and the production version, upon receipt of Client's notice under Paragraph 8.1, client shall duplicate the problem on the Shelf Version of the applicable Phase of the Developed Software stored at Client's site for such purpose. If the problem cannot be duplicated, QSSI's warranty shall not apply and QSSI shall have no obligation to remedy the cited defect. If the problem duplicated on the Shelf Version, QSSI shall use all reasonable efforts to promptly repair or correct the Shelf version in accordance with the terms of this agreement. This warranty does not apply to corrections or remedies for difficulties or defects arising from system changes, improper configuration or use of the Developed Software, the hardware or software environment, Third Party Software, or other causes external to the Developed Software. If Client requests QSSI assistance with any non-warranty problem, QSSI will provide assistance, subject to QSSI personnel availability, at its then standard time and material charges. 8.3 THIRD PARTY SOFTWARE The Parties understand that the Software System may include certain Third Party Software products which may or may not be listed in Schedule B hereto. It is acknowledged by Client that Client shall be solely responsible for obtaining licenses to such Third Party Software, if such software is not already in Client's possession, including the right to incorporate such software into the Software System. QSSI MAKES NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, AS TO THE QUALITY, CAPABILITIES, OPERATIONS, PERFORMANCE OR SUITABILITY OF THIRD PARTY SOFTWARE, INCLUDING THE ABILITY TO INTEGRATE WITH MODIFICATIONS TO THE SOFTWARE SYSTEM OR OF NEW RELEASES TO INTEGRATE WITH THE DEVELOPED SOFTWARE. The quality, capabilities, operations, performance and suitability of such Third Party Software lies solely with Client and the vendor or supplier of such Third Party Software. 8.4 Disclaimer of Warranty THE WARRANTY SET FORTH IN PARAGRAPHS 8.1 AND 8.2 IS A LIMITED WARRANTY AND IS IN LIEU OF ALL OTHER WARRANTIES EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. QSSI DOES NOT WARRANT THAT THE SOFTWARE SYSTEM WILL MEET CLIENT'S FUTURE OR UNDISCLOSED REQUIREMENTS. -7- 8 9. LIMITATION OF LIABILITY 9.1 NEITHER PARTY SHALL HAVE ANY LIABILITY WITH RESPECT TO ITS OBLIGATIONS UNDER THIS AGREEMENT OR OTHERWISE FOR CONSEQUENTIAL, EXEMPLARY, SPECIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN ANY EVENT, THE LIABILITY OF QSSI TO CLIENT FOR ANY REASON AND UPON ANY CAUSE OF ACTION OR CLAIM SHALL BE LIMITED TO THE AMOUNT PAID TO QSSI BY CLIENT HEREUNDER WITH RESPECT TO THE PHASE WHICH IS THE SUBJECT OF THE ACTION OR CLAIM. THIS LIMITATION APPLIES TO ALL CAUSES OF ACTION OR CLAIMS IN THE AGGREGATE, INCLUDING WITHOUT LIMITATION TO BREACH OF CONTRACT, BREACH OF WARRANTY, NEGLIGENCE, STRICT LIABILITY, MISREPRESENTATIONS, CLAIMS FOR FAILURE TO EXERCISE DUE CARE IN THE PERFORMANCE OF QSSI SERVICES HEREUNDER AND OTHER TORTS. BOTH PARTIES UNDERSTAND AND AGREE THAT THE REMEDIES, EXCLUSIONS AND LIMITATIONS HEREIN ALLOCATE THE RISKS OF PRODUCT AND SERVICE NONCONFORMITY BETWEEN THE PARTIES AS AUTHORIZED BY THE UNIFORM COMMERCIAL CODE AND/OR OTHER APPLICABLE LAWS. THE FEES HEREIN REFLECT, AND ARE SET IN RELIANCE UPON, THIS ALLOCATION OF RISK AND THE EXCLUSION OF CONSEQUENTIAL DAMAGES AND LIMITATIONS OF LIABILITY SET FORTH IN THIS AGREEMENT. 9.2 PATENT AND COPYRIGHT INDEMNIFICATION If an action is brought against Client claiming that the Developed Software infringes a patent, copyright or misappropriated trade secret, QSSI will defend Client and pay any damages awarded against Client, but only if (a) Client notifies QSSI promptly upon learning of the claim, (b) QSSI has sole control over the defense of the claim and any negotiation for its settlement or compromise, (c) Client takes no action, that in QSSI's judgment, is contrary to QSSI's interest and (d) provides QSSI with full cooperation at QSSI's expense to investigate and defend against the claim. If a claim may be or has been asserted, Client will permit QSSI, at QSSI's option and expense, to procure the right to continue using the Developed Software, or replace or modify the Developed Software to eliminate the infringement while providing functionally equivalent performance. Notwithstanding the above, QSSI will have no duty to indemnify Client if the patent or copyright infringement results from (a) a correction or modification of the Developed Software not provided by QSSI, (b) the failure to promptly install any update which QSSI may have provided to Client, or (c) the combination of the Developed Software with other software or hardware not provided by QSSI. 10. OTHER RIGHTS AND OBLIGATIONS 10.1 STATUS REPORTS Client and QSSI shall periodically communicate to the other's Project Leader the current status of the Party's activities, progress of the work being performed, and resources expended since the last report (and cumulative totals to date), identification and impact of actual and anticipated problem areas, and action being taken or alternative actions to be contemplated and taken to address such problems. Also, if requested by the other Party, Client -8- 9 and QSSI shall attend a status meeting, no more frequently than once per month, to review the status of Client and QSSI activities. 10.2 COOPERATION The Parties acknowledge and agree that successful installation of the Software System in Client's processing environment shall require their full and mutual good faith cooperation. 10.3 EMPLOYEE SOLICITATION Both Parties agree not to engage in any attempt to hire, or to engage as independent contractors, the other's employees or independent contractors for the two years after termination of this contract, except as may be otherwise agreed to in writing by both Parties. 10.4 CHARGES Client shall pay QSSI or reimburse QSSI for any out-of-pocket expenses incurred by QSSI in the fulfillment of its obligations under this Agreement, which include but are not limited to phone calls, one-way billable travel time, round trip airfare, lodging, meals, local transportation and communications, round trip travel expense to QSSI's principal place of business every two (2) weeks and incidentals incurred in connection with work performed at Client's place of business. QSSI estimates such expenses for this project will be less than [*]. If the expenses are expected to exceed that amount, QSSI will provide advance notice to Client. 10.5 TAXES Client shall pay for, or reimburse QSSI for all sales, use, transfer or other taxes and all duties, whether international, national, state, or local however designated, which are levied or imposed by reason of the transaction contemplated hereby; excluding, however, income taxes on QSSI's net income of profits. 10.6 INDEPENDENT CONTRACTOR QSSI and its personnel, in performance of this Agreement, are acting as independent contractors and not employees or agents of Client. QSSI shall be solely responsible for the payment of compensation of QSSI personnel assigned to perform services hereunder and such personnel are not entitled to the provisions of any Client employee benefits. QSSI and not Client, shall be responsible for payment of worker's compensation, disability benefits and unemployment insurance or for withholding and paying employment taxes for all QSSI personnel. 11. TERM This Agreement is effective from the date first set forth above and shall continue in effect until terminated by either party. Completion of any specific services or Customer's failure to order additional services hereunder shall not terminate this Agreement. This agreement can be terminated by either party upon one month's prior written notice to the other party. Any work order between the parties still in effect upon termination shall survive until completed according to its terms. 12. MISCELLANEOUS 12.1 DISPUTE RESOLUTION In the event of any dispute with regard to the interpretation of this Agreement or the respective rights and obligations of the Parties, other than those for which injunctive relief is appropriate, and as a condition precedent to any legal action being * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. -9- 10 commenced by either Party, Gerry Goldschein of QSSI and Lloyd Wallsten of Client, shall in good faith attempt to resolve the Parties' differences, the dispute shall be elevated to Ed Troianelo of QSSI and Diane Hourany of Client who shall meet in person and, in good faith, attempt to resolve the dispute. If the dispute is then not resolved within five (5) business days either party may pursue any remedies then available to it. 12.2 ENTIRE AGREEMENT This Agreement sets forth the entire and exclusive understanding and agreement of the Parties with respect to its subject matter and supersedes and merges any prior understanding or agreements, oral or written. This Agreement may not be modified except by a writing subscribed by both Client and QSSI. 12.3 FORCE MAJEURE Neither client or QSSI shall be liable to the other for any delay or failure to perform any of the services or obligations set forth in this Agreement due to any act of God, fire, flood, casualty, earthquake or other causes beyond its reasonable control provided that such party shall have used its best efforts to mitigate its effects. 12.4 NEW JERSEY LAW This Agreement and performance hereunder shall be governed by the laws of the State of New Jersey without regards to its conflict of laws provisions. QSSI and Client hereby agree on behalf of themselves and any person claiming by or through them that the sole jurisdiction and venue for any litigation rising from or relating to this Agreement shall be an appropriate federal or state court located in New Jersey. No action, regardless of form, arising out of this Agreement shall be brought by Client more than one year after such cause of action shall have accrued. 12.5 ASSIGNMENT Unless in connection with the sale of all or substantially all of its assets or a merger, neither party may assign this Agreement or any right, interest or benefit under this Agreement without the prior written consent of the other party. Subject to the foregoing, this Agreement shall be fully binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. 12.6 NOTICE Any communication provided or permitted under this Agreement, unless otherwise specifically provided otherwise herein, shall be in writing and shall be deemed given (i) if by hand deliver, upon receipt thereof; (ii) if mailed, four (4) business days after deposit in the U.S. mails, postage paid, certified mail, return receipt requested and received. All notices shall be addressed to Client and QSSI at their respective addresses set forth on the cover of this Agreement. 12.7 SURVIVAL The following Paragraphs or Sections of this Agreement shall survive its cancellation, termination or expiration: 4.2, 4.3, 4.4, 8.3, 8.4, 9, 10.3, 10.5, 10.6, and 11. 12.8 CLIENT IDENTIFICATION Upon the written consent of Client, which shall not be unreasonably withheld, QSSI may use the name of and identify Client as a Client, in press releases and similar materials distributed to prospective Clients. Client may from time to time as requested by QSSI but within Client's sole discretion, allow QSSI to perform site visits to Client's site provided however that Client is given adequate notice and would not provide proprietary information to a competitor. -10- 11 12.9 NO WAIVER The waiver or failure of either Client or QSSI to exercise any right in any instance shall be deemed a waiver neither of any other right hereunder not of its right to withhold other waivers of the same rights. 12.10 ENFORCEABILITY If any provision of this Agreement is determined to be invalid under any applicable statute or rule of law, it is to that extent to be deemed omitted, and the balance of the Agreement shall remain enforceable. CLIENT AND QSSI HAVE READ AND AGREES TO ALL OF THE ATTACHED AND INCORPORATED TERMS AND CONDITIONS. THIS AGREEMENT SHALL BE EFFECTIVE WHEN EXECUTED BY QSSI. -11- 12 IN WITNESS WHEREOF, the parties have caused this agreement to be executed by their duly authorized representatives as of the date first written above. Client: Pets.com QUALITY SOFTWARE SYSTEMS, INC. By: /s/ Diane Hourany By: /s/ H E Dybuahl ------------------------------ --------------------------------- (Signature) (Signature) Name: Diane Hourany Name: H. E. Dybuahl ---------------------------- ------------------------------- Title: VP OPS Title: Director, Sales & Marketing --------------------------- ------------------------------ Date: July 16, 1999 Date: July 16, 1999 ---------------------------- ------------------------------- -12- EX-10.22 28 PETPLACE.COM, INC. SERIES A PREFERRED STOCK 1 EXHIBIT 10.22 PETPLACE.COM, INC. SERIES A PREFERRED STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT is made as of the 12th day of November 1999, by and among PetPlace.com, Inc., a Delaware corporation (the "Company"), and the investors severally and not jointly listed on Schedule A hereto, each of which is herein referred to as an "Investor." THE PARTIES HEREBY AGREE AS FOLLOWS: 1. Purchase and Sale of Stock. 1.1 Sale and Issuance of Series A Preferred Stock. (a) The Company shall adopt and file with the Secretary of State of Delaware on or before the Initial Closing (as defined below) the Restated Certificate of Incorporation in the form attached hereto as Exhibit A (the "Restated Certificate"). (b) On or prior to the Initial Closing (as defined below), the Company shall have authorized (i) the sale and issuance to the Investors of the Series A Preferred Stock and (ii) the issuance of the shares of Common Stock to be issued upon conversion of the Series A Preferred Stock (the "Conversion Shares"). The Series A Preferred Stock and the Conversion Shares shall have the rights, preferences, privileges and restrictions set forth in the Restated Certificate. (c) Subject to the terms and conditions of this Agreement, each Investor agrees, severally and not jointly, to purchase at the Initial Closing or pursuant to Section 1.3 and the Company agrees to sell and issue to each Investor at the Initial Closing or pursuant to Section 1.3, that number of shares of the Company's Series A Preferred Stock set forth opposite such Investor's name on Schedule A hereto for the purchase price set forth thereon. 1.2 Initial Closing. The purchase and sale of the Series A Preferred Stock shall take place at the offices of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, 155 Constitution Drive, Menlo Park, California, at 10:00 A.M., on November 12, 1999, or at such other time and place as the Company and Investors acquiring in the aggregate more than half the shares of Series A Preferred Stock sold pursuant hereto mutually agree upon orally or in writing (which time and place are designated as the "Initial Closing"). At the Initial Closing the Company shall deliver to each Investor a certificate representing the Series A Preferred Stock that such Investor is purchasing against payment of the purchase price therefor by check, wire transfer, cancellation of indebtedness, or any combination thereof. 1.3 Subsequent Sale of Series A Preferred Stock to Pets.com, Inc. Concurrent with the launch of the Company's web site, which shall occur no later than February 1, 2000, Pets.com, Inc. shall purchase, at a purchase price of $0.93 per share an additional 1,612,903 -1- 2 shares of Series A Preferred Stock, provided that the web site is reasonably satisfactory to Pets.com, Inc. (the "Pets.com Subsequent Closing"). 1.4 Subsequent Sale of Series A Preferred Stock. The Company may sell up to the balance of the authorized number of shares of Series A Preferred Stock not sold at the Initial Closing or reserved for the Pets.com Subsequent Closing to such purchasers as it shall select, at a price not less than $0.93 per share, provided the agreement for sale is executed not later than January 1, 2000. Any such purchaser shall become a party to this Agreement and that certain Investors' Rights Agreement dated November 12, 1999, by and among the Company and the Investors, the form of which is attached hereto as Exhibit B (the "Investors' Rights Agreement"), that certain Voting Agreement dated November 12, 1999, by and among the Company and the Investors, the form of which is attached hereto as Exhibit C (the "Voting Agreement") and that certain Right of First Refusal and Co-Sale Agreement dated November 12, 1999 by and among the Company and the Investors, the form of which is attached hereto as Exhibit D (the "Right of First Refusal and Co-Sale Agreement") and shall have the rights and obligations hereunder and thereunder, unless such purchaser enters into an agreement that provides otherwise. The Voting Agreement and the Right of First Refusal and Co-Sale Agreement are herein called collectively the "Ancillary Agreements." 2. Representations and Warranties of the Company. The Company hereby represents and warrants to each Investor that, except as set forth on a Schedule of Exceptions (the "Schedule of Exceptions") furnished each Investor and special counsel for the Investors, specifically identifying the relevant subparagraph hereof, which exceptions shall be deemed to be representations and warranties as if made hereunder: 2.1 Organization, Good Standing and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a material adverse effect on its business or properties. 2.2 Capitalization and Voting Rights. The authorized capital of the Company consists of: (a) Preferred Stock. 10,000,000 shares of Preferred Stock, par value $0.0001 (the "Preferred Stock"), of which 5,500,000 shares have been designated Series A Preferred Stock (the "Series A Preferred Stock") and up to all of which will be sold pursuant to this Agreement. The rights, privileges and preferences of the Series A Preferred Stock will be as stated in the Company's Restated Certificate. (b) Common Stock. 40,000,000 shares of common stock, par value $0.0001 ("Common Stock"), of which 19,460,000 shares are issued and outstanding. The outstanding shares of Common Stock are all duly and validly authorized and issued, fully paid and nonassessable, and were issued in accordance with the registration and qualification provisions of the Securities Act of 1933, as amended (the "Securities Act") and any relevant state securities laws, or pursuant to any exemptions therefrom. -2- 3 (c) Except for (A) the conversion privileges of the Series A Preferred Stock to be issued under this Agreement, (B) the rights provided in Section 2.3 of the Investors' Rights Agreement, (C) commitments or proposals to issue up to 300,000 shares of Common Stock to certain service providers, and (D) currently outstanding options or commitments to purchase 1,780,000 shares of Common Stock granted to employees and other service providers pursuant to the Company's 1999 Stock Option Plan (the "Option Plan") or other arrangement approved by the Board of Directors, there are not outstanding any options, warrants, rights (including conversion or preemptive rights) or agreements for the purchase or acquisition from the Company of any shares of its capital stock. The Company is not a party or subject to any agreement or understanding, and, to the Company's knowledge, there is no agreement or understanding between any persons and/or entities, which affects or relates to the voting or giving of written consents with respect to any security or by a director of the Company. (d) Except as set forth on the Schedule of Exceptions hereto, no stock plan, stock purchase, stock option or other agreement or understanding between the Company and any holder of any equity securities or right to purchase equity securities provides for acceleration or other changes in the vesting provisions or other terms of such agreement or understanding as the result of any merger, consolidated sale of stock or assets, change of control or other similar transaction by the Company. 2.3 Subsidiaries. The Company does not presently own or control, directly or indirectly, any interest in any other corporation, association, or other business entity. The Company is not a participant in any joint venture, partnership, or similar arrangement. 2.4 Authorization. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement, the Investors' Rights Agreement and the Ancillary Agreements, the performance of all obligations of the Company hereunder and thereunder, and the authorization, issuance (or reservation for issuance), sale and delivery of the Series A Preferred Stock being sold hereunder and the Common Stock issuable upon conversion of the Series A Preferred Stock has been taken or will be taken prior to the Initial Closing, and this Agreement, the Investors' Rights Agreement and the Ancillary Agreements constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 2.5 Valid Issuance of Preferred and Common Stock. The Series A Preferred Stock that is being purchased by the Investors hereunder, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid, and nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and the Investors' Rights Agreement and under applicable state and federal securities laws. The Common Stock issuable upon conversion of the Series A Preferred Stock purchased under this Agreement has been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Restated Certificate, -3- 4 will be duly and validly issued, fully paid, and nonassessable and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and the Investors' Rights Agreement and under applicable state and federal securities laws. 2.6 Governmental Consents. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement, except (i) the filing of the Restated Certificate with the Secretary of State of Delaware; and (ii) the filing pursuant to Section 25102(f) of the California Corporate Securities Law of 1968, as amended, and the rules thereunder, which filing will be effected within 15 days of the sale of the Series A Preferred Stock hereunder, or such other post-closing filings as may be required. 2.7 Offering. Subject in part to the truth and accuracy of each Investor's representations set forth in Section 3 of this Agreement, the offer, sale and issuance of the Series A Preferred Stock as contemplated by this Agreement are exempt from the registration requirements of any applicable state and federal securities laws, and neither the Company nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 2.8 Litigation. There is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company that questions the validity of this Agreement, the Investors' Rights Agreement or any Ancillary Agreements, or the right of the Company to enter into such agreements, or to consummate the transactions contemplated hereby or thereby, or that might result, either individually or in the aggregate, in any material adverse changes in the assets, condition, affairs or prospects of the Company, financially or otherwise, or any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for the foregoing. The foregoing includes, without limitation, actions, suits, proceedings or investigations pending or threatened involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company currently pending or that the Company intends to initiate. 2.9 Proprietary Information Agreements. Each employee, officer and consultant of the Company has executed a Proprietary Information and Inventions Agreement in substantially the form provided to special counsel to the Investors. The Company is not aware that any of its employees, officers or consultants are in violation thereof and the Company will use its diligent efforts to prevent any such violation. No employee, officer or consultant of the Company has excluded works or inventions made prior to his or her employment with the Company from his or her assignment of inventions pursuant to such employee, officer or consultant's Proprietary Information and Inventions Agreement. 2.10 Patents and Trademarks. To its knowledge, the Company owns or possesses sufficient legal rights to all patents, trademarks, service marks, tradenames, copyrights, -4- 5 trade secrets, licenses, information and proprietary rights and processes necessary for its business as now conducted and as proposed to be conducted in the future without any conflict with, or infringement of, the rights of others and believes it can obtain, on commercially reasonable terms, any additional rights necessary for the conduct of its business as proposed to be conducted. There are no outstanding options, licenses, or agreements of any kind relating to the foregoing, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, proprietary rights and processes of any other person or entity, except, in either case, for end-user, object code, internal-use software license and support/maintenance agreements. The Company has not received any communications alleging that the Company has violated or, by conducting its business as proposed, would violate any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his or her best efforts to promote the interests of the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution nor delivery of this Agreement, the Investors' Rights Agreement or the Ancillary Agreements, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed, will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. The Company does not believe it is or will be necessary to utilize any inventions, trade secrets or proprietary information of any of its employees (or people it currently intends to hire) made prior to or outside the scope of their employment by the Company. 2.11 Compliance with Other Instruments. The Company is not in violation or default of any provision of its Restated Certificate or Bylaws, or of any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound, or, to the best of its knowledge, of any provision of any federal or state statute, rule or regulation applicable to the Company. The execution, delivery and performance of this Agreement, the Investors' Rights Agreement and the Ancillary Agreements, and the consummation of the transactions contemplated hereby and thereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract or an event that results in the creation of any lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, impairment, forfeiture, or nonrenewal of any material permit, license, authorization, or approval applicable to the Company, its business or operations or any of its assets or properties. To its knowledge, the Company has avoided every condition, and has not performed any act, the occurrence of which would result in the Company's loss of any material right granted under any license, distribution agreement or other agreement. 2.12 Agreements; Action. (a) Except for agreements explicitly contemplated hereby and by the Investors' Rights Agreement and the Ancillary Agreements, there are no agreements, -5- 6 understandings or proposed transactions between the Company and any of its officers, directors, affiliates, or any affiliate thereof. (b) There are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party or by which it is bound that may involve (i) obligations (contingent or otherwise) of, or payments to the Company in excess of, $10,000, or (ii) the license of any patent, copyright, trade secret or other proprietary right to or from the Company (other than the license by the Company of its software and products to third-party customers in the ordinary course of business or licenses of commercial off-the-shelf software used by the Company for internal purposes), or (iii) provisions restricting or affecting the development, manufacture or distribution of the Company's products or services, or (iv) indemnification by the Company with respect to infringements of proprietary rights. (c) The Company has not (i) declared or paid any dividends or authorized or made any distribution upon or with respect to any class or Series of its capital stock, (ii) incurred any indebtedness for money borrowed or any other liabilities individually in excess of $10,000 or, in the case of indebtedness and/or liabilities individually less than $10,000, in excess of $50,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. (d) For the purposes of subsections (b) and (c) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. (e) The Company is not a party to and is not bound by any contract, agreement or instrument, or subject to any restriction under its Restated Certificate or Bylaws that adversely affects its business, its properties or its financial condition. (f) The Company has not engaged in the past six (6) months in any discussion (i) with any representative of any corporation or corporations regarding the consolidation or merger of the Company with or into any such corporation or corporations, (ii) with any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company or a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, or (iii) regarding any other form of acquisition, liquidation, dissolution or winding up of the Company. 2.13 Related-Party Transactions. No employee, officer, or director of the Company or member of his or her immediate family is indebted to the Company, nor is the Company indebted (or committed to make loans or extend or guarantee credit) to any of them. To the Company's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation that competes with the Company, except that -6- 7 employees, officers, or directors of the Company and members of their immediate families may own stock in publicly traded companies that may compete with the Company. No member of the immediate family of any officer or director of the Company is directly or indirectly interested in any material contract with the Company. 2.14 Permits. The Company has all franchises, permits, licenses, and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects, or financial condition of the Company, and the Company believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. The Company is not in default in any material respect under any of such franchises, permits, licenses, or other similar authority. 2.15 Registration Rights. Except as provided in the Investors' Rights Agreement, the Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. 2.16 Corporate Documents. The Restated Certificate and Bylaws of the Company are in the form previously provided to special counsel for the Investors. The copy of the minute books of the Company provided to the Investors' special counsel contains minutes of all meetings of directors and stockholders and all actions by written consent without a meeting by the directors and stockholders since the date of incorporation and reflects all actions by the directors (and any committee of directors) and stockholders with respect to all transactions referred to in such minutes accurately in all material respects. 2.17 Title to Property and Assets. The Company owns its property and assets free and clear of all mortgages, liens, loans and encumbrances, except such encumbrances and liens that arise in the ordinary course of business and do not materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and, to its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances. 2.18 Material Liabilities. The Company has no material liability or obligation, absolute or contingent (individually or in the aggregate), except (i) obligations and liabilities incurred after the date of incorporation in the ordinary course of business that are not material, individually or in the aggregate, and (ii) obligations under contracts made in the ordinary course of business that would not be required to be reflected in financial statements prepared in accordance with generally accepted accounting principles. 2.19 Employee Benefit Plans. The Company does not have any Employee Benefit Plan as defined in the Employee Retirement Income Security Act of 1974. 2.20 Tax Returns, Payments and Elections. The Company has filed all tax returns and reports (including information returns and reports) as required by law. The Company has paid all taxes and other assessments due, except those contested by it in good faith that are listed in the Schedule of Exceptions and except to the extent that a reserve has been reflected on its financial statements in accordance with generally accepted accounting principles. The -7- 8 Company has never had any tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge. None of the Company's federal income tax returns and none of its state income or franchise tax or sales or use tax returns has ever been audited by governmental authorities. Since the date of its financial statements, the Company has not incurred any taxes, assessments or governmental charges other than in the ordinary course of business and the Company has made adequate provisions on its books of account for all taxes, assessments and governmental charges with respect to its business, properties and operations for such period. The Company has withheld or collected from each payment made to each of its employees, the amount of all taxes (including, but not limited to, federal income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositories. 2.21 Labor Agreements and Actions; Employee Compensation. The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union or any collective bargaining agreements with any of its employees, and no labor union has requested or, to the Company's knowledge, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending, or to the Company's knowledge, threatened, that could have a material adverse effect on the assets, properties, financial condition, operating results, or business of the Company (as such business is presently conducted and as it is proposed to be conducted), nor is the Company aware of any labor organization activity involving its employees. The Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company, nor does the Company have a present intention to terminate the employment of any of the foregoing. The employment of each officer and employee of the Company is terminable at the will of the Company. To its knowledge, the Company has complied in all material respects with all applicable state and federal equal employment opportunity and other laws related to employment. No employee has any agreement or contract, written or verbal, regarding his or her employment. The Company is not a party to or bound by any currently effective employment contract, deferred compensation agreement, bonus plan, incentive plan, profit sharing plan, retirement agreement, or other employee compensation agreement. The Company has not entered into any agreement that granted any employee (including any officer) the right to continued employment by the Company or to any material compensation following termination of employment with the Company. Each officer of the Company is currently devoting his or her full business time during normal business hours to the conduct of the Business of the Company. The Company is not aware of any officer or key employee of the Company planning to work less than full time at the Company in the future. 2.22 Real Property Holding Company. The Company is not currently, and has not been during the prior five years, a United States real property holding corporation within the meaning of Section 897 of the Code and the Company has filed with the Internal Revenue Service all statements, if any, with its United States income tax returns which are required under Section 1.897-2(h) of the Treasury Regulations. -8- 9 2.23 Brokers. The Company has no contract, arrangement or understanding with any broker, finder or similar agent with respect to the transactions contemplated by this Agreement. 2.24 Disclosure. The Company has fully provided each Investor with all the information that such Investor has requested for deciding whether to purchase the Series A Preferred Stock and all the information the Company believes is reasonably necessary to enable such Investor to make such decision. Neither this Agreement, the Investors' Rights Agreement, the Ancillary Agreements nor any exhibits hereto contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein or therein not misleading. 2.25 Financial Compilation. The Company has delivered to each Investor that has requested it a copy of a financial compilation as of August 31, 1999 (the "Financial Compilation"). The Financial Compilation fairly presents the financial condition of the Company. Except as set forth in the Financial Compilation, the Company has no material liabilities, contingent or otherwise, other than liabilities incurred in the ordinary course of business. 2.26 Section 83(b) Elections. To the Company's knowledge, all elections and notices permitted by Section 83(b) of the Internal Revenue Code and any analogous provisions of applicable sales tax laws have been filed by all employees who have purchased shares of the Company's common stock prior to the Closing under agreements that provide for the vesting of such shares. 2.27 Insurance. The Company has, or will obtain following the Initial Closing fire and casualty insurance policies with coverage customary for companies similarly situated to the Company. 3. Representations and Warranties of the Investors. Each Investor hereby represents and warrants that: 3.1 Authorization. Such Investor has full power and authority to enter into this Agreement, the Investors' Rights Agreement and each Ancillary Agreement, and each such agreement constitutes its valid and legally binding obligation, enforceable in accordance with its terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 3.2 Purchase Entirely for Own Account. This Agreement is made with such Investor in reliance upon such Investor's representation to the Company, which by such Investor's execution of this Agreement such Investor hereby confirms, that the Series A Preferred Stock to be received by such Investor and the Common Stock issuable upon conversion thereof (collectively, the "Securities") will be acquired for investment for such Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part -9- 10 thereof, and that such Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, such Investor further represents that such Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. 3.3 Disclosure of Information. Such Investor believes it has received all the information it considers necessary or appropriate for deciding whether to purchase the Series A Preferred Stock. Such Investor further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Series A Preferred Stock and the business, properties, prospects and financial condition of the Company. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the Investors to rely thereon. 3.4 Investment Experience. Such Investor is an investor in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Series A Preferred Stock. If other than an individual, Investor also represents it has not been organized for the purpose of acquiring the Series A Preferred Stock. 3.5 Accredited Investor. Such Investor is an "accredited investor" within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of Regulation D, as presently in effect. 3.6 Restricted Securities. Such Investor understands that the Securities it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Act, only in certain limited circumstances. In this connection, such Investor represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 3.7 Further Limitations on Disposition. Without in any way limiting the representations set forth above, such Investor further agrees not to make any disposition of all or any portion of the Securities unless and until the transferee has agreed in writing for the benefit of the Company to be bound by this Section 3 and the Investors' Rights Agreement provided and to the extent this Section and such agreement are then applicable, and: (a) There is then in effect a Registration Statement under the Act covering such proposed disposition and such disposition is made in accordance with such Registration Statement; or (b) (i) Such Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) if reasonably requested by the Company, such Investor shall have furnished the Company with an opinion of counsel, reasonably satisfactory to -10- 11 the Company that such disposition will not require registration of such shares under the Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. (c) Notwithstanding the provisions of Paragraphs (a) and (b) above, no such registration statement or opinion of counsel shall be necessary for a transfer by an Investor that is a partnership to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner or the transfer by gift, will or intestate succession of any partner to his or her spouse or to the siblings, lineal descendants or ancestors of such partner or his or her spouse, if the transferee agrees in writing to be subject to the terms hereof to the same extent as if he or she were an original Investor hereunder. 3.8 Legends. It is understood that the certificates evidencing the Securities may bear one or all of the following legends: (a) "These securities have not been registered under the Securities Act of 1933, as amended. They may not be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the securities under such Act or an opinion of counsel satisfactory to the Company that such registration is not required or unless sold pursuant to Rule 144 of such Act." (b) Any legend required by the laws of the State of California, including any legend required by the California Department of Corporations and Sections 417 and 418 of the California Corporations Code. 4. Conditions of Investors' Obligations at Initial Closing. The obligations of each Investor under subsection 1.1(b) of this Agreement are subject to the fulfillment on or before the Initial Closing of each of the following conditions, the waiver of which shall not be effective against any Investor who does not consent thereto: 4.1 Representations and Warranties. The representations and warranties of the Company contained in Section 2 shall be true on and as of the Initial Closing with the same effect as though such representations and warranties had been made on and as of the date of such Initial Closing. 4.2 Performance. The Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Initial Closing. 4.3 Compliance Certificate. The President of the Company shall deliver to each Investor at the Initial Closing a certificate stating that the conditions specified in Sections 4.1 and 4.2 have been fulfilled and stating that there shall have been no adverse change in the business, affairs, operations, properties, assets or condition of the Company since the date of incorporation. 4.4 Qualifications. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in -11- 12 connection with the lawful issuance and sale of the Securities pursuant to this Agreement shall be duly obtained and effective as of the Initial Closing. 4.5 Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated at the Initial Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to Investors' special counsel, and they shall have received all such counterpart original and certified or other copies of such documents as they may reasonably request. 4.6 Board of Directors. The directors of the Company shall be Jon Rappaport, Marc Richman and Richard Goldstein, who serve as the designees of the holders of Common Stock, one designee of Pets.com, Inc., and there shall be two vacancies on the Board of Directors, to be filled by outside industry experts who shall be elected by holders of a majority of Common Stock and Preferred Stock, voting together as a single class. 4.7 Investors' Rights Agreement. The Company and each Investor shall have entered into an Investors' Rights Agreement in the form attached as Exhibit B. 4.8 Voting Agreement. The Company and each Investor shall have entered into a Voting Agreement in the form attached as Exhibit C. 4.9 Co-Sale Agreements. Jon Rappaport and each Investor shall each have entered into a Co-Sale Agreement in the form attached hereto as Exhibit D. 4.10 Opinion of Company Counsel. Each Investor shall have received from Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel for the Company, an opinion, dated as of the Initial Closing, in the form attached hereto as Exhibit E. 4.11 Restated Certificate of Incorporation. The Company's Restated Certificate of Incorporation shall have been filed with the Delaware Secretary of State. 4.12 Proprietary Information and Inventions Agreement. The Company and each of its employees shall have entered into the Company's standard form Proprietary Information and Inventions Agreement, in substantially the form provided to the special counsel for the Investors. 5. Conditions of the Company's Obligations at Initial Closing. The obligations of the Company to each Investor under this Agreement are subject to the fulfillment on or before the Initial Closing of each of the following conditions by that Investor: 5.1 Representations and Warranties. The representations and warranties of the Investors contained in Section 3 shall be true on and as of the Initial Closing with the same effect as though such representations and warranties had been made on and as of the Initial Closing. 5.2 Payment of Purchase Price. Each Investor shall have delivered the purchase price specified in Section 1.2 opposite such Investors name and the Investors shall collectively have acquired and paid for at the Initial Closing at least 2,150,537 shares of Series A Preferred Stock hereunder. -12- 13 5.3 Qualifications. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Securities pursuant to this Agreement shall be duly obtained and effective as of the Initial Closing. 5.4 Investors' Rights Agreement. The Company and each Investor shall have entered into an Investors' Rights Agreement. 5.5 Voting Agreement. The Company and each Investor shall have entered into a Voting Agreement. 5.6 Co-Sale Agreements. Jon Rappaport and each Investor shall each have entered into a Co-Sale Agreement. 5.7 Restated Certificate of Incorporation. The Company's Restated Certificate of Incorporation shall have been filed with the Delaware Secretary of State. 6. Miscellaneous. 6.1 Survival of Warranties. The warranties, representations and covenants of the Company and Investors contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Initial Closing and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Investors or the Company. 6.2 Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any Securities). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 6.3 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 6.4 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 6.5 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. 6.6 Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the -13- 14 address indicated for such party on the signature page hereof, or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. 6.7 Finder's Fee. Each party severally and not jointly represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction. Each Investor agrees severally and not jointly to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which such Investor or any of its officers, partners, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless each Investor from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 6.8 Expenses. Irrespective of whether the Initial Closing is effected, the Company shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. If the Initial Closing is effected, the Company shall, at the Initial Closing, reimburse the reasonable fees and out-of-pocket expenses of Venture Law Group, special counsel for the Investors, not to exceed $15,000.00. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the Investors' Rights Agreement, any Ancillary Agreement or the Restated Certificate, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 6.9 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the Common Stock issuable or issued upon conversion of the Series A Preferred Stock. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities are convertible), each future holder of all such securities, and the Company. 6.10 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. 6.11 Corporate Securities Law. THE SALE OF THE SECURITIES THAT ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES 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 -14- 15 CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. 6.12 Aggregation of Stock. All shares of the Preferred Stock held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 6.13 Entire Agreement. This Agreement and the documents referred to herein constitute the entire agreement among the parties and no party shall be liable or bound to any other party in any manner by any warranties, representations, or covenants except as specifically set forth herein or therein. 6.14 Waiver of Conflicts. Each party to this Agreement acknowledges that Gunderson Dettmer, counsel for the Company, has in the past and may continue to perform legal services for certain of the Investors in matters unrelated to the transactions described in this Agreement, including the representation of such Investors in venture capital financings and other matters. Accordingly, each party to this Agreement hereby (1) acknowledges that they have had an opportunity to ask for information relevant to this disclosure; (2) acknowledges that Gunderson Dettmer represented the Company in the transaction contemplated by this Agreement and has not represented any individual Investor or any individual shareholder or employee of the Company in connection with such transaction; and (3) gives its informed consent to Gunderson Dettmer's representation of certain of the Investors in such unrelated matters and to Gunderson Dettmer's representation of the Company in connection with this Agreement and the transactions contemplated hereby. 6.15 Delay or Omissions. Except as expressly provided herein, no delay or omission to exercise any right, power or remedy accruing to any holder of any of the Series A Preferred Stock, upon any breach or default of the Company under this Agreement, shall impair any such right, power or remedy of such holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence thereto, or of or in any similar breach or default or any other breach or default theretofore of thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any Investor of any breach or default under this Agreement, or any waiver on the part of any Investor of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any Investor, shall be cumulative and not alternative. -15- 16 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMPANY PetPlace.com, Inc. By: /s/ Jon Rappaport --------------------------------- Jon Rappaport Chief Executive Officer Address: 71 Broadway, Suite 22a New York, NY 10006 INVESTOR: Pets.com, Inc. By: /s/ Julie Wainwright --------------------------------- Title: CEO ------------------------------ Address: 435 Brannan Street San Francisco, CA 94107 -1- 17 SCHEDULE A SCHEDULE OF INVESTORS
NUMBER OF TOTAL PURCHASE NAME AND ADDRESS SHARES PURCHASED PRICE OF SHARES ---------------- ---------------- --------------- Pets.com, Inc. 2,150,537 $1,999,999.40 435 Brannan Street San Francisco, CA 94107
-2- EX-10.23 29 SERIES B PREFERRED STOCK AND CONVERTIBLE NOTE 1 EXHIBIT 10.23 PETS.COM, INC. SERIES B PREFERRED STOCK AND CONVERTIBLE NOTE PURCHASE AGREEMENT This Series B Preferred Stock and Convertible Note Purchase Agreement (the "Agreement") is made as of the 5th day of November, 1999 by and between Pets.com, Inc., a California corporation (the "Company"), and the investors listed on Exhibit A attached hereto (each a "Purchaser" and together the "Purchasers"). The parties hereby agree as follows: 1. PURCHASE AND SALE OF PREFERRED STOCK AND NOTES; CONVERSION OF NOTES. 1.1 SALE AND ISSUANCE OF SERIES B PREFERRED STOCK AND NOTES. (a) The Company shall adopt and file with the Secretary of State of the State of California on or before the Closing (as defined below) the Third Amended and Restated Articles of Incorporation in the form attached hereto as Exhibit B (the "Restated Articles"). (b) The Company has, or will have before the Initial Closing (as defined in Section 1.2(a) below) authorized the sale and issuance of up to 5,886,149 shares of Series B Preferred Stock (or as applicable, up to 4,882,822 Shares of Series B Preferred Stock and up to 1,003,327 shares of Series B-1 Preferred Stock), or such greater number of shares of Series B and/or Series B-1 Preferred Stock that will permit Amazon.com, Inc. ("Amazon.com") to maintain its ownership of the Company at 46% on a fully diluted basis (assuming full conversion and exercise of all convertible or exercisable securities of the Company, including securities reserved for issuance and not granted under the Company's stock and option plans) (the "Ownership Threshold"), but not to exceed this threshold, after taking into account certain increases to the number of shares authorized for issuance pursuant to the company's 1999 Stock Plan and additional issuances under this Agreement. Shares issued to Amazon.com outside of the 5,886,149 shares contemplated by the first sentence of this Section1.1(b) which permit Amazon.com to maintain its ownership at the Ownership Threshold shall also be referred to hereinafter as the "Amazon True-Up Shares." Subject to the terms and conditions of this Agreement, each Purchaser agrees, severally and not jointly, to purchase at the Initial Closing or the Second Closing (as defined below) and the Company agrees to sell and issue to each Purchaser at the Initial Closing or the Second Closing that number of shares of Series B Preferred Stock and/or Series B-1 Preferred Stock set forth opposite each such Purchaser's name on Exhibit A attached hereto under "Initial Closing" and/or "Second Closing," respectively, at a purchase price of $7.55 per share, and certain Purchasers agree, severally and not jointly, to purchase at the Initial Closing and the Company agrees to sell and issue to each such Purchaser at the Initial Closing a Convertible Promissory Note in either the form attached hereto as Exhibit C-1 or C-2 (each, a "Note") in the principal amount set forth opposite each such Purchaser's name on Exhibit A attached hereto under "Initial Closing." The shares of Series B and/or Series B-1 Preferred Stock issued to the Purchaser pursuant to this Agreement shall be hereinafter referred to as the "Stock; and the Stock, the Notes, the Stock issuable upon -1- 2 conversion of the Notes, and the Common Stock issuable upon conversion of the Stock shall collectively be referred to hereinafter as the "Securities." 1.2 CLOSING; DELIVERY; CONVERSION OF NOTES. (a) The initial purchase and sale of the Stock and Notes shall take place at the offices of Venture Law Group, 2775 Sand Hill Road, Menlo Park, California, at 10:00 a.m., on November __, 1999, or at such other time and place as the Company and the Purchasers mutually agree upon, orally or in writing (which time and place are designated as the "Initial Closing"). At the Initial Closing, the Company shall deliver to each Purchaser a certificate representing the Stock being purchased thereby and/or a Note being purchased by such Purchaser against payment of the purchase price therefor by check payable to the Company or by wire transfer to the Company's bank account. (b) Without limiting the obligations of certain of the Purchasers to convert the Notes at the Second Closing as provided in Section 1.2(c) below, if the full number of the authorized shares of Series B Preferred Stock of the Company is not sold at the Initial Closing, the Company shall have the right, at any time prior to December 31, 1999, to sell the remaining authorized but unissued shares of Series B Preferred Stock at such other time and place as the Company and the Purchasers mutually agree upon, orally or in writing (which time and place are designated as the "Second Closing") to one or more additional purchasers as determined by the Company, or to any Purchaser hereunder who wishes to acquire additional shares of Series B Preferred Stock at the price and on the terms set forth herein, subject only to the Ownership Threshold applicable to Amazon.com, and provided further that so long as Amazon.com has not exceeded the Ownership Threshold and elects to purchase additional Stock in the Second Closing, it may elect to purchase shares of Series B-1 Preferred Stock instead of Series B Preferred Stock. Any additional Purchaser so acquiring shares of Series B Preferred Stock (or as may be applicable in the case of Amazon.com, Series B-1 Preferred Stock) shall be considered a "Purchaser" for purposes of this Agreement, any Series B Preferred Stock (or as may be applicable in the case of Amazon.com, Series B-1 Preferred Stock) so acquired by such additional purchaser shall be considered "Stock" for purposes of this Agreement and all other agreements contemplated hereby, and for purposes of this Agreement, unless otherwise indicated, the term "Closing" refers to the closing of the purchase and sale of Securities with respect to a particular Purchaser. At the Second Closing, the Company shall deliver to each Purchaser a certificate representing the Stock being purchased thereby against payment of the purchase price therefor by check payable to the Company or by wire transfer to the Company's bank account, or by conversion or partial conversion of the Note issued to such Purchaser in the Initial Closing, all as more fully set forth in Section 1.2(c) below. (c) Notwithstanding the provisions of Section 1.2(b) above and also subject to the following sentence, conversion of the Notes into Stock or repayment of the unconverted principal and accrued interest thereon shall be effected by the Company without any further action by the Purchasers at the Second Closing in accordance with the terms set forth in this Section 1.2(c) under one of the following three scenarios as may be applicable. Regardless of which scenario is applicable to the Second Closing, Amazon.com shall have the right to -2- 3 convert the Note issued and sold to it in the Initial Closing (the "Amazon Note") in whole or in part into Stock or demand repayment of the principal amount of the Amazon Note and accrued interest thereon in whole or in part, in accordance with the terms of the Amazon Note, in the form attached hereto as Exhibit C-1. In connection with any full or partial conversion of the Amazon Note by Amazon.com, the Company shall promptly issue and deliver a share certificate to Amazon.com for the number of shares of Series B or Series B-1 Preferred Stock applicable to such conversion, repay any unconverted part of the Amazon Note and applicable accrued interest, and the Amazon Note shall thereafter be deemed to have been canceled. In addition, regardless of which scenario is applicable to the Second Closing, Amazon.com shall have the right to purchase the applicable number of Amazon True-Up Shares to maintain its percentage ownership of the Company at 46%. Scenario 1: If in the Second Closing the Company sells 1,324,504 shares of Series B Preferred Stock for an aggregate purchase price of $10,000,005.20 (the "Target Amount") to a new investor who did not previously own any capital stock of the Company (an "Outside Investor"), then Amazon.com may, in its sole discretion, elect to purchase up to 609,272 shares of Series B and/or Series B-1 Preferred Stock (subject to the Ownership Threshold), and the principal amount of and accrued interest on each of the Notes issued and sold to the other Purchasers in the Initial Closing shall be repaid in full in cash by the Company. Scenario 2: If the Company does not sell any shares of Series B Preferred Stock to an Outside Investor in the Second Closing, then Amazon.com shall not purchase additional stock in the Second Closing and the principal amount of each Note issued to the other Purchasers in the Initial Closing shall be converted in full into a total of 584,052 shares of Series B Preferred Stock, and accrued interest on each such Note shall be payable in full in cash by the Company to each such Purchaser. Scenario 3: If the Company sells less than the Target Amount of Series B Preferred Stock to an Outside Investor in the Second Closing, then Amazon.com may, in its sole discretion, elect to purchase additional shares of Series B and/or Series B-1 Preferred Stock in the Second Closing, but only to the extent that following such additional purchase its percentage ownership of the capital stock of the Company on a fully diluted basis (assuming full conversion and exercise of all convertible or exercisable securities of the Company, including securities reserved for issuance and not granted under the Company's stock and option plans) will not exceed the Ownership Threshold. If Amazon.com elects to purchase fewer shares of Stock than the maximum number to which it would otherwise be entitled to maintain its ownership at 46% on a fully diluted basis at the time of the Second Closing, then the Company may in its sole discretion elect to convert in whole or in part the Notes issued to the other Purchasers in the Initial Closing on a pro rata basis based on the respective principal amounts of such Notes and/or to sell additional shares of Stock to any Purchaser, provided that the total number of shares of Series B and/or Series B-1 Preferred Stock issued hereunder (including upon conversion of the Notes) does not exceed 5,886,149 shares total for all closings (plus, as may be applicable, the Amazon True-Up Shares). Any unconverted principal under the Notes issued to each of the other Purchasers, and accrued interest on the foregoing Notes shall be payable in full in cash by the Company to each Purchaser as applicable at the Second Closing. -3- 4 1.3 HART-SCOTT-RODINO ACT COMPLIANCE. (a) The Company agrees to use its best efforts to make an appropriate filing of a Notification and Report Form pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), with respect to the transactions contemplated hereby as promptly as practicable and in any event within ten (10) business days of the date hereof and to supply as promptly as practicable any additional information and documentation that may be requested pursuant to the HSR Act and to take all other actions necessary to cause the expiration or termination of applicable waiting periods under the HSR Act as soon as practicable. The Company will cooperate and coordinate with the Purchasers in exchanging information and providing reasonable assistance as the other party may request in connection with the foregoing, to the extent such request is appropriate and reasonably necessary. (b) Each of the Purchasers (to the extent that a Purchaser is required to make a filing under the HSR Act) listed on Exhibit A hereto agrees to use its best efforts to make an appropriate filing of a Notification and Report Form pursuant to the HSR Act with respect to the transactions contemplated hereby as promptly as practicable and in any event within ten (10) business days of the date hereof and to supply as promptly as practicable any additional information and documentation that may be requested pursuant to the HSR Act and to take all other actions necessary to cause the expiration or termination of applicable waiting periods under the HSR Act as soon as practicable. The Purchasers will cooperate and coordinate with the Company in exchanging information and providing reasonable assistance as the other party may request in connection with the foregoing to the extent such request is appropriate and reasonably necessary. Each Purchaser hereby agrees to pay the filing fees and the related costs incurred by such Purchasers to effect any HSR filing that is applicable to such Purchaser. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to each Purchaser that, except as set forth on a Schedule of Exceptions attached hereto as Exhibit D, which exceptions shall be deemed to be representations and warranties as if made hereunder: 2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted in the future. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business or properties. 2.2 CAPITALIZATION. The authorized capital of the Company consists, or will consist, immediately prior to the Initial Closing, of: (a) 21,427,328 shares of Preferred Stock, 7,227,328 of which shares have been designated Series A Preferred Stock, all of which are issued and outstanding immediately prior to the Initial Closing, 12,900,000 of which shares have been designated Series B Preferred Stock, 6,622,517 of which are issued and outstanding immediately prior to the Initial Closing, and 1,300,000 of which shares have been designated Series B-1 Preferred Stock, -4- 5 none of which are issued and outstanding immediately prior to the Initial Closing. The rights, privileges and preferences of the Preferred Stock are as stated in the Restated Articles. All of the outstanding shares of Preferred Stock have been duly authorized, fully paid and are nonassessable and issued in compliance with all applicable federal and state securities laws. (b) 36,000,000 shares of Common Stock, 5,358,246 shares of which are issued and outstanding immediately prior to the Initial Closing. All of the outstanding shares of Common Stock have been duly authorized, fully paid and are nonassessable and issued in compliance with all applicable federal and state securities laws. (c) The Company has reserved 4,623,909 shares of Common Stock for issuance to officers, directors, employees and consultants of the Company pursuant to its 1999 Stock Plan duly adopted by the Board of Directors and approved by the Company shareholders (the "Stock Plan"). Of such reserved shares of Common Stock, 3,546,409 shares have been issued pursuant to restricted stock purchase agreements or exercised options, options to purchase 1,077,500 shares have been granted or are currently outstanding, and no shares of Common Stock remain available for issuance to officers, directors, employees and consultants pursuant to the Stock Plan. Except as set forth on the Schedule of Exceptions, options and Common Stock granted to employees by the Company pursuant to the Stock Plan are subject to the following vesting schedule: 25% of the shares comprising each grant to employees shall vest on the one-year anniversary of the vesting commencement date for such grant, and thereafter 1/48th of the shares comprising the grant shall vest on each monthly anniversary of the vesting commencement date for such grant over the following 36 months. Unvested shares of Common Stock issued to employees pursuant to the Stock Plan are subject to the Company's right of repurchase at the original grantee's purchase price. (d) Except for (a) the conversion privileges of the outstanding Series A Preferred Stock and the Series B Preferred Stock previously issued and the Series B and/or Series B-1 Preferred Stock to be issued pursuant to this Agreement, (b) the Right of First Offer set forth in Section 2.3 of the Amended and Restated Investors Rights Agreement to be entered into by the Company, Greg McLemore, the Purchasers, the holders of Series A Preferred Stock and the prior holders of Series B Preferred Stock at the Closing, and (c) outstanding options issued pursuant to the Stock Plan, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal or similar rights) or agreements, orally or in writing, for the purchase or acquisition from the Company of any shares of its capital stock. Other than the Amended and Restated Voting Agreement of even date herewith by and among the Company, Greg McLemore, Julie Wainwright, the holders of Series A Preferred Stock, the prior holders of Series B Preferred Stock and the Purchasers hereunder, the Company is not a party or subject to any agreement or understanding, and to the best of its knowledge, there is no agreement or understanding between any persons and/or entities, that affects or relates to the voting or giving of written consents with respect to any security or by a director of the Company. 2.3 SUBSIDIARIES. The Company does not currently own or control, directly or indirectly, any interest in any other corporation, association, or other business entity. The Company is not a participant in any joint venture, partnership or similar arrangement. -5- 6 2.4 AUTHORIZATION. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the Amended and Restated Investors' Rights Agreement, in the form attached hereto as Exhibit E (the "Investors' Rights Agreement"), the Amended and Restated Right of First Refusal and Co-Sale Agreement in the form attached hereto as Exhibit F (the "Co-Sale Agreement") and the Amended and Restated Voting Agreement in the form attached hereto as Exhibit G (the "Voting Agreement" and collectively with this Agreement, the Investors' Rights Agreement and the Co-Sale Agreement, the "Agreements"), the performance of all obligations of the Company hereunder and thereunder and the authorization, issuance (or reservation for issuance), sale and delivery of the Securities has been taken or will be taken prior to the Closing, and the Agreements, when executed and delivered by the Company, shall constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and other laws of general application affecting enforcement of creditors' rights generally, as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, or (ii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. The sale of the Securities is not and will not be subject to any preemptive rights or rights of first refusal, except for those rights waived or exercised by certain Purchasers purchasing the Stock set forth on Exhibit A. 2.5 VALID ISSUANCE OF SECURITIES. The Securities that are being issued to the Purchasers hereunder, when issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement, the Notes, the Investors' Rights Agreement and applicable state and federal securities laws. Based in part upon the representations of the Purchasers in this Agreement and subject to the provisions of Section 2.6 below, the Securities will be issued in compliance with all applicable federal and state securities laws. The Common Stock issuable upon conversion of the Stock has been duly and validly reserved for issuance, and upon issuance in accordance with the terms of the Restated Articles, shall be duly and validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement, the Investors' Rights Agreement and applicable federal and state securities laws and will be issued in compliance with all applicable federal and state securities laws. 2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement, except for the filing of the Restated Articles and filings pursuant to Section 25102(f) of the California Corporate Securities Law of 1968, as amended, and the rules thereunder, other applicable state securities laws and Regulation D of the Securities Act of 1933, as amended (the "Securities Act"). 2.7 OFFERING. Subject in part to the truth and accuracy of each Purchaser's representations set forth in Section 3 of this Agreement, the offer, sale and issuance of the -6- 7 Securities as contemplated by this Agreement are, to the Company's knowledge, exempt from the registration requirements of any applicable state and federal securities laws, and neither the Company nor any authorized agent acting on its behalf will knowingly take any action hereafter that would cause the loss of such exemption. 2.8 LITIGATION. There is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company that questions the validity of the Agreements or the right of the Company to enter into them, or to consummate the transactions contemplated hereby or thereby, or that might result, either individually or in the aggregate, in any material adverse changes in the assets, condition or affairs of the Company, financially or otherwise, or any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for the foregoing. The foregoing includes, without limitation, actions, suits, proceedings or investigations pending or threatened involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with former employers. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality nor has the Company received any notice thereof. There is no action, suit, proceeding or investigation by the Company or any of its subsidiaries currently pending or which the Company or any of its subsidiaries intends to initiate. 2.9 INTELLECTUAL PROPERTY. To its knowledge, the Company owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes necessary for its business as now conducted and as proposed to be conducted in the future without any conflict with, or infringement of, the rights of others and believes it can obtain, on commercially reasonable terms, any additional rights necessary for the conduct of its business as proposed to be conducted. The Company has not received any communications alleging that the Company has violated or, by conducting its business as currently conducted or as presently proposed, would violate any of the patents, trademarks, service marks, tradenames, copyrights, trade secrets or other proprietary rights or processes of any other person or entity. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of such employee's best efforts to promote the interest of the Company or that would conflict with the Company's business as currently conducted or as proposed to be conducted. Neither the execution or delivery of the Agreements, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed, will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any such employee is now obligated. The Company does not believe it is or will be necessary to use any inventions, trade secrets or proprietary information of any of its employees (or persons it currently intends to hire) made prior to their employment by the Company. The Schedule of Exceptions includes a list of all patents, copyrights, trademarks and domain names claimed or owned by the Company and all licenses by the Company of any intellectual property or technology from third parties. -7- 8 2.10 COMPLIANCE WITH OTHER INSTRUMENTS. (a) The Company is not in violation or default of any provisions of its Restated Articles or Bylaws or of any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound or, to its knowledge, of any provision of federal or state statute, rule or regulation applicable to the Company. The execution, delivery and performance of the Agreements and the consummation of the transactions contemplated hereby or thereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract or an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company or nonrenewal of any permit, license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties. (b) To its knowledge, the Company has avoided every condition, and has not performed any act, the occurrence of which would result in the Company's loss of any right granted under any license, permit, authorization, distribution agreement or other agreement. 2.11 AGREEMENTS; ACTION. (a) Except for agreements explicitly contemplated by the Agreements, there are no agreements, understandings or proposed transactions between the Company and any of its officers, directors, members of their immediate families, affiliates, or any affiliate thereof. (b) Except for agreements explicitly contemplated by the Agreements, there are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs, or decrees to which the Company is a party or by which it is bound that involve (i) obligations (contingent or otherwise) of, or payments to, the Company in excess of $50,000, (ii) the license of any patent, copyright, trade secret or other proprietary right to or from the Company, (iii) the grant of rights to manufacture, produce, assemble, license, market, or sell its products to any other person or affect the Company's exclusive right to develop, manufacture, assemble, distribute, market or sell its products or services, or (iv) indemnification by the Company with respect to infringement of proprietary rights. (c) The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or Series of its capital stock, (ii) incurred any indebtedness for money borrowed or incurred any other liabilities individually in excess of $50,000 nor, in the case of indebtedness and/or liabilities individually less than $50,000, in excess of $100,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. (d) For purposes of subsections (b) and (c) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to -8- 9 believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. (e) The Company is not a party to and is not bound by any contract, agreement or instrument, or subject to any restriction under its Restated Articles or Bylaws that, to its knowledge, adversely affects its business as now conducted and as proposed to be conducted in the future, its properties or its financial condition. (f) The Company has not engaged in the past three (3) months in any discussion (i) with any representative of any corporation or corporations regarding the merger of the Company with or into any such corporation or corporations, (ii) with any representative of any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company or a transaction or Series of related transactions in which more than fifty percent (50%) of the voting power of the Company would be disposed of, or (iii) regarding any other form of liquidation, dissolution or winding up of the Company. 2.12 DISCLOSURE. The Company has fully provided the Purchasers with all the information that the Purchasers have requested for deciding whether to acquire the Securities and all information that the Company believes is reasonably necessary to enable the Purchasers to make such a decision, including certain financial projections. No representation or warranty of the Company contained in this Agreement and the exhibits attached hereto, any certificate furnished or to be furnished to Purchasers at the Closing, or other information furnished to the Purchasers (when read together) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. To the extent the financial projections were prepared by management of the Company, such financial projections were prepared in good faith. The assumptions applied in preparing such projections appeared reasonable to management as of the date thereof and as of the date hereof. The Purchasers understand that actual results may differ substantially from those projections. 2.13 NO CONFLICT OF INTEREST. The Company is not indebted (or committed to make loans or extend or guarantee credit), directly or indirectly, to any of its employees, officers or directors or to their respective spouses or children, in any amount whatsoever other than in connection with expenses or advances of expenses incurred in the ordinary course of business or relocation expenses of employees nor is the Company contemplating such indebtedness as of the date of this Agreement. None of the Company's employees, officers or directors, or any members of their immediate families, are, directly or indirectly, indebted to the Company (other than in connection with purchases of the Company's stock) or, to the Company's knowledge, have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation which competes with the Company nor is the Company contemplating such indebtedness as of the date of this Agreement, except that employees, officers, directors and/or shareholders of the Company may own stock in (but not exceeding two percent of the outstanding capital stock of) any publicly traded company that may compete with the Company. -9- 10 To the Company's knowledge, none of the Company's officers, directors or shareholders or any members of their immediate families are, directly or indirectly, interested in any material contract with the Company, nor does any such person own, directly or indirectly, in whole or in part, any material tangible or intangible property that the Company uses or contemplates using in the conduct of its business. The Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 2.14 RIGHTS OF REGISTRATION AND VOTING RIGHTS. Except as contemplated in the Investors' Rights Agreement, the Company has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. Except as contemplated in the Voting Agreement, to the Company's knowledge, no shareholder of the Company has entered into any agreements with respect to the voting of capital shares of the Company. 2.15 TITLE TO PROPERTY AND ASSETS. The Company owns its property and assets free and clear of all mortgages, liens, loans and encumbrances, except such encumbrances and liens which arise in the ordinary course of business and do not materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and, to its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances. 2.16 BALANCE SHEET. The Company has delivered to each Purchaser that has requested it a copy of its unaudited balance sheet as of September 30, 1999 (the "Balance Sheet"), attached hereto as Exhibit G. The Balance Sheet has been prepared in accordance with generally accepted accounting principles and fairly presents the financial condition of the Company as of the date indicated therein, subject to normal year-end audit adjustments. Except as set forth in the Balance Sheet, the Company has no material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to September 30, 1999 that are not material, individually or in the aggregate, and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Balance Sheet, which, in both cases, individually or in the aggregate are not material to the financial condition or operating results of the Company. Except as disclosed to the Purchasers, the Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. The Company maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles. 2.17 EMPLOYEE BENEFIT PLANS. The Company does not have any Employee Benefit Plan as defined in the Employee Retirement Income Security Act of 1974. 2.18 LABOR AGREEMENTS AND ACTIONS. The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending, or to the knowledge of the Company threatened, which could -10- 11 have a material adverse effect on the assets, properties, financial condition, operating results, or business of the Company (as is presently conducted and as it is proposed to be conducted), nor is the Company aware of any labor organization activity involving its employees. The Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company, nor does the Company have the present intention to terminate the employment of any of the foregoing. The employment of each officer and employee of the Company is terminable at the will of the Company. To its knowledge, the Company has complied in all material respects with all applicable state and federal equal employment opportunity laws and with other laws related to employment. The Company is not a party to or bound by any currently effective employment contract, deferred compensation agreement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation plan or agreement. 2.19 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AND EMPLOYEE STOCK PURCHASE AGREEMENTS. Each current and former employee, consultant and officer of the Company has executed agreements with the Company regarding confidentiality and proprietary information (the "Confidential Information and Invention Assignment Agreement") and any stock purchases substantially in the form or forms delivered to the counsel for the Purchasers. No current employee, officer or consultant of the Company has excluded works or inventions made prior to his or her employment with the Company from his or her assignment of inventions pursuant to such employee, officer or consultant's Confidential Information and Invention Assignment Agreement. The Company is not aware that any of its employees or consultants is in violation thereof, and the Company will use its best efforts to prevent any such violation. The Company as taken reasonable security measures to maintain the confidentiality of the Company's proprietary information. 2.20 PERMITS. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business, the lack of which could materially and adversely affect the business, properties, prospects, or financial condition of the Company. The Company believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. The Company is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. 2.21 CORPORATE DOCUMENTS. The Restated Articles and Bylaws of the Company are in the form provided to counsel for the Purchasers. The copy of the minute books of the Company provided to the Purchasers' counsel contains minutes of all meetings of directors and shareholders and all actions by written consent without a meeting by the directors and shareholders since the date of incorporation and reflects all actions by the directors (and any committee of directors) and shareholders with respect to all transactions referred to in such minutes accurately in all material respects. 2.22 QUALIFIED SMALL BUSINESS STOCK. As of the Closing: (i) the Company will not have made any purchases of its own stock during the one-year period proceeding the Closing having an aggregate value exceeding 5% of the aggregate value of all its stock as of the beginning of such period and (ii) the Company's aggregate gross assets, as defined by Code -11- 12 Section 1202(d)(2), at no time between October 7, 1998, and through the Closing have exceeded or will exceed $50 million, taking into account the assets of any corporations required to be aggregated with the Company in accordance with Code Section 1202(d)(3). 2.23 MANUFACTURING AND MARKETING RIGHTS. The Company has not granted exclusive rights to develop, manufacture, produce, assemble, license, market, distribute or sell its products or services to any other person or entity and is not bound by any agreement that affects the Company's exclusive right to develop, manufacture, produce, assemble, license, distribute, market or sell its products, services or any other products that use its proprietary information. 2.24 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company has filed all tax returns and reports (including information returns and reports) as required by law. These returns and reports are true and correct in all material respects. The Company has paid all taxes and other assessments due. The Company has not elected pursuant to the Code to be treated as a Subchapter S corporation or a collapsible corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor has it made any other elections pursuant to the Code (other than elections that relate solely to methods of accounting, depreciation or amortization) that would have a material adverse effect on the Company, its financial condition, its business as presently conducted or proposed to be conducted or any of its properties or material assets. The Company has never had any tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge. None of the Company's federal income tax returns and none of its state income or franchise tax or sales or use tax returns has ever been audited by governmental authorities. Since the date of the Balance Sheet, the Company has not incurred any taxes, assessments or governmental charges other than in the ordinary course of business and the Company has made adequate provisions on its books of account for all taxes, assessments and governmental charges with respect to its business, properties and operations for such period. The Company has withheld or collected from each payment made to each of its employees, the amount of all taxes (including, but not limited to, federal income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositories. 2.25 SECTION 83(b) ELECTIONS. To the best of the Company's knowledge, all individuals who have purchased unvested shares of the Company's Common Stock have timely filed elections under Section 83(b) of the Code and any analogous provisions of applicable state tax laws. 2.26 BROKERS. The Company has no contract, arrangement or understanding with any broker, finder or similar agent with respect to the transactions contemplated by this Agreement. 2.27 INSURANCE. The Company has in full force and effect fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed and to -12- 13 satisfy its contractual obligations. The Company has in full force and effect products liability and errors and omissions insurance in amounts customary for companies similarly situated. 2.28 YEAR 2000. To the Company's knowledge, each hardware and software product and other computer and information technology used by the Company in its business (collectively, the "Software") will accurately receive, provide and process date and time data (including, but not limited to, calculating, comparing and sequencing) from, into and between the twentieth and twenty-first centuries, including, without limitation, leap year calculations, without a decrease in the functionality of the Software so that the Software will not malfunction, cease to function or provide invalid or incorrect results as a result of date or time data, to the extent that other information technology, used in combination with the information technology being acquired, properly exchanges date and/or time data with it. To the Company's knowledge, the Software is designed to be used prior to, during and after the calendar year 2000 A.D. and will operate during each such time period without error relating to date or time data, specifically including any error relating to, or the product of, date data which represents or references different centuries or more than one century. Without limiting the generality of the foregoing, to the Company's knowledge, the Software (a) will not abnormally end or provide invalid or incorrect results as a result of date or time data, specifically including date or time data which represents or references different centuries or more than one century, (b) has been designed to ensure year 2000 compatibility, including, but not limited to, date and time data century recognition, calculations which accommodate same century and multi-century formulas and date values, and date data interface values that reflect the century, and (c) includes "Year 2000 Capabilities," meaning that the Software (i) will manage and manipulate data involving dates or time, including single century formulas and multi-century formulas, and will not cause an abnormally ending scenario within the application or generate incorrect values or invalid results involving such dates, (ii) provides that all date-related user interface functionalities and data fields include the indication of century, and (iii) provides that all date-related data interface functionalities include the indication of century. 2.29 COMPLIANCE WITH LAWS. To its knowledge, the Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties which violation would materially and adversely affect the business, assets, liabilities, financial condition operations or prospects of the Company. To the best of the Company's knowledge, the Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and to the best of the Company's knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 2.30 OBLIGATIONS OF MANAGEMENT. To the best of the Company's knowledge, each of the Company's Chief Executive Officer, President and Chief Financial Officer is currently devoting one hundred percent (100%) of his or her business time to the conduct of the business of the Company. The Company is not aware that any such officer or key employee of the Company is planning to work less than full time at the Company in the future. -13- 14 2.31 USE OF PROCEEDS. The Company will use proceeds from the sale of the Stock for working capital purposes. Such proceeds shall not be used to repay indebtedness to any stockholders of the Company. 2.32 CHANGES. Since September 30, 1999, there has not been: (a) any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Balance Sheet, except changes in the ordinary course of business that have not been or are expected to be, in the aggregate, materially adverse; (b) any waiver or compromise by the Company of a valuable right or of a material debt owed to it; (c) any material change in any compensation arrangement or agreement (including salary, bonus, insurance or pension benefits) with any employee, officer, director or shareholder; (d) any change or amendment to any of the governing documents of the Company (including the Restated Articles and Bylaws of the Company), except as contemplated hereunder; or (e) any arrangement or commitment by the Company to do any of the things described in this Section 2.32. 2.33 SIGNIFICANT CUSTOMERS AND SUPPLIERS. No customer or supplier that was significant to the Company during the period from February 17, 1999 to the date hereof has terminated, materially reduced or threatened to terminate or materially reduce its purchases from, or provision of products or services to, the Company, as the case may be. 2.34 SERIES A PREFERRED STOCK. The holders of Series A Preferred Stock, as of the Closing, will not have any rights or privileges other than as reflected in the Series A Preferred Stock Purchase Agreement, the Restated Articles, and the Agreements. 2.35 ALL TERMS. The Agreements, together with the Restated Articles, Series A Preferred Stock Purchase Agreement dated as of April 22, 1999, and Series B Preferred Stock Purchase Agreement dated as of June 18, 1999 contain all terms relating to the issuances of Series A Preferred Stock and Series B Preferred Stock and the relationships among the holders of such stock, except as set forth in the Schedule of Exceptions. 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser, severally and not jointly, hereby represents and warrants to the Company that: 3.1 AUTHORIZATION. Such Purchaser has full power and authority to enter into the Agreements. The Agreements, when executed and delivered by the Purchaser and the other parties hereto and thereto that are required to enter into the Agreements, will constitute valid and legally binding obligations of the Purchaser, enforceable in accordance with their terms, except -14- 15 (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and any other laws of general application affecting enforcement of creditors' rights generally, and as limited by laws relating to the availability of a specific performance, injunctive relief, or other equitable remedies, and (b) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with the Purchaser in reliance upon the Purchaser's representation to the Company, which by the Purchaser's execution of this Agreement, the Purchaser hereby confirms, that the Securities to be acquired by the Purchaser will be acquired for investment for the Purchaser's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Purchaser further represents that the Purchaser does not presently have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. The Purchaser has not been formed for the specific purpose of acquiring the Securities. 3.3 DISCLOSURE OF INFORMATION. The Purchaser has had an opportunity to discuss the Company's business, management, financial affairs and the terms and conditions of the offering of the Stock with the Company's management and has had an opportunity to review the Company's facilities. The Purchaser understands that such discussions, as well as any other written information delivered by the Company to the Purchaser, were intended to describe the aspects of the Company's business which it believes to be material. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the investors to rely thereon. 3.4 RESTRICTED SECURITIES. The Purchaser understands that the Securities have not been, and will not be, registered under the Securities Act, by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Purchaser's representations as expressed herein. The Purchaser understands that the Securities are "restricted securities" under applicable U.S. federal and state securities laws and that, pursuant to these laws, the Purchaser must hold the Securities indefinitely unless they are registered with the Securities and Exchange Commission and qualified by state authorities, or an exemption from such registration and qualification requirements is available. The Purchaser acknowledges that the Company has no obligation to register or qualify the Securities for resale except as set forth in the Investors' Rights Agreement. The Purchaser further acknowledges that if an exemption from registration or qualification is available, it may be conditioned on various requirements including, but not limited to, the time and manner of sale, the holding period for the Securities, and on requirements relating to the Company which are outside of the Purchaser's control, and which the Company is under no obligation and may not be able to satisfy. -15- 16 3.5 NO PUBLIC MARKET. The Purchaser understands that no public market now exists for any of the securities issued by the Company, and that the Company has made no assurances that a public market will ever exist for the Securities. 3.6 LEGENDS. The Purchaser understands that the Securities, and any securities issued in respect of or exchange for the Securities, may bear one or all of the following legends: (a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933." (b) Any legend set forth in the other Agreements. (c) Any legend required by the Blue Sky laws of any state to the extent such laws are applicable to the shares represented by the certificate so legended. 3.7 ACCREDITED INVESTOR. The Purchaser is an accredited investor as defined in Rule 501(a) of Regulation D promulgated under the Securities Act, as presently in effect. 4. CONDITIONS OF THE PURCHASERS' OBLIGATIONS AT CLOSING. The obligations of each Purchaser to the Company under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived: 4.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in Section 2 shall be true and correct on and as of the Initial Closing with the same effect as though such representations and warranties had been made on and as of the date of the Initial Closing. 4.2 PERFORMANCE. The Company shall have performed and complied with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. 4.3 COMPLIANCE CERTIFICATE. The President of the Company shall deliver to the Purchasers at the Initial Closing a certificate certifying that the conditions specified in Sections 4.1 and 4.2 have been fulfilled, and stating that there shall have been no adverse change in the business, affairs, prospects, operations, properties, assets or condition of the Company since the date of the Balance Sheet. 4.4 QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in -16- 17 connection with the lawful issuance and sale of the Securities pursuant to this Agreement shall be obtained and effective as of the Closing. 4.5 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to Purchasers' special counsel, which shall have received all such counterpart original and certified or other copies of such documents as it has reasonably requested. This may include, without limitation, good standing certificates and certification by the Company's Secretary regarding the Company's Restated Articles and Bylaws and Board of Director and shareholder resolutions relating to this transaction. 4.6 OPINION OF COMPANY COUNSEL. The Purchasers shall have received from Venture Law Group, counsel for the Company, an opinion, dated as of the Closing, in substantially the form of Exhibit I. 4.7 BYLAWS. As of the Initial Closing, the Bylaws of the Company shall provide that the Board of Directors of the Company shall consist of five (5) persons, which number shall not be changed by an amendment to the Restated Articles or the Bylaws without consent of holders of seventy percent (70%) of the outstanding shares of Preferred Stock; and as of the Second Closing, the Company shall have taken all appropriate action to amend its Bylaws to provide that the Board of Directors of the Company shall consist of six (6) persons, which number shall not be changed by an amendment to the Restated Articles or the Bylaws without consent of holders of seventy percent (70%) of the outstanding shares of Preferred Stock. 4.8 BOARD OF DIRECTORS. As of the Initial Closing, the Board shall be comprised of five (5) directors: one representative designated by Bowman Capital Management, one representative designated by Hummer Winblad Venture Partners, one director designated by Amazon.com, the Company's Chief Executive Officer, and Jack Balousek. As of the Second Closing and pursuant to the Bylaws amendment contemplated by Section 4.7 above, the Board shall be comprised of six (6) directors, including the five (5) directors set forth above and one vacancy to be filled in the manner set forth in the Voting Agreement attached hereto as Exhibit G. 4.9 INVESTORS' RIGHTS AGREEMENT. The Company, each Purchaser, the holders of Series A Preferred Stock, the prior holders of Series B Preferred Stock and Greg McLemore shall have executed and delivered the Investors' Rights Agreement in substantially the form attached as Exhibit E. 4.10 RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT. The Company, Greg McLemore, Julie Wainwright, each Purchaser, the holders of Series A Preferred Stock, the prior holders of Series B Preferred Stock and all holders of more than 100,000 shares of the Company's Common Stock shall have executed and delivered the Co-Sale Agreement in substantially the form attached as Exhibit F. -17- 18 4.11 RESTATED ARTICLES. The Company shall have filed the Restated Articles with the Secretary of State of California on or prior to the Initial Closing Date, which shall continue to be in full force and effect as of each Closing Date, and shall deliver a copy of such filed Restated Articles to each Purchaser at Closing. 4.12 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AND EMPLOYEE STOCK PURCHASE AGREEMENTS. The Company and each of its employees and consultants shall have entered into the Company's standard form Confidential Information and Invention Assignment Agreement, in substantially the form provided to the Purchasers' legal counsel. Each holder of Common Stock of the Company shall have entered into an Employee Stock Purchase Agreement, in substantially the form provided to the Purchasers' legal counsel. 4.13 VOTING AGREEMENT. The Company, each Purchaser, the holders of Series A Preferred Stock, the prior holders of Series B Preferred Stock, Greg McLemore, and Julie Wainwright shall have executed and delivered the Voting Agreement in substantially the form attached hereto as Exhibit G. 4.14 SECURITIES COMPLIANCE. The Company shall have taken all actions necessary to comply with any federal or state securities laws applicable to the transactions contemplated hereunder that are required to be taken prior to the Closing. 4.15 STOCK CERTIFICATES AND NOTES. The Company shall have delivered to each Purchaser a duly executed stock certificate evidencing the Stock purchased by such Purchaser hereunder and, as applicable, a Note evidencing indebtedness of the Company to such Purchaser in the principal amount set forth thereon. 5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of the Company to each Purchaser under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived: 5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of each Purchaser contained in Section 3 shall be true and correct in all material respects on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 5.2 PERFORMANCE. All covenants, agreements and conditions contained in this Agreement to be performed by the Purchasers on or prior to the Closing shall have been performed or complied with in all material respects. 5.3 QUALIFICATIONS. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Stock pursuant to this Agreement shall be obtained and effective as of the Closing. -18- 19 6. MISCELLANEOUS. 6.1 SURVIVAL OF WARRANTIES. Unless otherwise set forth in this Agreement, the warranties, representations and covenants of the Company and the Purchasers contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Purchasers or the Company. 6.2 TRANSFER; SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any securities). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. The parties agree that the Purchaser may assign their rights and obligations under this Agreement to any of their affiliates (as defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended) or to any successors to the Purchasers or such affiliates. 6.3 GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. 6.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts and may be executed by facsimile, any of which shall be deemed an original and all of which together shall constitute one instrument. 6.5 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. 6.6 NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon delivery, when delivered personally or by overnight courier or sent by fax (with confirmation of successful electronic transmission), or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, addressed to the party to be notified at such party's address as set forth on the signature page or Exhibit A hereto, or as subsequently modified by written notice, and (a) if to the Company, with a copy to: Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Attn: John V. Bautista Tel: 650-854-4488 Fax: 650-854-1121 -19- 20 (b) if to Hummer Winblad Venture Partners, with a copy to: Gunderson, Dettmer, Stough, Villeneuve, Franklin & Hachigian, LLP 155 Constitution Drive Menlo Park, CA 94025 Attn: __________ Tel: 650-321-2400 Fax: 650-321-2800 (c) if to Bowman Capital Management, with a copy to: Shartsis, Friese & Ginsburg LLP One Maritime Plaza, 18th Floor San Francisco, CA 94111 Attn: Steve Gasser Tel: 415-421-6500 Fax: 415-421-2922 or (d) if to Amazon.com, with a copy to: Perkins Coie LLP 1201 Third Avenue, Suite 4800 Seattle, WA 98101-3099 Attn: Scott L. Gelband Tel: 206-583-8888 Fax: 206-583-8500 6.7 FINDER'S FEE. Each party represents that it neither is nor will be obligated for any finder's fee or commission in connection with this transaction. Each Purchaser agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finder's fee (and the costs and expenses of defending against such liability or asserted liability) for which each Purchaser or any of its officers, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless each Purchaser from any liability for any commission or compensation in the nature of a finder's fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 6.8 FEES AND EXPENSES. Upon the Initial Closing, the Company shall pay the reasonable fees and expenses of one legal counsel to the Purchasers incurred with respect to this Agreement, the documents referred to herein and the transactions contemplated hereby and thereby, provided such fees and expenses do not exceed $15,000. The Purchasers shall pay any additional legal fees and expenses incurred in excess of the foregoing. 6.9 ATTORNEY'S FEES. If any action at law or in equity (including arbitration) is necessary to enforce or interpret the terms of any of the Agreements, the prevailing party shall be -20- 21 entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 6.10 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended or waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the holders of at least 70% of the Stock (or the Common Stock issuable upon conversion of the Stock). Any amendment or waiver effected in accordance with this Section 6.10 shall be binding upon the Purchasers and each transferee of the Stock (or the Common Stock issuable upon conversion thereof), each future holder of all such securities, and the Company. Notwithstanding the foregoing, this Agreement (including Exhibit A hereto) may be amended with only the written consent of the Company to include additional purchasers of Series B and/or Series B-1 Preferred Stock at the Second Closing as "Purchasers." 6.11 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms. 6.12 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power or remedy of such non-breaching or non-defaulting party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative. 6.13 ENTIRE AGREEMENT. This Agreement, and the documents referred to herein constitute the entire agreement between the parties hereto pertaining to the subject matter hereof, and any and all other written or oral agreements relating to the subject matter hereof existing between the parties hereto are expressly canceled. 6.14 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY -21- 22 SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT. 6.15 CONFIDENTIALITY. Each party hereto agrees that, except with the prior written permission of the other party, it shall at all times keep confidential and not divulge, furnish or make accessible to anyone any confidential information, knowledge or data concerning or relating to the business or financial affairs of the other parties to which such party has been or shall become privy by reason of this Agreement, discussions or negotiations relating to this Agreement, the performance of its obligations hereunder or the ownership of Stock purchased hereunder ("Confidential Information"); provided, however, that (a) Confidential Information shall not include (i) information that is or becomes available to the general public other than as a result of disclosure by any Purchaser, (ii) information known to any Purchaser prior to discussions or negotiations related to this Agreement as demonstrated by tangible evidence of such prior knowledge by such Purchaser, or (iii) general knowledge of the Company's industry not specifically related to the Company's business; and (b) Hummer Winblad Venture Partners III, L.P., Hummer Winblad Technology Fund III, L.P. and Bowman Capital Management may distribute Confidential Information concerning the Company to their respective limited partners. The provisions of this Section 6.15 shall be in addition to, and not in substitution for, the provisions of any separate nondisclosure agreement executed by the parties hereto with respect to the transactions contemplated hereby. 6.16 EXCULPATION AMONG PURCHASERS. Each Purchaser acknowledges that it is not relying upon any person, firm or corporation, other than the Company and its officers and directors, in making its investment or decision to invest in the Company. Each Purchaser agrees that no Purchaser nor the respective controlling persons, officers, directors, partners, agents, or employees of any Purchaser shall be liable to any other Purchaser for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the purchase of the Securities. 6.17 WAIVER OF CONFLICTS. Each party to this Agreement acknowledges that Venture Law Group, counsel for the Company, has in the past performed and may continue to perform legal services for certain of the Purchasers in matters unrelated to the transactions described in this Agreement, including the representation of such Purchasers in venture capital financings and other matters. Accordingly, each party to this Agreement hereby (a) acknowledges that they have had an opportunity to ask for information relevant to this disclosure; and (b) gives its informed consent to Venture Law Group's representation of certain of the Purchasers in such unrelated matters and to Venture Law Group's representation of the Company in connection with this Agreement and the transactions contemplated hereby. 6.18 AGGREGATION OF STOCK. All shares of stock held or acquired by affiliated entities or persons hereunder shall be aggregated together for the purpose of determining the availability of rights under this Agreement. [SIGNATURE PAGE FOLLOWS] -22- 23 The parties have executed this Series B Preferred Stock and Convertible Note Purchase Agreement as of the date first written above. COMPANY: PETS.COM, INC. By: /s/ Julie Wainwright ------------------------------------ Name: Julie Wainwright ---------------------------------- (print) Title: CEO --------------------------------- Address: 435 Brannan Street San Francisco, CA 94107 Tel: (415) 222-9999 Fax: (415) 222-9998 PURCHASERS: SPINNAKER TECHNOLOGY FUND LP By: /s/ Thomas Pindelski ------------------------------------ Name: Thomas Pindelski ---------------------------------- (print) Title: Managing Director of Operations --------------------------------- Address: 1875 South Grant Street, Suite 600 San Mateo, CA 94402 Tel: (415) 222-9999 Fax: SIGNATURE PAGE TO PURCHASE AGREEMENT 24 SPINNAKER TECHNOLOGY OFFSHORE FUND LTD. By: /s/ Thomas Pindelski -------------------------------------- Name: Thomas Pindelski -------------------------------------- (print) Title: Managing Director of Operations ------------------------------------ Address: 1875 South Grant Street Suite 600 San Mateo, CA 94402 SPINNAKER FOUNDERS FUND LP By: /s/ Thomas Pindelski --------------------------------------- Name: Thomas Pindelski -------------------------------------- (print) Title: Managing Director of Operations ------------------------------------ Address: 1875 South Grant Street Suite 600 San Mateo, CA 94402 SPINNAKER OFFSHORE FOUNDERS FUND LTD By: /s/ Thomas Pindelski --------------------------------------- Name: Thomas Pindelski -------------------------------------- (print) Title: Managing Director of Operations ------------------------------------ Address: 1875 South Grant Street Suite 600 San Mateo, CA 94402 -1- 25 AMAZON.COM, INC. By: /s/ Randy Tinsley --------------------------------------- Name: Randy Tinsley -------------------------------------- (print) Title: VP, Corp. Dev. ------------------------------------- Address: 1200 -12th Ave. S., Suite 1200 Seattle, WA 98144 HUMMER WINBLAD VENTURE PARTNERS IV, L.P. By: /s/ Deborah Wright --------------------------------------- Name: Deborah Wright ------------------------------------- (print) Title: Member ------------------------------------ Address: 2 South Park San Francisco, CA 941115 THE PHOENIX PARTNERS IV LIMITED PARTNERSHIP By: The Phoenix Management IV. LLC --------------------------------------- its General Partner By: /s/ David B. Johnston --------------------------------------- Name: David B. Johnston ------------------------------------- (print) Title: Managing Member ------------------------------------- Address: 1000 Second Avenue Suite 3600 Seattle, WA 98104 THE AVRAM MILLER TRUST -2- 26 By: /s/ Avram Miller trust --------------------------------------- Name: Avram Miller -------------------------------------- (print) Title: Trustee ------------------------------------- Address: c/o The Avram Miller Company 505 Montgomery St., 20th Fl. San Francisco, CA 94111 (415) 835-7267 COMCAST INTERACTIVE CAPITAL, L.P. By: CIC Venture Management L.P. --------------------------------------- By: /s/ Abram E. Patlore --------------------------------------- Name: Abram E. Patlore ------------------------------------- (print) Title: Vice President ------------------------------------ Address: 1201 Market Street, Suite 2201 Wilmington, DE 19801 CYBER CONTROL DEVELOPMENT LIMITED By: /s/ Mico Chung --------------------------------------- Name: Mico Chung ------------------------------------- (print) Title: Director ------------------------------------ Address: 38th Floor, Citibank Tower, Citibank Plaza 3 Garden Road, Central Hong Kong ASIA PACIFIC TECHNOLOGY & FINANCE 1 N.V. -3- 27 By: /s/ Giorgo Ronchi --------------------------------------- Name: Pleadis Investment Management B.V. By Giorgo Ronchi, Managing Director (print) Title: ------------------------------------- Address: 62 de Ruyterkade, Curacao Netherlands Antilles With a copy: ETF Group, Via Cantonale, The Fantastic Building CH-6928 Manno, Switzerland Fax number: 41 91 610 71 66 Attention: Counsel and Secretary BAYSTAR INTERNATIONAL LTD, a British Virgin Islands Corporation By: BayStar International Management, LLC Its General Partner By: /s/ Steven M. Lamar -------------------------------- Name: Steven M. Lamar Title: Vice President 1500 West Market Street, Suite 200 Mequon, WI 53092 Fax: 415-835-3777 WORLD ONLINE INTERNATIONAL B.V. By: [SIGNATURES ILLEGIBLE] -------------------------------------- Name: [SIGNATURES ILLEGIBLE] ------------------------------------- Title:Director/ COO/CFO ------------------------------------- Address: Parklaan 28 P O Box ____ 3000 AA Rottendam, Netherlands -4- 28 THE BALOUSEK FAMILY LIMITED PARTNERSHIP DTD 1/7/99 /s/ Kathleen Balousek /s/ John B. Balousek ------------------------------------ Name: Kathleen Balousek John B. Balousek Title: General Partners Address: 11 Magee Ct. Moraga, CA 94556 FRANK M. (PETE) HIGGINS By: /s/ Frank M. Higgins -------------------------------------- Name: Frank M. Higgins ------------------------------------- Address: 7650 SE 22nd St Mercer Island, WA 98040 MICHAEL B. SLADE By: /s/ Michael B. Slade -------------------------------------- Address: 3732 E. High Ln. Seattle WA 98112 KEITH GRINSTEIN By: /s/ Keith Grinstein -------------------------------------- Name: Keith Grinstein ------------------------------------ -5- 29 NICK HANAUER PARTNERSHIP By: /s/ Nick Hanauer -------------------------------------- Name: Nick Hanauer ------------------------------------ Address: The Highlands Seattle WA 98177 -6- 30 EXHIBITS Exhibit A - Schedule of Purchasers Exhibit B - Form of Third Amended and Restated Articles of Incorporation Exhibit C - 1 Form of Convertible Promissory Note Issuable to Amazon.com Exhibit C - 2 Form of Convertible Promissory Note Issuable to Other Purchasers Exhibit D - Schedule of Exceptions to Representations and Warranties Exhibit E - Form of Amended and Restated Investors' Rights Agreement Exhibit F - Form of Amended and Restated Right of First Refusal and Co-Sale Agreement Exhibit G - Form of Amended and Restated Voting Agreement Exhibit H - Balance Sheet dated September 30, 1999 Exhibit I - Form of Legal Opinion of Venture Law Group 31 EXHIBIT A SCHEDULE OF PURCHASERS INITIAL CLOSING
PRINCIPAL AMOUNT NUMBER OF SHARES OF CONVERTIBLE NAME/ADDRESS/TEL/FAX OF SERIES B PURCHASE PRICE PROMISSORY NOTE - --------------------------------------- ------------------ ------------------- ------------------- Spinnaker Technology Fund, L.P. 215,998 $ 1,630,784.90 $ 510,349.80 c/o Bowman Capital Management 1875 South Grant Street, Suite 600 San Mateo, CA 94402-7013 Tel: 650-287-2200 Fax: 650-572-1844 Attn: Matthew Cowan Spinnaker Technology Offshore 205,691 $ 1,552,967.05 $ 486,001.05 Fund Limited c/o Bowman Capital Management 1875 South Grant Street, Suite 600 San Mateo, CA 94402-7013 Tel: 650-287-2200 Fax: 650-572-1844 Attn: Matthew Cowan Spinnaker Founders Fund, L.P. 117,082 $ 883,969.10 $ 276,639.55 c/o Bowman Capital Management 1875 South Grant Street, Suite 600 San Mateo, CA 94402-7013 Tel: 650-287-2200 Fax: 650-572-1844 Attn: Matthew Cowan
32
PRINCIPAL AMOUNT NUMBER OF SHARES OF CONVERTIBLE NAME/ADDRESS/TEL/FAX OF SERIES B PURCHASE PRICE PROMISSORY NOTE - --------------------------------------- ------------------ ------------------- ------------------- Spinnaker Offshore Founders Fund 66,509 $ 502,142.95 $ 157,145.70 Cayman Limited c/o Bowman Capital Management 1875 South Grant Street, Suite 600 San Mateo, CA 94402-7013 Tel: 650-287-2200 Fax: 650-572-1844 Attn: Matthew Cowan Amazon.com, Inc. 1,692,038 $12,774,886.90 $ 2,975,115.25 1200 12th Avenue South, Suite 1200 Seattle, WA 98144 P.O. Box 81226 Seattle, WA 98108-1226 Tel: 206-266-1000 Fax: 206-834-7010 Attn: General Counsel Hummer Winblad Venture 1,008,800 $ 7,616,440.00 $ 2,383,565.20 Partners IV, L.P. 2 South Park, 2nd Floor San Francisco, CA 94107 Tel: 415-979-9600 Fax: 415-979-9601 Attn: John Hummer The Phoenix Partners IV Limited 252,200 $ 1,904,110.00 $ 595,891.30 Partnership 1000 Second Avenue, Suite 3600 Seattle, WA 98104 Tel: 206-624-8968 Fax: 206-624-1907 Attn: David B. Johnston
-2- 33
PRINCIPAL AMOUNT NUMBER OF SHARES OF CONVERTIBLE NAME/ADDRESS/TEL/FAX OF SERIES B PURCHASE PRICE PROMISSORY NOTE - --------------------------------------- ------------------ ------------------- ------------------- The Avram Miller Trust 2,649 $ 19,999.95 -- c/o Avram Miller Company 505 Montgomery Street, 20th Floor San Francisco, CA 94111 Tel: 415-835-7268 Fax: 603-710-6213 Attn: Avram Miller ------------------ ------------------- ------------------- Total for Initial Closing: 3,560,967 $26,885,300.85 $ 7,384,707.85 ================== =================== ===================
-3- 34 SECOND CLOSING
Number of Shares Name/Address/Tel/Fax of Series B Purchase Price - ------------------------------------------- ------------------------ --------------------- Spinnaker Technology Fund, L.P. 67,596 $510,349.80* c/o Bowman Capital Management 1875 South Grant Street, Suite 600 San Mateo, CA 94402-7013 Tel: 650-287-2200 Fax: 650-572-1844 Attn: Matthew Cowan Spinnaker Technology Offshore 64,371 $486,001.05* Fund Limited c/o Bowman Capital Management 1875 South Grant Street, Suite 600 San Mateo, CA 94402-7013 Tel: 650-287-2200 Fax: 650-572-1844 Attn: Matthew Cowan Spinnaker Founders Fund, L.P. 36,641 $276,639.55* c/o Bowman Capital Management 1875 South Grant Street, Suite 600 San Mateo, CA 94402-7013 Tel: 650-287-2200 Fax: 650-572-1844 Attn: Matthew Cowan Spinnaker Offshore Founders Fund 20,814 $157,145.70* Cayman Limited c/o Bowman Capital Management 1875 South Grant Street, Suite 600 San Mateo, CA 94402-7013 Tel: 650-287-2200 Fax: 650-572-1844 Attn: Matthew Cowan Amazon.com, Inc. 394,055 $2,975,115.25* 1200 12th Avenue South, Suite 1200 Seattle, WA 98144 Tel: 206-266-1000 Fax: 206-834-7010 Attn: General Counsel
-1- 35
Number of Shares Name/Address/Tel/Fax of Series B Purchase Price - ------------------------------------------- ------------------------ --------------------- Hummer Winblad Technology 1,375,307 $10,383,567.85** Fund IV, L.P. 2 South Park, 2nd Floor San Francisco, CA 94107 Tel: 415-979-9600 Fax: 415-979-9601 Attn: John Hummer The Phoenix Partners IV 78,926 $595,891.30* Limited Partnership 1000 Second Avenue, Suite 3600 Seattle, WA 98104 Tel: 206-624-8968 Fax: 206-624-1907 Attn: David B. Johnston Comcast Interactive Capital, L.P. 331,125 $2,499,993.75 1201 Market Street, Suite 2201 Wilmington, DE 19801 Tel: 302-594-8705 Fax: 302-658-1600 Attn: Abram E. Patlove, Vice President Cyber Control Development Limited 198,675 $1,499,996.25 38th Floor, Citibank Tower, Citibank Plaza 3 Garden Court Hong Kong Tel: 011-852-2514-8656 Fax: 011-852-2514-8651 Attn: Eric Oei Asia Pacific Technology & 132,450 $999,997.50 Finance 1 N.V. 62 De Ruyterkade Curacao, Netherlands Antilles Attn: Managing Director
-2- 36
Number of Shares Name/Address/Tel/Fax of Series B Purchase Price - ------------------------------------------- ------------------------ --------------------- With a copy to: ETF Group Via Cantonale, The Fantastic Building CH-6928 Manno, Switzerland Tel: 011-41-91-610-7111 Fax: 011-41-91-610-7166 Attn: Anthony J. Barbieri, General Counsel & Secretary BayStar Capital, L.P. 33,112 $249,995.60 1500 West Market Street, Suite 200 Mequon, WI 53092 Tel: 415-835-7260 Fax: 415-835-3777 Attn: Steven M. Lamar BayStar International Ltd. 33,113 $250,003.15 1500 West Market Street, Suite 200 Mequon, WI 53092 Tel: 415-835-7260 Fax: 415-835-3777 Attn: Steven M. Lamar World Online International B.V. 66,225 $499,998.75 Parklaan 28 P.O. Box ___ 3000 AA Rottendam, Netherlands Tel: 415-835-7260 Fax: 415-835-3777 Attn: Steven M. Lamar The Balousek Family Limited 19,868 $150,003.40 Partnership DTD 1/7/99 11 Magee Court Moraga, CA 94556 Tel: 925-376-8934 Fax: 925-631-9015 Attn: John B. Balousek, Jr.
-3- 37
Number of Shares Name/Address/Tel/Fax of Series B Purchase Price - ------------------------------------------- ------------------------ --------------------- Frank M. Higgins 19,868 $150,003.40 7650 SE 22nd Street Mercer Island, WA 98040 Tel: 206-232-1092 Fax: 206-230-9060 Michael B. Slade 19,868 $150,003.40 3732 E. High Lane Seattle, WA 98112 Tel: 206- Fax: 206- Keith Grinstein 19,868 $150,003.40 1191 2nd Avenue, #1600 Seattle, WA 98101 Tel: 206-749-8350 Fax: 206-749-8365 Nick Hanauer Partnership 19,868 $150,003.40 The Highlands Seattle, WA 98177 Tel: 206-363-4954 Fax: 206-436-8502 VLG Investments 1999 4,636 $35,001.80 Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Tel: 650-854-4488 Fax: 650-854-8386 Attn: Elias J. Blawie John V. Bautista 22,186 $167,504.30 Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Tel: 650-854-4488 Fax: 650-854-8386
-4- 38
Number of Shares Name/Address/Tel/Fax of Series B Purchase Price - ------------------------------------------- ------------------------ --------------------- Edmund S. Ruffin, Jr. 2,318 $17,500.90 Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Tel: 650-854-4488 Fax: 650-854-8386 Glen Van Ligten 1,325 $10,003.75 Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Tel: 650-854-4488 Fax: 650-854-8386 Frances Johnston 993 $7,497.15 Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Tel: 650-854-4488 Fax: 650-854-8386 Richard Hsu 993 $7,497.15 Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Tel: 650-854-4488 Fax: 650-854-8386 Kenneth Cramer 662 $4,998.10 Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Tel: 650-854-4488 Fax: 650-854-8386 ======================== ===================== Total for Second Closing: 2,964,863 $22,384,715.65*** ======================== =====================
* Conversion of Convertible Promissory Note issued to the Purchaser as of the Initial Closing. ** Includes conversion of Convertible Promissory Note in the principal amount of $2,383,565.20 and payment of $8,000,002.65 at the time of the Second Closing. *** Includes conversion of Convertible Promissory Notes in the aggregate principal amount of $7,384,707.85 and total payments of $15,000,007.80 at the time of the Second Closing. -5- EX-10.24 30 AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 1 EXHIBIT 10.24 PETS.COM, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT This Amended and Restated Investors' Rights Agreement (the "Agreement") is made as of the 5th day of November, 1999, by and among Pets.com, Inc., a California corporation (the "Company"), the investors listed on Exhibit A hereto, each of which is herein referred to as an "Investor," and Greg McLemore, who is also herein referred to as the "Founder". RECITALS A. The Company and certain of the Investors (the "Prior Investors") have entered into either a Series A Preferred Stock Purchase Agreement (the "Series A Purchase Agreement") dated April 22, 1999, pursuant to which the Company sold, and such Investors purchased, shares of the Company's Series A Preferred Stock (the "Series A Shares"), or a Series B Preferred Stock Purchase Agreement (the "Prior Series B Purchase Agreement," and together with the Series A Purchase Agreement, the "Prior Purchase Agreements") pursuant to which the Company sold, and such Investors purchased, shares of the Company's Series B Preferred Stock (the "Previously Issued Series B Shares"). B. The Company, Founder and the Prior Investors have previously entered into an Amended and Restated Investors' Rights Agreement, dated October 18, 1999 (the "Prior Rights Agreement"), which amended and restated that certain Investors' Rights Agreement dated April 22, 1999 between the Company, Founder, and certain of the Prior Investors. C. The Company and certain of the Investors (the "New Series B Investors") have entered into a Series B Preferred Stock and Convertible Note Purchase Agreement of even date herewith (the "Purchase Agreement") pursuant to which the Company desires to sell to the New Series B Investors and the New Series B Investors desire to purchase from the Company shares of the Company's Series B Preferred Stock (the "Series B Shares") and/or Series B-1 Preferred Stock (the "Series B-1 Shares," and together with the Series A Shares, Series B Shares and the Previously Issued Series B Shares, the "Preferred Stock") and/or Convertible Promissory Notes (the "Notes"). A condition to the New Series B Investors' obligations under the Purchase Agreement is that the Company, Founder, Prior Investors and the New Series B Investors enter into this Agreement in order to provide the Investors with (i) certain rights to register shares of the Company's Common Stock issuable upon conversion of the Series A, Series B and Series B-1 Preferred Stock held by the Investors, (ii) certain rights to receive or inspect information pertaining to the Company, (iii) certain rights to have a right of first offer with respect to certain issuances by the Company of its securities, and (iv) certain additional covenants of the Company. The Company, Founder, and the Prior Investors each desire to induce the New Series B Investors to purchase shares of Series B Preferred Stock pursuant to the Purchase Agreement by agreeing to the terms and conditions set forth herein. D. The Company wishes to execute this Agreement and grant to the New Series B Investors the rights contained herein in order to fulfill such condition. 2 E. The Company and the Prior Investors executing this Agreement together represent sufficient signatory authority to amend and restate the Prior Rights Agreement and to waive the Right of First Offer contained in Section 2.3 of the Prior Rights Agreement with respect to those Prior Investors who are not purchasing shares of Series B and/or Series B-1 Preferred Stock pursuant to the Purchase Agreement. AGREEMENT In consideration of the mutual promises and covenants hereinafter set forth, and for certain other valuable considerations, the receipt of which is hereby acknowledged, the parties hereby agree as follows: 1. REGISTRATION RIGHTS. The Company, the Founder and the Investors covenant and agree as follows: 1.1 DEFINITIONS. For purposes of this Section 1: (a) The terms "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and the declaration or ordering of effectiveness of such registration statement or document; (b) The term "Registrable Securities" means (i) the shares of Common Stock issuable or issued upon conversion of the Series A Preferred Stock, Series B Preferred Stock and Series B-1 Preferred Stock, (ii) the shares of Common Stock issuable or issued upon conversion of the Series B Preferred Stock and Series B-1 Preferred Stock issuable or issued upon conversion of the Notes, (iii) the shares of Common Stock issued to the Founder (the "Founder's Stock"), provided, however, that for the purposes of Sections 1.2, 1.4, 1.13, 3 and 5.2 the Founder's Stock shall not be deemed Registrable Securities and the Founder shall not be deemed a Holder, and (iv) any other shares of Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares listed in (i), (ii) and (iii); provided, however, that the foregoing definition shall exclude in all cases any Registrable Securities sold by a person in a transaction in which his or her rights under this Agreement are not assigned. Notwithstanding the foregoing, Common Stock or other securities shall only be treated as Registrable Securities if and so long as they have not been (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof so that all transfer restrictions, and restrictive legends with respect thereto, if any, are removed upon the consummation of such sale; (c) The number of shares of "Registrable Securities then outstanding" shall be determined by the number of shares of Common Stock outstanding which are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities which are, Registrable Securities; 3 (d) The term "Holder" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.12 of this Agreement; provided, however, that the Founder shall not be deemed to be a Holder with respect to Founder's Stock only for purposes of Sections 1.2, 1.4 and 1.13, nor an Eligible Holder (as defined herein below in Section 2.1) with respect to Founder's Stock only for purposes of Section 3.2. (e) The term "Form S-3" means such form under the Securities Act as in effect on the date hereof or any successor form that permits significant incorporation by reference of a Company's filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (f) The term "SEC" means the Securities and Exchange Commission; and (g) The term "Qualified IPO" means a firm commitment underwritten public offering by the Company of shares of its Common Stock pursuant to a registration statement under the Securities Act, the public offering price of which is not less than $10.00 per share (appropriately adjusted for any stock split, dividend, combination or other recapitalization) and which results in aggregate cash proceeds to the Company of $10,000,000 (net of underwriting discounts and commissions). 1.2 REQUEST FOR REGISTRATION. (a) Subject to the conditions of this Section 1.2, if the Company shall receive at any time after the earlier of (i) the fifth anniversary of the date hereof, or (ii) six (6) months after the effective date of the first registration statement for a public offering of securities of the Company (other than a registration statement relating either to the sale of securities to employees of the Company pursuant to a stock option, stock purchase or similar plan or an SEC Rule 145 transaction), a written request from the Holders of at least 33 1/3% of the Preferred Stock then outstanding that the Company file a registration statement under the Securities Act covering the registration of Registrable Securities, the anticipated aggregate offering price, net of underwriting discounts and commissions, of which are in excess of $5,000,000, then the Company shall, within ten (10) days of the receipt thereof, give written notice of such request to all Holders and shall, subject to the limitations of subsection 1.2(b), use its best efforts to effect as soon as practicable, and in any event within 60 days of the receipt of such request, the registration under the Securities Act of all Registrable Securities which the Holders request to be registered within twenty (20) days of the mailing of such notice by the Company in accordance with Section 3.3. (b) If the Holders initiating the registration request hereunder ("Initiating Holders") intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 1.2 and the Company shall include such information in the written notice referred to in subsection 1.2(a). The underwriter will be selected by a majority in interest of the Initiating Holders and shall be reasonably acceptable to the Company. In such event, the right of 4 any Holder to include his Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in subsection 1.5(e)) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Section 1.2, if the underwriter advises the Initiating Holders and the Company in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Company shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all Holders thereof, including the Initiating Holders, in proportion (as nearly as practicable) to the amount of Registrable Securities of the Company owned by each Holder; provided, however, that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting. (c) Notwithstanding the foregoing, if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 1.2, a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer such filing for a period of not more than 90 days after receipt of the request of the Initiating Holders; provided, however, that the Company may not utilize this right more than once in any twelve-month period; and provided further that the Company shall not register shares for its own account during such 90 day period, but such prohibition shall not apply to the registration of Company shares in connection with a merger or other strategic transaction by the Company. (d) In addition, the Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to this Section 1.2: (i) After the Company has effected two (2) registrations pursuant to this Section 1.2 and such registrations have been declared or ordered effective; (ii) During the period starting with the date sixty (60) days prior to the Company's good faith estimate of the date of filing of, and ending on a date one hundred eighty (180) days after the effective date of, a registration subject to Section 1.3 hereof; provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; or (iii) If the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request made pursuant to Section 1.4 below. 5 1.3 COMPANY REGISTRATION. If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Holders) any of its stock under the Securities Act in connection with the public offering of such securities (other than a registration relating solely to the sale of securities to participants in a Company stock plan or a transaction covered by Rule 145 under the Securities Act, a registration in which the only stock being registered is Common Stock issuable upon conversion of debt securities which are also being registered, or any registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 3.3, the Company shall, subject to the provisions of Section 1.8, cause to be registered under the Securities Act all of the Registrable Securities that each such Holder has requested to be registered. 1.4 FORM S-3 REGISTRATION. In case the Company shall receive from any Holder or Holders of not less than thirty percent (30%) of the Preferred Stock then outstanding a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and (b) as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 15 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 1.4: (i) if Form S-3 is not available for such offering by the Holders; (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public (net of any underwriters' discounts or commissions) of less than $1,000,000; (iii) if the Company shall furnish to the Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than 90 days after receipt of the request of the Holder or Holders under this Section 1.4; provided, however, that the Company shall not utilize this right more than once in any twelve month period; (iv) if the Company has, within the twelve (12) month period preceding the date of such request, already effected two registrations on Form S-3 for the Holders pursuant to this Section 1.4; (v) in any particular jurisdiction in which the Company would be required to qualify 6 to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance; or (vi) during the period ending one hundred eighty (180) days after the effective date of the Company's initial registration statement subject to Section 1.3. (c) Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. Registrations effected pursuant to this Section 1.4 shall not be counted as demands for registration or registrations effected pursuant to Sections 1.2 or 1.3, respectively. 1.5 OBLIGATIONS OF THE COMPANY. Whenever required under this Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to one hundred twenty (120) days. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement for such period of time as the registration statement remains on effective. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) During the period of time that such registration statement remains effective, notify each Holder of Registrable Securities covered by such registration statement at any time when (i) a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such 7 registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing or (ii) there is a stop order issued by the SEC suspending effectiveness of the registration statement or the initiation of any proceedings for that purpose or the receipt by the Company of any notification with respect to the suspension of the qualification of the Registered Securities for sale in any jurisdiction or the initiation of any such procedure. (g) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed. (h) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration. (i) Use its best efforts to furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 1, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Section 1, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. 1.6 FURNISH INFORMATION. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. The Company shall have no obligation with respect to any registration requested pursuant to Section 1.2 or Section 1.4 of this Agreement if, as a result of the application of the preceding sentence, the number of shares or the anticipated aggregate offering price of the Registrable Securities to be included in the registration does not equal or exceed the number of shares or the anticipated aggregate offering price required to originally trigger the Company's obligation to initiate such registration as specified in subsection 1.2(a) or subsection 1.4(b)(ii), whichever is applicable. 8 1.7 EXPENSES OF REGISTRATION. (a) DEMAND REGISTRATION. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications pursuant to Section 1.2, including (without limitation) all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of one counsel for the selling Holders selected by them with the approval of the Company, which approval shall not be unreasonably withheld, shall be borne by the Company; provided, however, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 1.2 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses pro rata based upon the number of Registrable Securities that were to be requested in the withdrawn registration), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one demand registration pursuant to Section 1.2; provided, further, however, that if at the time of such withdrawal, the Holders have learned of a material adverse change in the condition, business, or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable promptness following disclosure by the Company of such material adverse change, then the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to Section 1.2. (b) COMPANY REGISTRATION. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications of Registrable Securities pursuant to Section 1.3 for each Holder (which right may be assigned as provided in Section 1.12), including (without limitation) all registration, filing, and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company and the reasonable fees and disbursements of one counsel for the selling Holder or Holders selected by them with the approval of the Company, which approval shall not be unreasonably withheld, shall be borne by the Company. (c) REGISTRATION ON FORM S-3. All expenses incurred in connection with a registration requested pursuant to Section 1.4, including (without limitation) all registration, filing, qualification, printers' and accounting fees and the reasonable fees and disbursements of one counsel for the selling Holder or Holders selected by them with the approval of the Company, which approval shall not be unreasonably withheld, and counsel for the Company, and any underwriters' discounts or commissions associated with Registrable Securities, shall be borne by the Company. 1.8 UNDERWRITING REQUIREMENTS. In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under Section 1.3 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters) and enter into an underwriting agreement in the customary form with an underwriter or underwriters, and then, except as provided below, only in such quantity as the underwriters determine in their sole 9 discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by shareholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling shareholders according to the total amount of securities entitled to be included therein owned by each selling shareholder or in such other proportions as shall mutually be agreed to by such selling shareholders) but in no event shall (i) the amount of securities of the selling Holders included in the offering be reduced below thirty percent (30%) of the total amount of securities included in such offering, unless such offering is the initial public offering of the Company's securities, in which case, the selling shareholders may be excluded if the underwriters make the determination described above and no other shareholder's securities are included, (ii) any securities held by a Founder be included if any securities held by any selling Holder are excluded, or (iii) notwithstanding (i) above, any shares being sold by a shareholder exercising a demand registration right similar to that granted in Section 1.2 be excluded from such offering. For purposes of the preceding parenthetical concerning apportionment, for any selling shareholder which is a holder of Registrable Securities and which is a partnership or corporation, the partners, retired partners and shareholders of such holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling shareholder," and any pro-rata reduction with respect to such "selling shareholder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling shareholder," as defined in this sentence. 1.9 DELAY OF REGISTRATION. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. 1.10 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (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 10 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; and the Company will pay to each such Holder, underwriter or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.10(a) 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 to any Holder, underwriter or controlling person 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 any such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 1.10(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.10(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, that in no event shall any indemnity under this subsection 1.10(b) exceed the net proceeds from the offering received by such Holder, except in the case of willful fraud by such Holder. (c) Promptly after receipt by an indemnified party under this Section 1.10 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.10, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the reasonable fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate 11 due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.10 to the extent prejudicial, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.10. (d) If the indemnification provided for in this Section 1.10 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations; provided, that in no event shall any contribution by a Holder under this Subsection 1.10(d) when aggregated with amounts paid pursuant to Subsection 1.10(b) hereof, exceed the net proceeds from the offering received by such Holder, except in the case of willful fraud by such Holder. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (f) The obligations of the Company and Holders under this Section 1.10 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise. 1.11 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times after ninety (90) days after the effective date of the first registration statement filed by the Company for the offering of its securities to the general public so long as the Company remains subject to the periodic reporting requirements under Sections 13 or 15(d) of the Exchange Act; 12 (b) take such action, including the voluntary registration of its Common Stock under Section 12 of the Exchange Act, as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities, such action to be taken as soon as practicable after the end of the fiscal year in which the first registration statement filed by the Company for the offering of its securities to the general public is declared effective; (c) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (d) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company), the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 1.12 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such securities that (i) is a subsidiary, parent, partner, limited partner, retired partner, member or former member of a Holder, (ii) is a Holder's family member or trust for the benefit of an individual Holder or (iii) is a transferee or assignee of at least 100,000 (appropriately adjusted to reflect subsequent stock splits, stock dividends, combinations or other recapitalizations) shares of such securities; provided the 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; and provided, further, that 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. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, the holdings of transferees and assignees of (i) a partnership who are partners or retired partners of such partnership (including spouses and ancestors, lineal descendants and siblings of such partners or spouses who acquire Registrable Securities by gift, will or intestate succession) or (ii) a corporation or limited liability company which is a parent or subsidiary of such entity shall be aggregated together and with the partnership or other entity, as the case may be; provided that all assignees and transferees who would not qualify individually for assignment of registration rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices or taking any action under Section 1. 1.13 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of at least seventy percent (70%) of the outstanding Registrable Securities, not including the 13 Founder's Stock, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include such securities in any registration filed under Section 1.2 or 1.3 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of his securities will not reduce the amount of the Registrable Securities of the Holders which are included in such registration, (b) to make a demand registration which could result in such registration statement being declared effective prior to the earlier of either of the dates set forth in subsection 1.2(a) or within one hundred twenty (120) days of the effective date of any registration effected pursuant to Section 1.2 or (c) to receive rights pari passu or senior to those granted the Investors hereunder. 1.14 MARKET-STANDOFF AGREEMENT. (a) MARKET-STANDOFF PERIOD; AGREEMENT. In connection with the initial public offering of the Company's securities and upon request of the Company or the underwriters managing such offering of the Company's securities, each Holder agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any securities of the Company acquired by such Holder in a private transaction (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as may be requested by the Company or such managing underwriters and to execute an agreement reflecting the foregoing as may be requested by the underwriters at the time of the Company's initial public offering. (b) LIMITATIONS. The obligations described in Section 1.14(a) shall apply only if all officers, directors and one-percent security holders of the Company and all other persons with registration rights (whether or not pursuant to this Agreement) enter into similar agreements, and shall not apply to a registration relating solely to employee benefit plans, or to a registration relating solely to a transaction pursuant to Rule 145 under the Securities Act. (c) STOP-TRANSFER INSTRUCTIONS. In order to enforce the foregoing covenants, the Company may impose stop-transfer instructions with respect to the securities of each Holder (and the securities of every other person subject to the restrictions in Section 1.14(a)) until the end of such period. (d) TRANSFEREES BOUND. Each Holder agrees that it will not transfer securities of the Company unless each transferee agrees in writing to be bound by all of the provisions of this Section 1.14, provided that this Section 1.14(d) shall not apply to transfers pursuant to a registration statement or transfers after the six-month anniversary of the effective date of the Company's initial registration statement subject to this Section 1.14. 1.15 TERMINATION OF REGISTRATION RIGHTS. No Holder shall be entitled to exercise any right provided for in this Section 1 after the earlier of (i) seven (7) years following the consummation of a Qualified IPO, or (ii) such time as Rule 144 or another similar exemption under the Securities Act is available for the sale of all of such Holder's shares during a three (3)-month period without registration. 14 2. COVENANTS OF THE COMPANY. 2.1 DELIVERY OF FINANCIAL STATEMENTS. The Company shall deliver to each Holder of at least 100,000 shares of Registrable Securities (as adjusted for stock splits, stock dividends, recapitalizations and the like) (each, an "Eligible Holder"): (a) as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, an income statement for such fiscal year, a balance sheet of the Company and statement of shareholder's equity as of the end of such year, and a statement of cash flows for such year, such year-end financial reports to be in reasonable detail, prepared in accordance with generally accepted accounting principles ("GAAP"), and audited and certified by an independent public accounting firm of nationally recognized standing selected by the Company; (b) within thirty (30) days of the end of each month, an unaudited income statement and a statement of cash flows and balance sheet for and as of the end of such month, in reasonable detail; (c) as soon as practicable, but in any event thirty (30) days prior to the end of each fiscal year, a budget and business plan for the next fiscal year, prepared on a monthly basis, including balance sheets, income statements and statements of cash flows for such months and, as soon as prepared, any other budgets or revised budgets prepared by the Company; and (d) with respect to the financial statements called for in subsection (b) of this Section 2.1, an instrument executed by the Chief Financial Officer or President of the Company and certifying that such financials were prepared in accordance with GAAP consistently applied with prior practice for earlier periods (with the exception of footnotes that may be required by GAAP) and fairly present the financial condition of the Company and its results of operation for the period specified, subject to year-end audit adjustment, provided that the foregoing shall not restrict the right of the Company to change its accounting principles consistent with GAAP, if the Board of Directors determines that it is in the best interest of the Company to do so. 2.2 INSPECTION. The Company shall permit each Eligible Holder (except for an Eligible Holder reasonably deemed by the Company to be a competitor of the Company), at such Eligible Holder's expense, to visit and inspect the Company's properties, to examine its books of account and records and to discuss the Company's affairs, finances and accounts with its officers, all at such reasonable times as may be requested by the Investor; provided, however, that the Company shall not be obligated pursuant to this Section 2.2 to provide access to any information which it reasonably considers to be a trade secret or similar confidential information. For purposes of this Section 2.2, Amazon.com, Inc. ("Amazon.com") shall not be considered a competitor of the Company. 2.3 RIGHT OF FIRST OFFER. Subject to the terms and conditions specified in this Section 2.3, the Company hereby grants to each Eligible Holder a right of first offer with respect to future sales by the Company of its Shares (as hereinafter defined). For the avoidance of doubt 15 and for purposes of this Section 2.3, the Founder shall be considered an Eligible Holder only with respect to the Series A Preferred Stock held by him, and his pro rata share (as used in Section 2.3(b) below) shall be calculated based exclusively on the shares of Series A Preferred Stock then held by him. An Eligible Holder who chooses to exercise the right of first offer may designate as purchasers under such right itself, its current or former partners, members or affiliates, or a corporation or limited liability company which is a parent or subsidiary of such entity, in such proportions as it deems appropriate. Each time the Company proposes to offer any shares of, or securities convertible into or exercisable for any shares of, any class of its capital stock ("Shares"), the Company shall first make an offering of such Shares to each Eligible Holder in accordance with the following provisions: (a) The Company shall deliver a notice by certified mail ("Notice") to the Eligible Holders stating (i) its bona fide intention to offer such Shares, (ii) the number of such Shares to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such Shares. (b) Within 15 calendar days after delivery of the Notice, (i) each Eligible Holder (including Amazon.com) may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to that portion of such Shares which equals the proportion that the number of shares of Common Stock issued and held, or issuable upon conversion and exercise of all convertible or exercisable securities then held by such Eligible Holder bears to the total number of shares of Common Stock then outstanding (assuming full conversion and exercise of all convertible or exercisable securities); and (ii) Amazon.com may elect to purchase or obtain, at the price and on the terms specified in the Notice, the lesser of (A) all such remaining Shares and (B) up to that portion of such Shares that, when aggregated with the total number of shares of the Company's Common Stock issued and held, or issuable upon conversion or exercise of all convertible or exercisable securities then held by Amazon.com, plus all shares which Amazon.com has the right to purchase under Subsection (i) of this Section 2.3(b), equals 46% of the total number of shares of the Company's Common Stock then outstanding on a fully-diluted basis (assuming full conversion and exercise of all convertible or exercisable securities of the Company, including securities reserved for issuance and not granted under the Company's stock and option plans) (the "Threshold Percentage"). The Company shall promptly, in writing, inform each Eligible Holder that purchases all the shares available to it (each, a "Fully-Exercising Investor") of any other Eligible Holder's failure to do likewise. During the ten (10)-day period commencing after receipt of such information, each Fully-Exercising Investor shall be entitled to obtain that portion of the Shares for which Eligible Holders were entitled to subscribe but which were not subscribed for by the Eligible Holders that is equal to the proportion that the number of shares of Common Stock 16 issued and held, or issuable upon conversion and exercise of all convertible or exercisable securities then held, by such Fully-Exercising Investor bears to the total number of shares of Common Stock then outstanding (assuming full conversion and exercise of all convertible or exercisable securities), provided, however, that in no event shall Amazon.com be entitled to purchase under this Section 2.3 a number of Shares that, when aggregated with the total number of shares of Common Stock issued and held, or issuable upon conversion or exercise of all convertible or exercisable securities then held by Amazon.com, plus all shares which Amazon.com has the right to purchase under Subsection (i) of this Section 2.3(b), equals an amount greater than the Threshold Percentage. The right of Amazon.com to purchase up to the Threshold Percentage pursuant to this Section 2.3 may not be transferred to any third party or parties, other than to a corporation or limited liability company which is a parent or subsidiary of Amazon.com. (c) The Company may, during the 45-day period following the expiration of the later of the ten-day or fifteen-day period provided in subsection 2.3(b) hereof, offer the remaining unsubscribed portion of the Shares to any person or persons at a price not less than, and upon terms no more favorable to the offeree than those specified in the Notice. If the Company does not enter into an agreement for the sale of the Shares within such period, or if such agreement is not consummated within 60 days of the execution thereof, the right provided hereunder shall be deemed to be revived and such Shares shall not be offered unless first reoffered to the Eligible Holders in accordance herewith. (d) The right of first offer in this Section 2.3 shall not be applicable (i) to the issuance or sale of Common Stock (or options therefor) to employees, consultants and directors, pursuant to plans or agreements approved by the Board of Directors for the primary purpose of soliciting or retaining their services, (ii) to or after consummation of a Qualified IPO, except that with respect to Amazon.com (subject to Sections 2.3(e) through (i) below) and with respect to Bowman Capital Management or any fund over which Bowman Capital Management exercises control or is under common control with (collectively "Bowman") (subject to Sections 2.3(j) and (k) below), the right of first offer in this Section 2.3 shall terminate immediately after consummation of a Qualified IPO, (iii) to the issuance of securities pursuant to the conversion or exercise of convertible or exercisable securities, (iv) to the issuance of securities to financial institutions or lessors in connection with commercial credit arrangements, equipment financings, or similar transactions, or (v) to the issuance or sale of the Series A Preferred Stock or Series B Preferred Stock. (e) Notwithstanding anything in this Section 2.3 to the contrary, and subject to paragraphs (f), (g), (h) and (i) below, to the extent permissible under the federal securities laws, the rules and regulations of the National Association of Securities Dealers, Inc. (the "NASD"), and all other applicable laws, rules and regulations, the Company hereby agrees that in connection with the Company's initial public offering of Common Stock pursuant to a registration statement filed under the Securities Act (the "IPO"), the Company shall use reasonable efforts to cause the managing underwriter or underwriters (who were selected with the prior approval, not to be unreasonably withheld, of Amazon.com) for such IPO to offer to Amazon.com the right to purchase up to such number of shares of the Company's Common Stock to be sold in the IPO (the "IPO Shares") sufficient to raise Amazon.com's total equity ownership in the Company upon consummation of the IPO to its permitted Threshold Percentage. The IPO Shares shall be offered to Amazon.com on the same terms and at the same price at which they are being offered to the public. If Amazon.com wishes to purchase the IPO Shares, it shall promptly respond to such offer within the time frame reasonably requested by the managing underwriter(s). The foregoing provisions are not intended to be, and shall not be 17 construed as, an offer by the Company to sell the IPO Shares. Any such offer will be made pursuant to applicable requirements of the federal securities laws, the rules and regulations of the NASD, and all other applicable laws, rules and regulations, as well as the provisions of this Section 2.3(e). (f) In the event that despite all purchases by Amazon.com of shares of the Company's capital stock under this Section 2.3, Amazon.com's total equity ownership in the Company will not reach its permitted Threshold Percentage upon consummation of the IPO, then to the extent permissible under the federal securities laws, the rules and regulations of the NASD, and all other applicable laws, rules and regulations, and to the extent the managing underwriter(s) determine that the sale of the Additional Shares (as defined below) will not jeopardize the success of the IPO, the Company shall use its best efforts to sell and issue to Amazon.com, and Amazon.com may, but shall not be required to, purchase from the Company, in a private placement transaction such number of shares of the Company's Common Stock ("Additional Shares") sufficient to raise Amazon.com's total equity ownership in the Company (including, without limitation, any IPO Shares and Additional Shares purchased) to its permitted Threshold Percentage upon consummation of the IPO. The price per share paid by Amazon.com for such Additional Shares shall be the price at which the IPO Shares are offered to the public. The purchase of such shares shall be contingent upon the closing of the IPO. The foregoing provisions are not intended to be, and shall not be construed as, an offer by the Company to sell such shares. Any such offer will be made pursuant to applicable requirements of the federal securities laws, the rules and regulations of the NASD, and all other applicable laws, rules and regulations, as well as the provisions of this Section 2.3(f). (g) Notwithstanding Sections 2.3(e) and (f) above, if the managing underwriter(s) of the IPO determine in their sole discretion that Amazon.com's purchase of IPO Shares in the amount otherwise specified in Section (e) or Amazon.com's purchase of Additional Shares in the amount otherwise specified in Section (f) is not compatible with the success of the IPO, then the managing underwriter(s) may prohibit Amazon.com from purchasing any IPO Shares or Additional Shares or may allow Amazon.com to purchase only that number of IPO Shares or Additional Shares that the managing underwriter(s) determine in their sole discretion will not jeopardize the success of the IPO; provided however that in no event shall Bowman be permitted to purchase any shares in the Company's IPO pursuant to Section 2.3(j) below until Amazon.com shall have been permitted to purchase its full allocation of IPO Shares. (h) Notwithstanding anything in this Section 2.3 to the contrary, and subject to paragraph (i) below, to the extent Amazon.com is not permitted to purchase the number of shares of additional shares of the Company's Common Stock which it has requested to purchase pursuant to Section 2.3(e) (the "Refused Shares"), the Company hereby agrees that for a period of one year following the IPO, the Company shall in good faith negotiate with Amazon.com to agree upon a means by which Amazon.com may purchase the Refused Shares (as adjusted for stock splits, stock dividends, recapitalizations and the like) at the then fair market value of the Company's Common Stock. Such means may include a private placement of shares by the Company or the sale of shares by the Company to Amazon.com in a secondary public offering. 18 (i) The rights of Amazon.com under Sections 2.3(e), (f) and (h) above shall terminate at such time as Amazon.com has disposed of any shares of the Company's capital stock held by it as of the time of this Agreement or acquired thereafter, provided however, that any transfer of shares by Amazon.com to a corporation or limited liability company which is a parent or subsidiary of Amazon.com will not be deemed to trigger the terms of this Section 2.3(i). (j) Notwithstanding anything in this Section 2.3 to the contrary, and subject to paragraphs (g) above and (k) below, to the extent permissible under the federal securities laws, the rules and regulations of the NASD, and all other applicable laws, rules and regulations, the Company hereby agrees that in connection with the Company's IPO, the Company shall use reasonable efforts to cause the managing underwriter or underwriters for such IPO to offer to Bowman the right to purchase up to two and one-half percent (2.5%) of the shares offered and sold by the Company in the IPO. The IPO shares shall be offered to Bowman on the same terms and at the same price at which they are being offered to the public. If Bowman wishes to purchase such shares, it shall promptly respond to such offer within the time frame reasonably requested by the managing underwriter(s). The foregoing provisions are not intended to be, and shall not be construed as, an offer by the Company to sell such shares. Any such offer will be made pursuant to applicable requirements of the federal securities laws, the rules and regulations of the NASD, and all other applicable laws, rules and regulations, as well as the provisions of this Section 2.3(j). Notwithstanding the foregoing provisions, if the managing underwriter(s) of the IPO determine in their sole discretion that Bowman's purchase of such shares is not compatible with the success of the IPO, then the managing underwriter(s) may prohibit Bowman from purchasing any shares in the IPO or may allow Bowman to purchase only that number of shares that the managing underwriter(s) determine in their sole discretion will not jeopardize the success of the IPO. (k) The rights of Bowman under Section 2.3(j) above shall terminate at such time as Bowman has disposed of any shares of the Company's capital stock held by it as of the time of this Agreement or acquired thereafter. 2.4 REIMBURSEMENT OF DIRECTOR EXPENSES. The Company shall reimburse the reasonable documented expenses incurred by the directors elected by the holders of Series A Preferred Stock and Series B Preferred Stock pursuant to that certain Amended and Restated Voting Agreement between the Company and the Investors of even date herewith (the "Voting Agreement") in connection with such directors' attendance of meetings of the Company's Board of Directors promptly upon receipt of documentation of such expenses. 2.5 NOTICE OF SALE OF COMPANY. Until the Standstill Termination Date (as defined below in Section 4.1), promptly following commencement of any discussion with any third-party and in any event at least ten (10) days prior to signing any letter of intent (whether binding or non-binding) or any definitive documents, the Company shall provide Amazon.com with written notice of its intent to enter into an agreement to sell, convey, or otherwise dispose of all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any other transaction or series of related transactions in which more than fifty percent (50%) of the Company's voting 19 power would be disposed of, provided such notice shall not be required in connection with a merger effected solely for the purpose of changing the domicile of the Company. 2.6 VESTING UNDER 1999 STOCK PLAN. Unless otherwise approved by a majority of the Company's Board of Directors, options and Common Stock granted by the Company pursuant to its 1999 Stock Plan (the "Plan") will be subject to the following vesting schedule: 25% of the shares comprising each grant to employees shall vest on the one-year anniversary of the vesting commencement date for such grant, and thereafter 1/48th of the shares comprising the grant shall vest on each monthly anniversary of the vesting commencement date for such grant. Unvested shares of Common Stock issued to employees pursuant to the Plan will be subject to the Company's right of repurchase at the original grantee's purchase price. 2.7 CONFLICTS OF INTERESTS. The Company shall use its best efforts to ensure that the Company's employees, during the term of their employment with the Company, do not engage in activities which would result in a conflict of interest with the Company. The Company's obligations hereunder include, but are not limited to, requiring that the Company's employees devote their primary productive time, ability and attention to the business of the Company (provided, however, the Company's employees may engage in other professional activity if such activity does not materially interfere with their obligations to the Company), requiring that the Company's employees enter into agreements regarding proprietary information and confidentiality and inventions, and preventing the Company's employees from engaging or participating in any business that is in competition with the business of the Company. 2.8 QUALIFIED SMALL BUSINESS. The Company shall use its best efforts to provide notice to the Investors of any proposed action that could affect its qualification as a "Qualified Small Business" as defined in Section 1202(d) of the Code, and covenants that so long as Registrable Securities are held by the Series B Investors (or a transferee or assignee of Series B Investors), prior to taking any such action, it will discuss such action with the Eligible Holders. To the extent that such disqualification could be avoided by parties, other than the Company, repurchasing shares of outstanding stock, the Eligible Holders or any other persons or entities designated by the Company's Board of Directors may purchase such stock in accordance with the procedures set forth in Section 1.1(b) of the Amended and Restated Right of First Refusal and Co-Sale Agreement dated the same date herewith. The Company shall use its best efforts to comply with the reporting requirements of the State of California regarding "Qualified Small Business Stock" and similar federal regulations when and if promulgated. 2.9 PROPRIETARY AGREEMENTS. The Company shall have each officer, employee and consultant of the Company execute the Company's standard form of non-disclosure and proprietary information agreement prior to disclosing any proprietary information to any such officer, employee and consultant. The Company will use its best efforts to prevent any employee from violating the confidentiality and proprietary information agreement entered into between the Company and each of its officers, employees and consultants. 20 2.10 DIRECTORS AND OFFICERS INSURANCE. The Company will use its best efforts to maintain directors and officers insurance, upon a determination by the Company's Board of Directors that such insurance is economically feasible. 2.11 DIRECTORS' LIABILITY AND INDEMNIFICATION. The Company's Second Amended and Restated Articles of Incorporation (the "Restated Articles") and Bylaws shall provide (a) for elimination of the liability of director to the maximum extent permitted by law and (b) for indemnification of directors for acts on behalf of the Company to the maximum extent permitted by law. In addition, the Company shall indemnify such directors to the maximum extent permissible under California law pursuant to an indemnification agreement. 2.12 AUDITORS. The Company will retain independent public accountants of recognized national standing (i.e., a firm acknowledged to be among the Big Five or their successors) who shall audit the Company's financial statements at the end of each fiscal year. 2.13 EXTRAORDINARY REMUNERATION. The Board of Directors may not approve any plan or action to grant extraordinary remuneration to management in connection with the sale of the Company or any subsidiary of the Company, or the termination of employment or otherwise, unless such plan or action has been approved by the non-employee members of the Board of Directors. 2.14 APPROVAL OF HOLDERS OF PREFERRED STOCK. The Company shall disclose all terms, including those provided in side letters, relating to the issuances described in Article III(B), Sections 6(b)(ii) and 6(c)(ii) of the Restated Articles to the holders of Preferred Stock before such holders are to vote on such issuances. 2.15 ISSUANCE OF SERIES B PREFERRED STOCK. After the date of the Closing (as defined in the Purchase Agreement), the Company shall not issue any shares of Series B Preferred Stock to any person or entity not referenced in Article III(B), Section 4(d)(i)(B)(3) of the Restated Articles. 2.16 TERMINATION OF COVENANTS. (a) The covenants set forth in Sections 2.1 through 2.3 and 2.6 through 2.15 shall terminate as to each Investor and be of no further force or effect (i) immediately prior to the consummation of a Qualified IPO (except as otherwise noted in Section 2.3), or (ii) when the Company shall sell, convey, or otherwise dispose of or encumber all or substantially all of its property or business or merge into or consolidate with any public corporation (other than a wholly-owned subsidiary corporation) or effect any other transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, provided that this subsection (ii) shall not apply to a merger effected exclusively for the purpose of changing the domicile of the Company. (b) The covenants set forth in Sections 2.1 and 2.2 shall terminate as to each Holder and be of no further force or effect when the Company first becomes subject to the 21 periodic reporting requirements of Sections 13 or 15(d) of the Exchange Act, if this occurs earlier than the events described in Section 2.16(a) above. (c) The covenant set forth in Section 2.4 shall terminate and be of no further force or effect at such time as the Voting Agreement terminates pursuant to its terms. 3. COVENANTS OF THE INVESTORS. 3.1 NOTICE OF PROPOSED TRANSFER. Prior to any transfer of Registrable Securities, the Holder of such Registrable Securities (the "Seller") must give to the Company a written notice signed by the Seller (the "Seller's Notice") stating (a) the Seller's bona fide intention to transfer such Registrable Securities (the "Offered Stock") and the name and address of the proposed transferee (the "Transferee"); (b) the number of shares of the Offered Stock; and (c) the bona fide cash price or, in reasonable detail, other consideration, per share for which the Seller proposes to transfer such Offered Stock (the "Offered Price"). Upon the request of the Company, the Seller will promptly furnish information to the Company as may be reasonably requested to establish that the offer and proposed transferee are bona fide. 3.2 RIGHT OF FIRST REFUSAL. (a) The Company shall have the right of first refusal to purchase all or any part of the Offered Stock, if the Company gives written notice of the exercise of such right to the Seller within thirty (30) days (the "Company's Refusal Period") after the date of the Seller's Notice to the Company, provided however, that for purposes of this Section 3.2, Offered Stock shall not include proposed transfers of stock to any Transferee who is either (i) a partner or affiliate of the Seller or (ii) a corporation or limited liability company which is a parent or subsidiary of the Seller. (b) The purchase price for the Offered Stock to be purchased by the Company exercising its right of first refusal under this Agreement will be the Offered Price, and will be payable as set forth in Section 3.2(c) hereof. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration will be determined by the Board of Directors of the Company in good faith, which determination will be binding upon the Company and the Seller, absent fraud or error. (c) Payment of the purchase price for the Offered Stock purchased by the Company exercising its right of first refusal will be made within fifteen (15) days after the end of the Company's Refusal Period. Payment of the purchase price will be made, at the option of the Company (i) in cash (by check), (ii) by cancellation of all or a portion of any outstanding indebtedness of the Seller to the Company, or (iii) by any combination of the foregoing. (d) If the Company exercises its right of first refusal to purchase the Offered Stock, then, upon the date the notice of such exercise is given by the Company, the Seller will have no further rights as a holder of the Offered Stock except the right to receive payment for the Offered Stock from the Company in accordance with the terms of this 22 Agreement and the Seller will forthwith cause all certificate(s) evidencing such Offered Stock to be surrendered for transfer to the Company. (e) The right of the Company to purchase any part of the Offered Stock may be assigned in whole or in part to any third party in the Company's sole discretion. (f) If the Company (or its designated assignee) has not elected to purchase all of the Offered Stock, then the Seller may transfer the remaining shares of Offered Stock to the Transferee at the Offered Price or at a higher price, provided that such transfer (i) is consummated within thirty (30) days after the end of the Company's Refusal Period, (ii) is on terms no more favorable than the terms proposed in the Seller's Notice and (iii) is in accordance with all the terms of this Agreement. If the Offered Stock is not so transferred during such thirty (30) day period, then the Seller may not transfer any of such Offered Stock without complying again in full with the provisions of this Agreement. 3.3 RESTRICTIVE LEGEND AND STOP-TRANSFER ORDERS. (a) Each Investor understands and agrees that the Company will cause the legend set forth below, or a legend substantially equivalent thereto, to be placed upon any certificate(s) or other documents or instruments evidencing ownership of the Registrable Securities: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RIGHTS OF FIRST REFUSAL AS SET FORTH IN AN AGREEMENT ENTERED INTO BY THE HOLDER OF THESE SHARES AND THE COMPANY. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY. SUCH RIGHTS OF FIRST REFUSAL ARE BINDING ON CERTAIN TRANSFEREES OF THESE SHARES. (b) Each Investor agrees, to ensure compliance with the restrictions referred to herein, that the Company may issue appropriate "stop transfer" certificates or instructions and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its records. 3.4 TRANSFERS. No securities shall be transferred unless (i) such transfer is made in compliance with applicable federal and state securities laws and (ii) prior to such transfer, the transferees sign a counterpart to this Agreement pursuant to which it or they agree to be bound by the terms of this Agreement. The Company shall not be required (a) to transfer on its books any shares that shall have been sold or transferred in violation of any of the provisions of this Agreement or (b) to treat as the owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares shall have been so transferred. 3.5 TERMINATION OF RIGHT OF FIRST REFUSAL. The Company's right of first refusal pursuant to Section 3.2 hereof shall terminate immediately prior to the closing of: (i) a Qualified IPO or (ii) the sale, conveyance, disposal, or encumbrance of all or substantially all of the Company's property or business or the Company's merger into or consolidation with any 23 other corporation (other than a wholly-owned subsidiary corporation) or any other transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, provided that this Section 3.5 shall not apply to a merger effected exclusively for the purpose of changing the domicile of the Company. 4. COVENANTS OF AMAZON.COM. Amazon.com hereby covenants and agrees as follows: 4.1 LIMITATION ON OWNERSHIP. Except with the prior written consent of a majority of the Company's Board of Directors (excluding the vote of any director designated by Amazon.com), Amazon.com shall not, directly or indirectly, acquire beneficial ownership of any capital stock of the Company, any securities convertible into or exchangeable for capital stock of the Company, or any other right to acquire capital stock of the Company (except, in any case, by way of stock dividends or other distributions or offerings made available to holders of any capital stock generally) if the effect of such acquisition would be to increase the capital stock owned by Amazon.com to more than the Threshold Percentage; provided, however, that Amazon.com may acquire additional shares of capital stock of the Company without regard to the foregoing limitation upon the earliest to occur of the following (the "Standstill Termination Date"): (a) the second anniversary of the closing date of a Qualified IPO; (b) immediately following the effective date on which the Company shall sell, convey, or otherwise dispose of or encumber all or substantially all of its property or business or merge or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any other transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, except in each case a merger effected exclusively for the purpose of changing the domicile of the Company; or (c) April 22, 2003. Notwithstanding the foregoing, if the Company repurchases or recapitalizes any of its shares and such repurchases or recapitalization result in Amazon.com owning more than the Threshold Percentage at the effective time of such repurchases or recapitalization, Amazon.com shall not be obligated to divest itself of shares of capital stock of the Company to meet the foregoing the Threshold Percentage, but shall not acquire any additional shares of capital stock of the Company unless such acquisition would otherwise be permitted under this Section 4.1. 4.2 NOTICE OF CAPITAL STOCK PURCHASES. Amazon.com shall notify the Company as to any future acquisition of beneficial ownership of capital stock, or rights thereto, within ten (10) business days after such action in order for the Company to monitor compliance with the terms of this Agreement. All purchases of capital stock of the Company by Amazon.com shall be made in compliance with applicable laws and regulations. 4.3 ACQUISITION BY POOLING. In the event the Company enters into any agreement providing for the acquisition of the Company by merger, sale of assets or otherwise in a negotiated transaction approved by the Board of Directors of the Company, then if such 24 agreement provides, as a condition to closing, that the transaction shall be treated as a pooling of interests under generally accepted accounting principles, Amazon.com shall (i) refrain from exercising any right of appraisal; and (ii) not sell or otherwise reduce its risk relative to any securities received in such combination until such time as financial results covering at least 30 days of post-transaction combined operations have been published. 4.4 PERMITTED TRANSACTION. Notwithstanding the provisions of this Section 4, on and after the eleventh business day after the commencement of a proxy contest, tender offer or exchange offer which could result in a "Change of Control Transaction" (as defined below) for the outstanding shares of capital stock of the Company or on or after the public announcement that the Company has entered into an agreement with a third party not affiliated with the Company that would result in a Change of Control Transaction, Amazon.com shall be permitted to make a proposal to the Company's Board of Directors or shareholders or to tender or exchange shares of capital stock beneficially owned by it pursuant to such transaction. As used herein, "Change of Control Transaction" shall mean (a) any tender or exchange offer, merger, consolidation, recapitalization or other business combination or transaction pursuant to which either (1) the holders of the outstanding voting power immediately prior to the transaction would hold less than 50% of the outstanding voting power outstanding immediately after the transaction or (2) 50% of the assets of the Company would be transferred to or controlled by a third party not affiliated with the Company, excluding in each case a merger effected exclusively for the purpose of changing the domicile of the Company, or (b) any action by the shareholders of the Company that results in the directors, who as of the date of Closing constitute the Company's Board of Directors (the "Incumbent Board"), ceasing to constitute at least a majority of the Company's Board of Directors; provided, however that any individual becoming a director subsequent to the date of Closing whose nomination for election by the shareholders of the Company was approved by the vote of the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board. 5. MISCELLANEOUS. 5.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided in this Agreement, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective permitted successors and assigns of the parties (including transferees of any of the Series A Preferred Stock, Series B Preferred Stock or any Common Stock issued upon conversion thereof). Subject to the threshold provisions generally included above herein, the parties agree that the Investors may assign their rights and obligations under this Agreement to any of their current or former partners, members or affiliates, including to any corporation or limited liability company which is a parent or subsidiary of such Investor. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 5.2 AMENDMENTS AND WAIVERS. This Agreement (including the Exhibit hereto) constitutes the full and entire understanding and agreement among the parties with regard to the subjects hereof and supersedes and terminates in its entirety the Investors' Rights 25 Agreement dated as of April 22, 1999. Any term of this Agreement may be amended or waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the holders of at least seventy percent (70%) of the Registrable Securities then outstanding, not including the Founders' Stock; provided that if such amendment has the effect of affecting the Founders' Stock (i) in a manner different than securities issued to the Investors and (ii) in a manner adverse to the interests of the holders of the Founders' Stock, then such amendment shall also require the consent of the holder or holders of a majority of the Founders' Stock. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any Registrable Securities then outstanding, each future holder of all such Registrable Securities, and the Company. Notwithstanding the foregoing, this Agreement (including Exhibit A hereto) may be amended with only the written consent of the Company to include additional purchasers of Series B and/or Series B-1 Preferred Stock as "Investors" or "Holders." 5.3 NOTICES. Unless otherwise provided, any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon delivery, when delivered personally or by overnight courier or sent by fax (with confirmation of successful electronic transmission), or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party (with a copy to such party's counsel at such counsel's address or fax number as set forth in the Purchase Agreement or the Prior Purchase Agreement, whichever applicable) to be notified at such party's address or fax number as set forth on the signature page or on Exhibit A hereto or as subsequently modified by written notice. 5.4 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms. 5.5 GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of laws. 5.6 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 5.7 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. 5.8 AGGREGATION OF STOCK. All shares of the Preferred Stock held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 26 5.9 EXPENSES. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 5.10 WAIVER OF RIGHT OF FIRST OFFER IN PRIOR RIGHTS AGREEMENT. By executing this Agreement, the undersigned agrees that it hereby waives on behalf of itself and all other Investors (as defined in the Prior Rights Agreement) the right of first offer contained in Section 2.3 of the Prior Rights Agreement to purchase additional Shares of the Company to which such Investors would otherwise be entitled. 5.11 TERMINATION OF PRIOR RIGHTS AGREEMENT. Upon the execution of this Agreement by the Company, the Founders and the Investors, the Prior Rights Agreement shall be amended and restated in its entirety as set forth herein, and the terms of the Prior Rights Agreement shall be of no further force or effect. [Signature Page Follows] 27 The parties have executed this Amended and Restated Investors' Rights Agreement as of the date first above written. COMPANY: PETS.COM, INC. By: /s/ Julie Wainwright --------------------------------------- Name: Julie Wainwright ------------------------------------- (print) Title: CEO ------------------------------------- Address: 435 Brannan Street San Francisco, CA 94107 Tel: (415) 222-9999 Fax: (415) 222-9998 FOUNDER: /s/ Greg McLemore ------------------------------------------- Greg McLemore Address: 87 N. Raymond Avenue, Suite 850 Pasadena, CA 91103 Fax: 626-794-8500 SIGNATURE PAGE TO AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT 28 INVESTORS: SPINNAKER TECHNOLOGY FUND LP By: /s/ Thomas Pindelski --------------------------------------- Name: Thomas Pindelski ------------------------------------- (print) Title: Managing Director of Operations ------------------------------------ Address: 1875 South Grant Street Suite 600 San Mateo, CA 94402 Tel: (415) 222-9999 Fax: SPINNAKER TECHNOLOGY OFFSHORE FUND LTD. By: /s/ Thomas Pindelski --------------------------------------- Name: Thomas Pindelski ------------------------------------- (print) Title: Managing Director of Operations ------------------------------------ Address: 1875 South Grant Street Suite 600 San Mateo, CA 94402 SPINNAKER FOUNDERS FUND LP By: /s/ Thomas Pindelski --------------------------------------- Name: Thomas Pindelski ------------------------------------- (print) Title: Managing Director of Operations ------------------------------------- Address: 1875 South Grant Street Suite 600 San Mateo, CA 94402 -1- 29 SPINNAKER OFFSHORE FOUNDERS FUND LTD By: /s/ Thomas Pindelski --------------------------------------- Name: Thomas Pindelski -------------------------------------- (print) Title: Managing Director of Operations ------------------------------------- Address: 1875 South Grant Street Suite 600 San Mateo, CA 94402 AMAZON.COM, INC. By: /s/ Randy Tinsley --------------------------------------- Name: Randy Tinsley ------------------------------------- (print) Title: VP, Corp. Dev. ------------------------------------- Address: 1200 - 12th Ave. S., Suite 1200 Seattle, WA 98144 HUMMER WINBLAD VENTURE PARTNERS IV, L.P. By: /s/ Deborah Wright --------------------------------------- Name: Deborah Wright -------------------------------------- (print) Title: Member ------------------------------------- Address: 2 South Park San Francisco, CA 94115 -2- 30 THE PHOENIX PARTNERS IV LIMITED PARTNERSHIP By: The Phoenix Management IV, LLC --------------------------------------- its General Partner By: /s/ David B. Johnston --------------------------------------- Name: David B. Johnston ------------------------------------- (print) Title: Managing Member ------------------------------------- Address: 1000 Second Avenue Suite 3600 Seattle, WA 98104 THE AVRAM MILLER TRUST By: /s/ Avram Miller trust --------------------------------------- Name: Avram Miller ------------------------------------- (print) Title: Trustee ------------------------------------- Address: c/o The Avram Miller Company 505 Montgomery St., 20th Fl. San Francisco, CA 94111 (415) 835-7267 COMCAST INTERACTIVE CAPITAL, L.P. By: CIC Venture Management L.P. --------------------------------------- By: /s/ Abram E. Patlore --------------------------------------- Name: Abram E. Patlore ------------------------------------- (print) -3- 31 Title: Vice President ------------------------------------ Address: 1201 Market Street, Suite 2201 Wilmington, DE 19801 CYBER CONTROL DEVELOPMENT LIMITED By: /s/ Mico Chung --------------------------------------- Name: Mico Chung ------------------------------------- (print) Title: Director ------------------------------------ Address: 38th Floor, Citibank Tower, Citibank Plaza 3 Garden Road, Central Hong Kong ASIA PACIFIC TECHNOLOGY & FINANCE 1 N.V. By: /s/ Giorgo Ronchi --------------------------------------- Name: Pleadis Investment Management B.V. By Giorgo Ronchi, Managing Director (print) Title: ------------------------------------ Address: 62 de Ruyterkade, Curacao Netherlands Antilles With a copy: ETF Group, Via Cantonale, The Fantastic Building CH-6928 Manno, Switzerland Fax number: 41 91 610 71 66 Attention: Counsel and Secretary BAYSTAR INTERNATIONAL LTD, a British Virgin Islands Corporation -4- 32 By: BayStar International Management, LLC Its General Partner By: /s/ Steven M. Lamar ------------------------------- Name: Steven M. Lamar Title: Vice President 1500 West Market Street, Suite 200 Mequon, WI 53092 Fax: 415-835-3777 WORLD ONLINE INTERNATIONAL B.V. By: [SIGNATURES ILLEGIBLE] --------------------------------------- Name: [SIGNATURES ILLEGIBLE] ------------------------------------- Title: Director/COO/CFO ------------------------------------- Address: Parklaan 28 P O Box ____ 3000 AA Rottendam, Netherlands THE BALOUSEK FAMILY LIMITED PARTNERSHIP DTD 1/7/99 /s/ Kathleen Balousek /s/ John B. Balousek ------------------------------------ Name: Kathleen Balousek John B. Balousek ------------------------------------ Title: General Partners ------------------------------------ Address: 11 Magee Ct. Moraga, CA 94556 -5- 33 FRANK M. (PETE) HIGGINS By: /s/ Frank M. Higgins --------------------------------------- Name: Frank M. Higgins ------------------------------------- Address: 7650 SE 22nd St. Mercer Island, WA 98040 MICHAEL B. SLADE By: /s/ Michael B. Slade --------------------------------------- Address: 3732 E. High Ln. Seattle, WA 98112 KEITH GRINSTEIN By: /s/ Keith Grinstein --------------------------------------- Name: Keith Grinstein ------------------------------------- NICK HANAUER PARTNERSHIP By: /s/ Nick Hanauer --------------------------------------- Name: Nick Hanauer ------------------------------------- Address: The Highlands Seattle, WA 98177 -6- EX-10.25 31 LEASE AGREEMENT W/THE PAULSEN FAMILY PARTNERSHIP 1 EXHIBIT 10.25 LEASE OF COMMERCIAL SPACE This Lease of Commercial Space ("Lease") is entered into as of April 8, 1999, by and between The Paulsen Family Partnership (hereafter called "Landlord"), and Pets.com a California corporation (hereafter called "Tenant"). Now, therefore, it is agreed: 1. PREMISES: Effective as of the "Commencement Date" (hereafter defined), Tenant hereby leases from Landlord a portion of the ground floor containing approximately Fifteen Thousand (15,000) rentable square feet in the building located in the City and County of San Francisco, California, commonly known as 435 Brannan Street. The square footage indicated herein is approximate only, and the rent provided herein shall not be adjusted by reason of the fact the actual square footage leased is more or less than the indicated square footage. The leased space is hereafter called the "Premises." 2. TERM: Unless sooner terminated as provided herein, the term of this Lease shall be a period of three years from the Commencement Date. The "Commencement Date" shall be the date when the present tenant vacates and the Premises are delivered to Tenant, but not later than June 1, 1999. The Lease term may be terminated for any default as herein provided. 3. BASE RENT: Tenant agrees to pay as base rent for the entire three year term the sum of [*] as indicated in the following chart. Base rent shall be an annual per square foot rental of [*] with annual [*] increases. The first four month's rent (including abatement of 1st month's rent) of [*] is due upon execution of this Lease.
MONTHLY PERIOD RENT INSTALLMENTS ------ ---- ------------- Year 1: First month. $0. Rent is abated. 11 month Balance of Year 1: [*] per rsf per month, industrial [*] gross. Year 2: [*] per rsf per month, industrial gross [*] Year 3: [*] per rsf per month, industrial gross [*]
ADDITIONAL RENT: In addition to the base rent, Tenant shall pay as additional rent all other payments required under this Lease, including but not limited to, any payments for utilities, late charges and interest on delinquent sums due hereunder. 4. ASSIGNMENT & SUBLETTING: Except as expressly provided herein, Tenant shall not assign this Lease or sublet any portion of the Premises without the prior written consent of Landlord, which consent shall not be unreasonably withheld. Tenant agrees to provide Landlord with all information on the proposed subtenant or assignee requested by Landlord and the terms upon which the intended subtenancy or assignment is proposed. If Tenant wishes to sublet or assign the Lease and the remaining balance of the term is less than *CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. -1- 2 two years, then Landlord may terminate the Lease and recapture the space by giving written notice to Tenant within 30 days of Tenant's request to sublet or assign, except for assignments related to a merger or acquisition, or a sublease to a related entity. Any assignment or subletting without Landlord's written consent shall be void, and Landlord may, at its option, terminate this Lease on such account. If; with Landlord's consent, Tenant assigns any interest in this Lease or sublets all or any portion of the Premises, any excess of the amounts received by Tenant for such assigned or sublet space over the amounts payable by Tenant hereunder with respect to such space shall be shared equally by Tenant and Landlord. 5. LATE PAYMENTS: The above stated monthly installments of base rent for each calendar month of the term hereof shall be paid to Landlord monthly, in advance, on the first calendar day of each month of the term. If such base rent is not paid by the tenth calendar day of the month in question, it is agreed that Landlord will suffer damages the amount of which are difficult or impractical to fix. Therefore, Tenant will pay Landlord damages in the amount of $1,000 for each month that the base rent is not paid within such ten day period. Amounts due hereunder other than base rent shall be paid to Landlord within ten days after payment is demanded. All amounts which are not paid to Landlord when due, including base rent, shall bear interest at the rate of 10% per annum (or if a higher rate is permissible then at the maximum legal rate) from the date the same become delinquent (the eleventh of the month for base rent, the eleventh day after demand for all other amounts) until paid. Notwithstanding the foregoing, Tenant shall be entitled to one late payment exemption per Lease Year; as to the one annual late payment exemption, interest shall not commence to run until the first of the next month after the due date and shall run thereafter until paid. No interest shall accrue on the late payment charge. 6. USE: Tenant may use the Premises for general office purposes. Tenant shall not use the Premises for any purpose which is unlawful, or contrary to applicable laws, regulations, or ordinances, or which tends to increase the existing rate of insurance on the building in which the Premises are located. 7. ORDINANCES & STATUTES: Tenant shall comply with all statutes, ordinances and requirements of all municipal, state and federal authorities now in force, or which may hereafter be in force, applicable to Tenant's particular use or occupancy of the Premises. 8. MAINTENANCE & REPAIRS: Tenant shall, at its expense, clean, repair, and maintain the Premises in good order and repair, including, without limitation, maintenance and repair of the Premises to conform with applicable statutory requirements which apply to Tenant's particular use, and shall surrender the same upon termination of this Lease in as good a condition as received, normal wear and tear and acts of God and other casualties excepted. Without limiting the generality of the foregoing, Tenant, at Tenant's sole cost and expense shall comply with all requirements imposed by fire, health and safety codes and handicap access laws (including the American With Disabilities Act of 1992 ("ADA"), as such may be amended from time to time) when such compliance is required solely within the Premises by reason of with -2- 3 Tenant's specific use of the Premises or because Tenant's application for a building permit triggers modifications to the Premises. If modifications to the Premises are required to make the same ADA compliant, but this requirement is imposed by a governmental entity having jurisdiction and is not triggered by any action of Tenant, Landlord and Tenant shall share equally the cost of compliance. If modifications to the building without the Premises are required to make the building ADA compliant, and this requirement of compliance is not triggered by any action of Tenant, Landlord shall be solely responsible for the cost of said modifications. Except as provided in the preceding two sentences, Landlord shall be responsible only for maintenance and repair of the roof, exterior walls, structural foundations, heating system, and common areas of the building. Landlord shall not be responsible for the repair of any damage caused by Tenant. Tenant waives the provisions of Sections 1941, 1941.1, 1941.2, 1941.4, and 1942 of the California Civil Code. 9. IMPROVEMENTS: Except as provided in Section 34 below, Tenant shall make no alteration or improvement of the Premises without the prior written consent of Landlord, which consent shall not be unreasonably withheld beyond five (5) business days following Tenant's request. Prior to the commencement of any improvement or alteration, Tenant shall give Landlord copies of all proposed work to be performed and a schedule of the time for completion of such work. At least ten days before the commencement of any such work, Tenant shall give advance notice in writing to Landlord such that Landlord may post appropriate notices to avoid liability for liens. If any contractor, subcontractor, laborer or supplier of Tenant shall impose or seek to impose any lien upon the property in which the Premises are located, upon demand, Tenant shall promptly discharge and release or bond over any and all such liens. The failure to discharge or bond over any lien within fifteen (15) days following request shall be a default hereunder. 10. WASTE: Tenant shall not commit any waste upon the Premises or permit or maintain any nuisance or act which may disturb the quiet enjoyment of any tenant in the building or the Landlord's management of the building. 11. ENTRY & INSPECTION: Tenant shall permit Landlord or its agents to enter upon the Premises, at reasonable times and upon reasonable notice, for the purpose of inspecting the same, and will permit Landlord, at any time within one hundred eighty days prior to the expiration of this lease, to place upon the Premises any usual "For Lease" signs, and will permit persons proposing to lease the same to inspect the Premises. No notice shall be necessary prior to Landlord's entry of the Premises in response to an emergency. 12. LIABILITY & INDEMNIFICATION: Landlord shall not be liable for any damage or injury to person or property of Tenant, its employees or agents, excepting only such damage or injury as may be caused solely by Landlord's negligent or willful acts. Tenant shall indemnify, defend, save and hold Landlord harmless from any and all liability, costs and expenses (including attorneys' fees) arising from injury to any person and/or damage to any property occurring in, on or about the Premises excepting only such damage or injury as may be caused solely by Landlord's negligent or willful acts. Tenant also shall indemnify, defend, save -3- 4 and hold harmless Landlord from any and all liability, costs and expenses (including attorneys' fees) arising from damage to the property of or injury to the person of any employee, customer or business invitee of Tenant wherever the same may occur excepting only such damage or injury as may be caused solely by Landlord's negligent or willful acts. The obligation of Tenant to indemnify hereunder shall survive the termination of this Lease. 13. INSURANCE: Tenant will, at its expense, maintain commercial general liability insurance covering personal injuries and property damage with coverage not less than $1,000,000 single limit. Landlord shall be named as an additional insured on such policy or policies, and Landlord shall be provided a certificate of insurance for each. All such policies shall require thirty (30) days advance written notice to Landlord prior to cancellation or material change of coverage caused by Tennant. Tenant also, at its expense, shall insure all personal property, trade fixtures and improvements on the Premises against damage, excepting only such damage caused solely by Landlord's negligence or willful acts. All insurance policies required to be provided by Tenant shall be primary and shall contain a waiver of subrogation against Landlord. In the event that Tenant fails to provide Landlord with a certificate of insurance within 30 days of renewal, then upon written notice to Tenant, Landlord may, but shall have no obligation to, obtain insurance on Tenant's behalf and the cost of such insurance shall be paid by Tenant upon demand of Landlord. Landlord will obtain a waiver of subrogation against Tenant in the insurance policies Landlord maintains with respect to the Premises. 14. UTILITIES: Tenant shall pay for all the utilities, including electricity, heat and other services, provided to the Premises excepting water, gas, taxes, refuse removal and sewer Tenant shall pay 44.8% of Landlord's bill for water, gas, refuse removal and sewer service to the 435 Brannan Street Building during the lease term. Tenant shall provide and pay for its own janitorial services and trash removal from the Premises. 15. SIGNS: Landlord reserves the exclusive right to use and control the roof, side, front and rear walls of the building in which the Premises are located. Tenant shall not install any sign or awning without the prior written consent of Landlord. All signs and awnings installed by Tenant shall comply with all applicable laws and regulations. 16. ABANDONMENT: Tenant shall not vacate or abandon the Premises at any time during the term hereof. If Tenant shall abandon or vacate the Premises, or be dispossessed by process of law or otherwise, any personal property belonging to Tenant left upon the Premises shall be deemed to be abandoned, at the option of Landlord. Tenant shall be deemed to have abandoned the Premises if Tenant vacates the Premises for more than 15 consecutive days. 17. TRADE FIXTURES: Any and all improvements made to the Premises during the term hereof shall belong to Landlord except Tenant's trade fixtures. Tenant may, upon termination hereof, remove all its trade fixtures, but shall repair or pay for all repairs necessary for damages to the Premises occasioned by such removal. Tenant shall pay all property taxes levied with respect to Tenant's trade fixtures, equipment and personal property. -4- 5 18. CONDEMNATION: If any part of the Premises shall be taken or condemned for public use or transferred under threat of such condemnation, and a part thereof remains which is susceptible of occupation hereunder, this Lease shall, as to the part taken, terminate as of the date the condemnor acquires possession. Thereafter, Tenant shall pay such proportion of the base rent for the remaining term as the value of the Premises remaining bears to the total value of the Premises at the date of condemnation; provided however, that Landlord or Tenant may, at its option, terminate this Lease as of the date the condemnor acquires possession. In the event that, the Premises are condemned in whole, or that such portion is condemned or transferred under threat of condemnation so that the remainder is not susceptible for use hereunder, this Lease shall terminated upon the date upon which the condemnor acquires possession. All amounts which may be payable on account of any condemnation or transfer under threat of condemnation shall belong to Landlord, and Tenant shall not be entitled to any part thereof Notwithstanding the foregoing, Tenant may separately apply to the condemnor for compensation payable, if any, for Tenant's trade fixtures and moving expenses provided that such application will not unreasonably delay or diminish Landlord's award. The parties waive the provisions of Section 1265.130 of the California Code of Civil Procedure. 19. DESTRUCTION OF PREMISES: In the event of a partial destruction of the Premises during the term hereof from any cause covered by insurance, Landlord will forthwith repair the same provided that in Landlord's judgment such repairs can reasonably be made within ninety (90) days following the date of such destruction under existing governmental laws and regulations, taking into consideration the availability of labor and materials and based on regular working hours without overtime. Such partial destruction shall not terminate this Lease, except that Tenant shall be entitled to a proportionate reduction of base rent while such repairs are being made, based upon the extent to which the making of such repairs interferes with the business of Tenant on the Premises. In the event Landlord elects not to make repairs which are uninsured or cannot reasonably be made within the ninety (90) day period, this Lease may be terminated at the option of either party. In the event the building in which the Premises are situated is destroyed to an extent of not less than one-third of the replacement cost thereof, Landlord may elect to terminate this Lease whether the Premises are injured or not. A total destruction of the building in which the Premises are located shall terminate this Lease. Tenant waives the provisions of Section 1932 and 1933(4) of the California Civil Code. 20. HAZARDOUS MATERIALS: Tenant shall not use, store, or dispose of any hazardous substances upon or about the Premises or the building. The term "hazardous substances" means any hazardous waste, substance or toxic materials regulated under any federal, state or local environmental laws or regulations. Tenant will indemnify, hold harmless and defend Landlord against any loss, clean-up cost, governmental fines, and any other kind of liability which Landlord may incur or suffer as a result of Tenant's breach of this provision, whether such liability is incurred before, during or after the term of this Lease. This obligations of Tenant hereunder shall survive the termination of the Lease. 21. INSOLVENCY: In the event a receiver is appointed to take over the business of Tenant, or Tenant makes a general assignment for the benefit of creditors, or Tenant takes or -5- 6 suffers any action under any insolvency or bankruptcy act, the same shall constitute a breach of this Lease by Tenant. 22. REMEDIES OF LANDLORD ON DEFAULT: In the event of any breach of this Lease by Tenant, Landlord may, at its option, terminate the Lease and recover from Tenant: (a) the worth at the time of award of the unpaid rent which had been earned at the time of termination; (b) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (c) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; and (d) any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom. Landlord may, in the alternative, continue this Lease in effect, as long as Landlord does not terminate Tenant's right to possession, and Landlord may enforce all its rights and remedies under the Lease, including the right to recover the rent as it becomes due. If said breach of Lease continues, Landlord may, at any time thereafter, elect to terminate this Lease. In addition to any and all other remedies, Landlord has the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee's breach and abandonment and recover rent as it becomes due, if lessee has right to sublet or assign, subject only to reasonable limitations). Nothing herein shall be deemed to limit any other rights or remedies which Landlord may have in law, equity or by contract. 23. SECURITY DEPOSIT: Upon execution of this Lease, Tenant shall pay Landlord the cash sum of [*] as a security deposit. The security deposit shall be held by Landlord to secure the performance of Tenant's obligations hereunder. Landlord may, but is not obligated, to apply all or portions of said deposit on account of Tenant's obligations hereunder. To the extent the deposit is so applied by Landlord, Tenant shall, upon demand by Landlord, replenish such deposit to [*]. Tenant does not have the right to apply the security deposit in payment of the last month's rent. Any unapplied balance of the security deposit remaining upon termination of the Lease shall be returned to Tenant within two weeks following delivery of possession of the Premises to Landlord, and Landlord shall upon such return advise Tenant in writing of all charges made against the security deposit. Landlord may commingle the funds of the security deposit with other funds of Landlord. No interest shall be payable by Landlord on the security deposit. 24. ATTORNEY'S FEES & COSTS: In any arbitration, legal action or other proceeding involving a dispute between Landlord and Tenant arising out of the execution of this Lease, or to enforce the terms and conditions of this Lease, or to recover possession of the Premises from Tenant, or to monitor any bankruptcy or insolvency proceeding in which Tenant is the bankrupt or insolvent party, the prevailing party shall be entitled to receive from the other party reasonable attorneys' fees, expert witness fees, appraisal fees and all other costs incurred in *CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. -6- 7 connection with such arbitration, legal action or proceeding, (including the cost of enforcing any judgment or order) to be determined by any court or arbitration panel. 25. ARBITRATION: Any dispute with respect to determinations under paragraphs 5, 6, 18, and 19 hereof shall be resolved by arbitration before one arbitrator selected by agreement of both parties, or if no agreement is reached within ten days then as selected by the Presiding Judge of the Superior Court sitting in San Francisco. The arbitration shall be conducted in accordance with the Rules of Commercial Arbitration of the American Arbitration Association. 26. WAIVER: No failure of Landlord to enforce any term here of shall be deemed to be a waiver of that or of any other term or condition, and Landlord's acceptance of rent shall not be construed as a waiver of any breach of this Lease occurring prior to such rent payment. 27. NOTICES: Any notice which any party may or is required to give may be given by personal delivery or by mailing the same, with first class postage prepaid, addressed to Landlord at 435 Brannan Street, San Francisco, CA 94107, to Tenant at 435 Brannan Street, San Francisco, CA 94107, or to such other address as either party may designate in writing from time to time. 28. HOLDING OVER: Any holding over after the expiration of this Lease, with the Landlord, shall be construed as a month-to-month tenancy at a monthly base rental 150% of the base rental for the month immediately preceding the expiration of the Lease and otherwise in accordance with the terms hereof as applicable. Any holding over without the consent of Landlord shall be a breach of this Lease and in addition to any amounts due hereunder, Landlord shall also recover from Tenant all consequential damages arising from such holding over. 29. TIME: Time is of the essence of this Lease. 30. SUCCESSOR LANDLORD: In the event of transfer of Landlord's interest in the building in which the Premises are located, the Landlord named herein (or the grantor in case of any subsequent transfers) shall be relieved of all liability related to Landlord's obligations to be performed after such transfer. Provided, however, that any security deposit or other funds in the hands of Landlord (or grantor) at the time of such transfer shall be delivered to the transferee. Landlord's obligations hereunder shall be binding upon Landlord's successors and assigns only during their respective periods of ownership of the building in which the leased Premises are located. Except as heretofore provided, this Lease is binding upon and inures to the benefit of the heirs, assigns and successors in interest of the parties. 31. ESTOPPEL CERTIFICATE: (a) Tenant shall at any time upon not less than ten (10) days prior written notice from Landlord execute, acknowledge and deliver to Landlord a statement in writing (1) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect), the amount of any security deposit, and the date to which the rent and other charges are paid in advance, if any, and (2) acknowledging that there are not, to Tenant's -7- 8 knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective buyer or encumbrance of the building in which the Premises are located. (b) At Landlord's option, Tenant's failure to deliver such statement within such time shall be a material breach of this Lease or shall be conclusive upon Tenant (1) that this Lease is in full force and effect, without modification except as may be represented by Landlord, (2) that there are no uncured defaults in Landlord's performance, and (3) that not more that one month's rent has been paid in advance, except pursuant to the Lease terms.. (c) If Landlord desires to finance, refinance, or sell the building in which the Premises are located, or any part thereof, Tenant agrees to deliver to any prospective lender or buyer designated by Landlord such financial statements of Tenant as may be reasonably required by such lender or buyer. All such financial statements shall be received by Landlord and such lender or buyer in confidence and shall be used only for the purposes herein set forth. 32. INTERPRETATION: All provisions hereof, whether covenants or conditions, on the part of Tenant shall be deemed to be both covenants and conditions. The unenforceability, invalidity, or illegality of any provision hereof shall not render the other provisions unenforceable, invalid or illegal. The paragraph captions of this Lease are for ease of reference only and shall have no effect on its interpretation. Where required by the context hereof, the singular shall include the plural and the neuter shall include the masculine and feminine. 33. CONDITION OF PREMISES: Landlord will deliver the Premises to Tenant in a broom clean condition. Tenant understands and agrees that it is leasing the Premises in an "As Is, Where Is" condition and that Landlord has not agreed to make any leasehold improvements to the Premises. Landlord has made no structural report with respect to the condition of the Premises nor has Landlord made any investigation with respect to the presence of asbestos or other toxic substances on the Premises, and Landlord makes no representation with respect thereto. Tenant acknowledges that to the extent Tenant wishes any such investigation or report to be made, Tenant will undertake the same at Tenant's expense. 34. TENANT'S EXPANSION REQUIREMENTS: Landlord will endeavor to work with tenants to accommodate Tenant's expansion requirements. 35. POSSESSION: It is Landlord's intention to deliver possession of the Premises to Tenant upon vacation of the same by the present tenant, with the Commencement Date (for purposes of beginning the rent abatement period, and thereafter for the payment of rent) being no later than June 1, 1999. Should Landlord be unable to deliver possession of the Premises at the Commencement Date provided herein, Landlord will not be liable for any damage caused by the delay nor will this Lease be void or voidable, but Tenant will not be liable for any rent until possession is delivered. Tenant may terminate this Lease if possession is not delivered by July 1, 1999. -8- 9 36. TAX INCREASES: In the event there is any increase during any year of the term of this Lease in real property taxes on the land and building in which the Premises are situated over and above the amount of such taxes assessed for the tax year during which the term of the Lease commences, Tenant will pay to Landlord an amount equal to 44.8% of the increase in such taxes. In the event such taxes are assessed for a tax year extending beyond the Lease term, the obligation of Tenant will be prorated. 37. RENT TAXES: Tenant shall reimburse Landlord for all occupation taxes, gross receipts taxes or similar taxes (other than taxes on net income) assessed on or measured by the rentals paid to Landlord hereunder. 38. ENTIRE AGREEMENT: This Lease constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous oral or written agreements, understandings, representations and negotiations with respect thereto. This Lease may be modified only by an agreement in writing executed by all parties. IN WITNESS WHEREOF these presents are executed as of the date first above written. "Tenant" "Landlord" Pets.com The Paulsen Family Partnership /s/ Julie Wainwright /s/ Alice H. Paulsen - ------------------------------ ------------------------------- CEO Alice H. Paulsen - ------------------------------ ------------------------------- -9- 10 AMENDMENT TO COMMERCIAL LEASE This Amendment to Commercial Lease ("Amendment") is entered into as of June 1, 1999 (the "Effective Date"), by and between The Paulsen Family Partnership (hereinafter called "Landlord") and Pets.com, a California corporation (hereinafter called "Tenant). Now, therefore, it is agreed: Recitals A. Landlord and Tenant are parties to that certain Lease of Commercial Space ("Lease") covering a portion of the ground floor containing approximately fifteen thousand (15,000) rentable square feet in the building located in the City and County of San Francisco commonly known as 435 Brannan Street. Said Lease commenced on June 1 ,1999. B. Landlord has available for lease, and Tenant desires to lease, suite 200 in said 435 Brannan Street building, consisting of approximately two thousand (2,000) rentable square feet located on the second floor as set forth in Exhibit A ("Amendment Space"). The square footage indicated herein is approximate only, and the rent provided in this Amendment shall not be adjusted by reason of the fact the actual square footage leased pursuant to this Amendment is more or less than the indicated square footage. C. The Amendment Space, and the rent payable pursuant to this Amendment shall be a part of, and shall be governed by the terms and conditions of the Lease, except as otherwise set forth in this Amendment. The rent adjustment dates provided for in paragraph 1 below shall be the same dates as the rent adjustment dates for the Base Rent under the Lease. This lease for the Amendment Space shall be co-terminus with the termination date of the Lease. Except for the first period of the Amendment Space lease term and the rent payable for the Amendment Space, all of the terms and conditions of the Lease shall be fully applicable to the Amendment Space. Agreement NOW THEREFORE it is agreed as follows: 1. All of the above recitals are incorporated into this Amendment. 2. On or before the Effective Date, Landlord shall deliver possession of the Amendment Space to Tenant. 11 3. Commencing on the Effective Date, and subject to the terms of the Lease, Tenant agrees to pay as base rent for the Amendment Space the rent indicated in the following chart. Base rent shall be an annual per square foot rental of [*] with annual [*] increases. The first month's rent of [*] is due upon execution of the Amendment.
PERIOD RENT MONTHLY INSTALLMENTS ------ ---- -------------------- Balance of first year under ground floor Lease [*] per rsf per month [*] Year 2 [*] per rsf per month [*] Year 3 [*] per rsf per month [*]
4. Except as otherwise set forth in this Amendment, all of the terms and conditions of the Lease, including, but not limited to the Lease termination date, apply to this Amendment as if the same were fully set forth herein. IN WITNESS WHEREOF, the parties have executed this Amendment to Lease as of the day and year first above written. "Tenant" "Landlord" Pets.com Paulsen Family Partnership By /s/ Julie Wainwright By /s/ Alice H. Paulsen ---------------------------- -------------------------------- By By ---------------------------- -------------------------------- *CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. -2- 12 SECOND AMENDMENT TO COMMERCIAL LEASE This Second Amendment to Commercial Lease ("Second Amendment") is entered into as of October 1, 1999 (the "Effective Date"), by and between The Paulsen Family Partnership (hereinafter called "Landlord") and Pets.com, a California corporation (hereinafter called "Tenant). Now, therefore, it is agreed: Recitals A. Landlord and Tenant are parties to that certain Lease of Commercial Space ("Lease") covering a portion of the ground floor containing approximately fifteen thousand (15,000) rentable square feet in the building located in the City and County of San Francisco commonly known as 435 Brannan Street ("the Property"). Said Lease commenced on June 1, 1999. B. Landlord and Tenant are parties to that certain Amendment to Commercial Lease ("Amendment") through which the parties added Suite 200 in said 435 Brannan Street building, consisting of approximately two thousand (2,000) rentable square feet located on the second floor of the Property. The effective date of the Amendment is June 1, 1999. The space covered by the Lease and the Amendment is referred to herein as the Premises. C. In connection with certain leasehold improvements which Tenant is making to the Premises, the applicable governmental authority is requiring certain changes to the building common area in order to comply with applicable codes, statutes and regulations, including, but not limited to, the requirements of the Americans with Disabilities Act. Tenant is willing to make said changes at Tenant's sole cost and expense, but only if Landlord will grant Tenant an option to extend the term of Tenant's Lease of the Premises for an additional two (2) years and if Landlord will make certain other adjustments to the terms of the Lease. D. Tenant desires to add suite 207 on the second floor of the building in which the Premises are located and Landlord is willing to lease said suite to Tenant at a rental rate of [*] per month. The total rent payable under the Lease will be increased by this monthly amount. Tenant shall have the right to surrender suite 207 upon sixty (60) day's written notice to Landlord. Upon surrender of suite 207 the total rent due under the Lease will be reduced by the then applicable rent for said space. The rent for suite 207 will increase by three percent [*] per year adjusted on the first anniversary of the original Lease and on each anniversary thereafter. Agreement NOW THEREFORE it is agreed as follows: 1. All of the above recitals are incorporated into this Second Amendment. 2. On condition that Tenant is not in default in the performance of any of the terms and conditions of the Lease, either at the time of exercise or at the time of the commencement of the option term, Landlord grants to Tenant the option ("Option") to extend the term of Tenants Lease of the Premises for a period of two (2) years, on the following terms and conditions. a. Tenant shall give Landlord written notice of its election to exercise this Option not less then nine (9) months prior to the commencement of the Option term. *CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 13 b. The rent for the period of the first year of the option term shall be a three percent [*] per annum increase over the rent paid by Tenant during the last year of the original Lease term. The rent for the period of the second year of the Option term shall be a three percent [*] per annum increase over the rent paid by Tenant during the first year of the Option term, as reflected in the following table:
Period Rent Monthly Installments ------ ---- -------------------- Year 1 of Option term [*] per rsf per month [*] ground floor, [*] per rsf per month for suite 200 on the second floor and [*] per month for suite 207 on the second floor, Industrial gross Year 2 of Option term [*] per rsf per month [*] ground floor, [*] per rsf per month for suite 200 on the second floor and [*] per month for suite 207 on the second floor, Industrial gross
3. The third sentence of Paragraph 4 of the Lease, which presently reads as follows: "If Tenant wishes to sublet or assign the Lease and the remaining balance of the term is less than two years, then Landlord may terminate the Lease and recapture the space by giving written notice to Tenant with in 30 days of Tenant's request to sublet or assign, except for assignments related to a merger or acquisition, or a sublease to a related entity." hereby is deleted in its entirety. The last paragraph of Paragraph 4 of the Lease is amended to read, in its entirety, as follows: "If, with Landlord's consent, Tenant assigns any interest in this Lease or sublets all or any portion of the Premises, any excess of the amounts received by Tenant for such assigned or sublet space over the amounts paid by Tenant with respect to such space as detailed on Exhibit A hereto and any leasing commissions and attorney's fees for new subtenant or assignee paid by Tenant, shall be shared equally by Tenant and Landlord." A new paragraph is added at the end of Paragraph 4 of the Lease, which new paragraph reads as follows: "Notwithstanding anything to the contrary in this Lease, Tenant may, without Landlord's prior written consent and without any participation by Landlord in assignment or subletting proceeds, sublet the Premises or assign the Lease to (a) a subsidiary, affiliate, division or corporation *CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. -2- 14 controlling, controlled by or under common control with Tenant; (b) a successor corporation related to Tenant by merger, consolidation, nonbankruptcy reorganization, or government action; of (c) a purchaser of substantially all of Tenant's assets located in the Premises. The above is referenced hereafter as "Permitted Transfer". For purposes of this Lease, sale of Tenant's capital stock through any public exchange or issuance for purposes of raising capital shall not be deemed an assignment, subletting or any other transfer of the Lease of the Premises." 4. Except as otherwise set forth in this Second Amendment, during the Option term all of the terms and conditions of the Lease, including, but not limited to, the provisions relating to Additional Rent, Late Payments, Insurance, Utilities, Security Deposit, Holding Over, Tax Increases and Rent Taxes, shall apply to this Second Amendment as if the same were fully set forth herein. Where applicable, the base year from which any payment increases are to be measured shall continue to be 1999. -3- 15 IN WITNESS WHEREOF, the parties have executed this Second Amendment to Lease as of the day and year first above written. "Tenant" "Landlord" Pets.com, Inc. Paulsen Family Partnership By /s/Julie Wainwright CEO By /s/ A. R.Paulsen ----------------------------- ------------------------------- By By Alice H. Paulsen ----------------------------- ------------------------------- -4- 16 ROOFTOP SATELLITE DISH LICENSE AGREEMENT This Rooftop Satellite Dish License Agreement ("Agreement') is made as of the 28th day of May, 1999 by and between The Paulsen Family Partnership ("Landlord") and pets.com ("Tenant") with reference to the following: Recitals A. Landlord and Tenant have entered into that certain Lease of Commercial Space dated April 8, 1999, relating to a portion of the building commonly known as 435 Brannan Street, San Francisco, California (the "Lease"). B. Notwithstanding the provisions of Section 15 of the Lease (reserving to Landlord exclusive right to use and control the roof, side front and rear walls of the building in which the Premises are located), Landlord is willing to grant to Tenant the right to install, operate and maintain a rooftop satellite dish ("Satellite Dish") on the 435 Brannan Street building, subject, however, to the terms and conditions of this Agreement. C. Tenant understands that the installation, operation and maintenance of the Satellite Dish may expose the Landlord to liability by reason of, but not limited to, the following: (i) injury to persons or property if the Satellite Dish or any of the installation brackets, bolts, wires or other fixtures or fastenings used to secure the same should become dislodged during installation, maintenance, removal, or by reason of weather conditions or otherwise; (ii) injury to workers and their property, vehicles or equipment, during the installation, maintenance or removal of the Satellite Dish, if said workers should fall, drop tools or materials, or otherwise; (iii) damage to the building by reason of (aa) the temporary or permanent installation of ladders, hoists, scaffolding, or other means of access to the roof, (bb) damage to the roof by reason of roof, penetrations for the mounting, securing or other fastening of the Satellite Dish to the structure, (cc) damage to the building or its contents (whether belonging to the Landlord, the Tenant or other Tenants, customers, employees or invitees of Landlord or any building tenant) because of water, air, dust or other elements which flow, seep or pass through roof penetrations made to secure the Satellite Dish to the building. NOW THEREFORE, IT IS AGREED: 1. During the term of Tenant's Lease, Landlord hereby grants to Tenant permission to install, operate and maintain one (1) rooftop Satellite Dish on the building at 435 Brannan Street, San Francisco, California, all as more particularly described on Exhibit A attached hereto and made a part hereof. 2. Tenant shall not be required to pay additional rent or a license fee in conjunction with the license granted herein. -1- 17 3. Tenant, for itself, its owners, officers, directors, agents, successors and assigns hereby agrees to indemnify, hold harmless and defend Landlord and Landlord's current and former officers, shareholders, members, agents, employees, successors and assigns ("Indemnified Parties") from any and all claims, demands, liabilities, actions, causes of action or costs, including, but not limited to, attorneys' fees and expenses arising out of or in any way connected with the installation, operation, maintenance and/or removal of said Satellite Dish, together with attorneys' fees and costs incurred in the preparation of this Agreement in an amount not to exceed $250. 4. Upon expiration or earlier termination of Tenant's Lease, or upon Landlord's earlier written demand, Tenant shall cause the Satellite Dish to be removed from the building and all damage caused thereby to be repaired. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. "Landlord" "Tenant" The Paulsen Family Trust Pets.com. By /s/ A. R. Paulsen By /s/ Julie Wainwright ----------------------------- ------------------------------- -2- EX-10.26 32 SUBLEASE AGREEMENT W/NATIONAL DISTRIBUTION AGENCY 1 EXHIBIT 10.26 INDUSTRIAL REAL ESTATE SUBLEASE (MULTI-TENANT FACILITY) This Agreement constitutes a sublease of a portion of the premises at 33201 Dowe Avenue, Union City, California (the "Property"), between National Distribution Agency, Inc., a Delaware corporation ("Landlord or Sublessor"), and Pets.com, Inc., a California corporation ("Tenant" or "Sublessee"), for (the "Lease" or the "Sublease"). This Lease is subject to that certain lease between Landlord as Lessee and Chino Pacific Warehouse Corporation as Lessor, dated September 25, 1997, (the "Master Lease"). Landlord warrants and represents to Tenant that the Master Lease has not been amended or modified except as expressly set forth herein, that Landlord is not now, and as of the commencement of the Term hereof will not be, in default or breach of any of the provisions of the Master Lease, and the Landlord has no knowledge of any claim by the Master Lessor that Landlord is in default or breach of any of the provisions of the Master Lease. Tenant shall not commit or suffer any act or omission that will violate any of the provisions of the Master Lease. Landlord shall exercise due diligence in attempting to cause the Master Lessor to perform its obligations under the Master Lease for the benefit of Tenant. If the Master Lease terminates this Sublease shall terminate and the parties shall be relieved of any further liability or obligation under this Sublease provided however, that if the Master Lease terminates as a result of a default or breach by Landlord or Tenant under this Sublease and/or the Master Lease, then the defaulting party shall be liable to the non-defaulting party for the damage suffered as a result of such termination. Notwithstanding the foregoing, if the Master Lease gives Landlord any right to terminate the Master Lease in the event of the partial or total damage, destruction, or condemnation of the Master Premises or the building or project of which the Master Premises are a part, the exercise of such right by Landlord shall not constitute a default or breach hereunder, provided that Tenant receives a pro rata portion of any proceeds, or other remuneration, if any, which Landlord receives as a result of such termination. ARTICLE ONE: BASIC TERMS This Article One contains the Basic Terms of this Lease between the Landlord and Tenant named below. Other Articles, Sections and paragraphs of the Lease referred to in this Article One explain and define the Basic Terms and are to be read in conjunction with the Basic Terms. Section 1.01. DATE OF LEASE: July 1, 1999. Section 1.02. LANDLORD (INCLUDE LEGAL ENTITY): National Distribution Agency, Inc., a Delaware corporation, herein also known and sometimes described as Sublessor. Address of Landlord: c/o 528 Arizona Avenue, Suite 206, Santa Monica, CA 90401-1437. Section 1.03. TENANT (INCLUDE LEGAL ENTITY): Pets.com, a California corporation, herein also known and sometimes described as Sublessee herein. -1- 2 Address of Tenant: Section 1.04 PROPERTY: The Property leased hereunder is part of a multi-tenant real property leased to Landlord under the Master Lease, and described or depicted in Exhibit "A". The premises comprise the total property and includes the land, the buildings and all other improvements located on the land, and the common areas described in Paragraph 4.05(a), (the "Project"). The leased Property is located at 33201 Dowe Avenue, Union City, California, and includes 73,920 square feet of warehouse space, and 4,800 square feet of office space in the Southeastern portion of the Project, as more fully reflected in Exhibit "A", and outlined in red. Section 1.05. LEASE TERM: Five (5) years and one and one-half (1 1/2) months BEGINNING ON July 1, 1999, or such other date as specified in this Lease, and ENDING ON August 14, 2004. Tenant shall pay no Base Rent for the period July 1, 1999 to August 14, 1999. During this free rent period, Tenant shall be obligated to pay its pro rata share of taxes, insurance, maintenance and utilities. In addition, Tenant shall have one Option to Renew, as more fully provided in Rider No. 3, attached and incorporated herein by reference. Section 1.06. PERMITTED USES: (See Article Five) Warehousing and storage of Pets.com, or its affiliates, products, and for no other purpose, without the prior or concurrent written consent of Landlord. Section 1.07. TENANT'S GUARANTOR: Not applicable. Section 1.08. BROKERS: (See Article Fourteen) Landlord's Broker: Colliers International Tenant's Broker: GVA Beitler. Section 1.09. COMMISSION PAYABLE TO LANDLORD'S BROKER: (See Article Fourteen) Per separate agreement with Landlord. Section 1.10. INITIAL SECURITY DEPOSIT: (See Section 3.03) [*]. LETTER-OF-CREDIT: [*]. Provided the Sublessee is not in default of the Sublease, the Letter-of-Credit shall be reduced to [*], as of August 14, 2000. As of August 14, 2001, the Letter-of-Credit shall no longer be on deposit with the Landlord. Section 1.11. VEHICLE PARKING SPACES ALLOCATED TO TENANT: (See Section 4.05) Thirty (30) unassigned parking spaces. -2- * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 3 Section 1.12. RENT AND OTHER CHARGES PAYABLE BY TENANT: (a) BASE RENT:
RATE PER SQ. FT. AMOUNT MONTHS PER MO. PER MO. ------ ------- ------- July 1 - Aug. 14, 1999 Free rent Aug. 15, 1999 - April 14, 2001 [*] psf/mth/nnn April 15, 2001 - Dec. 14, 2002 Annual minimum CPI (All Consumers S.F. Bay Area) increase of [*]; annual maximum CPI (All Consumers S.F. Bay Area) of [*] over base rental rate in months 1 - 20. Dec. 15, 2002 - Aug. 14, 2004 Annual Minimum CPI (All Consumers S.F. Bay Area) increase of [*]; annual maximum CPI (All Consumers S.F. Bay Area) of [*] over base rental rate in months 21 - 40.
The rents payable hereunder are more fully set forth in Lease Rider No. 1 attached and incorporated herein by reference, and as referred to in Lease Rider No. 2, also attached and incorporated herein by reference. In the event that Landlord is in default under the Master Lease and either Landlord or Tenant receive notice of such default from the Master Lessor under the Master Lease, Tenant shall have the right (without any obligation to do so), to pay rent provided in this section, and all other sums due Landlord hereunder, which Landlord is obligated to pay directly to the Master Lessor. (a) OTHER PERIODIC PAYMENTS INCLUDED AS RENT : (i) Real Property Taxes (See Section 4.02); (ii) Utilities (See Section 4.03); (iii) Insurance Premiums (See Section 4.04); (iv) Tenant's Initial Pro Rata Share of Common Area Expenses (25.67%) (See Section 4.05); (v) Impounds for Insurance Premiums and Property Taxes (See Section 4.08); (vi) Maintenance, Repairs and Alterations (See Article Six). Section 1.13. LANDLORD'S SHARE OF PROFIT ON ASSIGNMENT OR SUBLEASE: (See Section 9.05) seventy percent (70%) of the Profit (the "Landlord's Share"). Section 1.14. RIDERS: The following Riders are attached to and made a part of this Lease: Rider No. 1 - Base Rent Schedule Rider No. 2 - Tenant Improvement Allowance Rider No. 3 - Options to Renew ARTICLE TWO: LEASE TERM Section 2.01. LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the Property to Tenant and Tenant leases the Property from Landlord for the Lease Term. The Lease Term is -3- * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 4 for the period stated in Section 1.05 above and shall begin and end on the dates specified in Section 1.05 above, unless the beginning or end of the Lease Term is changed under any provision of this Lease. The "Commencement Date" shall be the date specified in Section 1.05 above for the beginning of the Lease Term, unless advanced or delayed under any provision of this Lease. Section 2.02. DELAY IN COMMENCEMENT. Landlord shall not be liable to Tenant if Landlord does not deliver possession of the Property to Tenant on the Commencement Date. Landlord's non-deliver of the Property to Tenant on that date shall not affect this Lease or the obligations of Tenant under this Lease except that the Commencement Date shall be delayed until Landlord delivers possession of the Property to Tenant and the Lease Term shall be extended for a period equal to the delay in delivery of possession of the Property to Tenant, plus the number of days necessary to end the Lease Term on the last day of a month. If Landlord does not deliver possession of the Property to Tenant within sixty (60) days after the Commencement Date, Tenant may elect to cancel this Lease by giving written notice to Landlord within ten (10) days after the sixty (60) day period ends. If Tenant gives such notice, the Lease shall be cancelled and neither Landlord nor Tenant shall have any further obligations to the other. If Tenant does not give such notice, Tenant's right to cancel the Lease shall expire and the Lease Term shall commence upon the delivery of possession of the Property to Tenant. If delivery of possession of the Property to Tenant is delayed, Landlord and Tenant shall, upon such delivery, execute an amendment to this Lease setting forth the actual Commencement Date and expiration date of the Lease. Failure to execute such amendment shall not affect the actual Commencement Date and expiration date of the Lease. Section 2.03. EARLY OCCUPANCY. If Tenant occupies the Property prior to the Commencement Date, Tenant's occupancy of the Property shall be subject to all of the provisions of this Lease. Early occupancy of the Property shall not advance the expiration date of this Lease. Tenant shall pay Base Rent and all other charges specified in this Lease for the early occupancy period. Section 2.04. HOLDING OVER. Tenant shall vacate the Property upon the expiration or earlier termination of this Lease. Tenant shall reimburse Landlord for and indemnify Landlord against all damages which Landlord incurs from Tenant's delay in vacating the Property. If Tenant does not vacate the Property upon the expiration or earlier termination of the Lease and Landlord thereafter accepts rent from Tenant, Tenant's occupancy of the Property shall be a "month-to-month" tenancy, subject to all of the terms of this Lease applicable to a month-to-month tenancy, except that the Base Rent in effect shall be increased by twenty-five percent (25%). ARTICLE THREE: BASE RENT Section 3.01. TIME AND MANNER OF PAYMENT. Upon execution of this Lease, Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph 1.12(a) above for the first month of the Lease Term. On the first day of the second month of the Lease Term and each month thereafter, Tenant shall pay Landlord the Base Rent, in advance within five (5) business days after the commencement of each month, without offset, deduction or prior demand. The -4- 5 Base Rent shall be payable at Landlord's address or at such other place as Landlord may designate in writing. Section 3.02. COST OF LIVING INCREASE. The Base Rent shall be increased on each date (the "Rental Adjustment Date") subject to Paragraph 1.12(a) above in accordance with the increase in the United States Department of Labor, Bureau of Labor Statistics, Consumer Price Index for All Urban Consumer (all items for the geographical Statistical Area in which the Property is located on the basis of 1982-1984 = 100) (the "Index") as follows: (a) The Base Rent (the "Comparison Base Rent") in effect immediately before each Rental Adjustment Date shall be increased by the percentage that the Index has increased from the date (the "Comparison Date') on which payment of the Comparison Base Rent began through the month in which the applicable Rental Adjustment Date occurs. The Base Rent began through the month in which the applicable Rental Adjustment Date occurs. The Base Rent shall not be reduced by reason of such computation. Landlord shall notify Tenant of each increase by a written statement which shall include the Index for the applicable Comparison Date, the Index for the increase in the Base Rent provided for in this Section 3.02 shall be subject to any minimum or maximum increase, if provided for in Paragraph 1.12(a). (b) Tenant shall pay the new Base Rent from the applicable Rental Adjustment Date until the next Rental Adjustment Date. Landlord's notice may be given after the applicable Rental Adjustment Date of the increase, and Tenant shall pay Landlord the accrued rental adjustment for the months elapsed between the effective date of the increase and Landlord's notice of such increase within ten (10) days after Landlord's notice. If the format or components of the Index are materially changed after the Commencement Date, Landlord shall substitute an index which is published by the Bureau of labor Statistics or similar agency and which is most nearly equivalent to the Index in effect on the Commencement Date. The substitute index shall be used to calculate the increase in the Base Rent unless Tenant objects to such index in writing within fifteen (15) days after receipt of Landlord's notice. If Tenant objects, Landlord and Tenant shall submit the selection of the substitute index for binding arbitration in accordance with the rules and regulations of the American Arbitration Association at its office closest to the Property. The costs of arbitration shall be borne equally by Landlord and Tenant. Section 3.03. SECURITY DEPOSIT; INCREASES. (a) Upon the execution of this Lease, Tenant shall deposit with Landlord a cash Security Deposit in the amount set forth in Section 1.10 above. Landlord may apply all or part of the Security Deposit to any unpaid rent or other charges due from Tenant or to cure any other defaults of Tenant. If Landlord uses any part of the Security Deposit, Tenant shall restore the Security Deposit to its fully amount within ten (10) days after Landlord's written request. Tenant's failure to do so shall be a material default under this Lease. No interest shall be paid on the -5- 6 Security Deposit. Landlord shall not be required to keep the Security Deposit separate from its other accounts and no trust relationship is created with respect to the Security Deposit. Section 3.04. TERMINATION; ADVANCE PAYMENT. Upon termination of this Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation) or any other termination not resulting from Tenant's default, and after Tenant has vacated the Property in the manner required by this Lease, Landlord shall refund or credit to Tenant (or Tenant's successor) the unused portion of the Security Deposit, any advance rent or other advance payments made by Tenant to Landlord, and any amounts paid for real property taxes and other reserves which apply to any time periods after termination of the Lease. ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT Section 4.01. ADDITIONAL RENT. All charges payable by Tenant other than Base Rent are called "Additional Rent." Unless this Lease provides otherwise, Tenant shall pay all Additional Rent then due with the next monthly installment of Base Rent. The term "rent" shall mean Base Rent and Additional Rent. Section 4.02. PROPERTY TAXES. (a) REAL PROPERTY TAXES. Tenant shall pay all real property taxes on the Property (including any fees, taxes or assessments against, or as a result of, any tenant improvements installed on the Property by or for the benefit of Tenant) during the Lease Term. Subject to Paragraph 4.02(c) and Section 4.08 below, such payment shall be made at lease ten (10) days prior to the delinquency date of the taxes. Within such ten (10) day period, Tenant shall furnish Landlord with satisfactory evidence that the real property taxes have been paid. Landlord shall reimburse Tenant for any real property taxes paid by Tenant covering any period prior to or after the Lease Term. If Tenant fails to pay the real property taxes when due, Landlord may pay the taxes and Tenant shall reimburse Landlord for the amount of such tax payments as Additional rent. (b) DEFINITION OF "REAL PROPERTY TAX". "Real property tax" means: (i) any fee, license fee, license tax, business license fee, commercial rental tax, levy, charge, assessment, penalty or tax imposed by any taxing authority against the Property; (ii) any tax on the Landlord's right to receive, or the receipt of, rent or income from the Property or against Landlord's business of leasing the Property; (iii) any tax or charge for fire protection, streets, sidewalks, road maintenance, refuse or other services provided to the Property by any governmental agency; (iv) any tax imposed upon this transaction or based upon a re-assessment of the Property due to a change of ownership, as defined by applicable law, or other transfer of all or part of Landlord's interest in the Property; and (v) any charge or fee replacing any tax previously included within the definition of real property tax. "Real property tax" does not, however, include Landlord's federal or state income, franchise, transfer, inheritance or estate taxes. -6- 7 (c) JOINT ASSESSMENT. If the Property is not separately assessed, Landlord shall reasonably determine Tenant's share of the real property tax payable by Tenant under Paragraph 4.02(a) from the assessor's worksheets or other reasonably available information. Tenant shall pay such share to Landlord within fifteen (15) days after receipt of Landlord's written statement. Tenant's share of such real property tax shall be 25.67% of the total amount assessed on the Project, based on the total square footage occupied at the time of the execution of this Sublease, divided by the total square footage of the premises (78,720 square feet / 306,650 square feet = 25.67%). (d) PERSONAL PROPERTY TAXES. (i) Tenant shall pay all taxes charged against trade fixtures, furnishings, equipment or any other personal property belonging to Tenant. Tenant shall try to have personal property taxed separately from the Property. (ii) If any of Tenant's personal property is taxed with the Property, Tenant shall pay Landlord the taxes for the personal property within fifteen (15) days after Tenant receives a written statement from Landlord for such personal property taxes. Section 4.03. UTILITIES. Tenant shall pay, directly to the appropriate supplier, the cost of all natural gas, heat, light, power, sewer service, telephone, water, refuse disposal and other utilities and services supplied to the Property. However, if any services or utilities are jointly metered with other property, Landlord shall make a reasonable determination of Tenant's proportionate share of the cost of such utilities and services and Tenant shall pay its share to Landlord within fifteen (15) days after receipt of Landlord's written statement. Tenant's share of such non-jointly metered costs shall be 25.67% of the total charged to the Project, based on the square footage occupied by Tenant at the time of the execution of this Sublease. Section 4.04. INSURANCE POLICIES. (a) LIABILITY INSURANCE. During the Lease Term, Tenant shall maintain a policy of commercial general liability insurance (sometimes known as broad form comprehensive general liability insurance) insuring Tenant against liability for bodily injury, property damage (including loss of use of property) and personal injury arising out of the operation, use or occupancy of the Property. Tenant shall name Landlord as an additional insured under such policy. The initial amount of such insurance shall be One Million Dollars ($1,000,000) per occurrence and shall be subject to periodic increase based upon inflation, increased liability awards, recommendation of Landlord's professional insurance advisers and other relevant factors. The liability insurance obtained by Tenant under this Paragraph 4.04(a) shall be (i) primary and non-contributing; (ii) contain cross-liability endorsements; and (iii) insure Landlord against Tenant's performance under Section 5.05, if the matters giving rise to the indemnity under Section 5.05 result from the negligence -7- 8 of Tenant. The amount and coverage of such insurance shall not limit Tenant's liability nor relieve Tenant of any other obligation under this Lease. Landlord may also obtain comprehensive public liability insurance in an amount and with coverage determined by Landlord insuring Landlord against liability arising out of ownership, operation, use or occupancy of the Property. The policy obtained by Landlord shall not be contributory and shall not provide primary insurance. (b) PROPERTY AND RENTAL INCOME INSURANCE. During the Lease Term, Landlord shall maintain policies of insurance covering loss of or damage to the Property in the full amount of its replacement value. Such policy shall contain an Inflation Guard Endorsement and shall provide protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, special extended perils (all risk), sprinkler leakage and any other perils which Landlord deems reasonably necessary. Landlord shall have the right to obtain flood and earthquake insurance if required by any lender holding a security interest in the Property. Landlord shall not obtain insurance for Tenant's fixtures or equipment or building improvements installed by Tenant on the Property. During the Lease Term, Landlord shall also maintain a rental income insurance policy, with loss payable to Landlord, in an amount equal to one year's Base Rent, plus estimated real property taxes and insurance premiums. Tenant shall be liable for the payment of any deductible amount under Landlord's or Tenant's insurance policies maintained pursuant to this Section 4.04, in an amount not to exceed Five Thousand Dollars ($5,000). Tenant shall not do or permit anything to be done which invalidates any such insurance policies. (c) PAYMENT OF PREMIUMS. Subject to Section 4.08, Tenant shall pay all premiums for the insurance policies described in Paragraphs 4.04(a) and (b) (whether obtained by Landlord or Tenant) within fifteen (15) days after Tenant's receipt of a copy of the premium statement or other evidence of the amount due, except Landlord shall pay all premiums for non-primary comprehensive public liability insurance which Landlord elects to obtain as provided in Paragraph 4.04(a). For insurance policies maintained by Landlord which cover improvements on the entire Project, Tenant shall pay Tenant's pro rata share of the premiums, in accordance with the formula in Paragraph 4.05(e) for determining Tenant's share of Common Area costs. If insurance policies maintained by Landlord cover improvements on real property other than the Project, Landlord shall deliver to Tenant a statement of the premium applicable to the Property showing in reasonable detail how Tenant's share of the premium was computed. If the Lease Term expires before the expiration of an insurance policy maintained by Landlord, Tenant shall be liable for Tenant's pro rata share of the insurance premiums. Before the Commencement Date, Tenant shall deliver to Landlord a copy of any policy of insurance which Tenant is required to maintain under this Section 4.04. At least thirty (30) days prior to the expiration of any such policy, Tenant shall deliver to Landlord a renewal of such policy. As an alternative to providing a policy of insurance, Tenant shall have the right to provide Landlord a certificate of insurance, executed by an authorized officer of the insurance company, showing -8- 9 that the insurance which Tenant is required to maintain under this Section 4.04 is in full force and effect and containing such other information which Landlord reasonably requires. (d) GENERAL PROVISIONS. (i) Any insurance which Tenant is required to maintain under this Lease shall include a provision which requires the insurance carrier to give Landlord not less than thirty (30) days' written notice prior to any cancellation or decrease of such coverage. (ii) If Tenant fails to deliver any policy, certificate or renewal to Landlord required under this Lease within the prescribed time period of if any such policy is cancelled or modified during the Lease Term without Landlord's consent, landlord may obtain such insurance, in which case Tenant shall reimburse Landlord for the cost of such insurance within twenty (20) days after receipt of a statement that indicates the cost of such insurance. (iii) Tenant shall maintain all insurance required under this Lease with companies holding a "General Policyholders Rating of at least B+, V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Landlord and Tenant acknowledge the insurance markets are rapidly changing and that insurance in the form and amounts described in this Section 4.04 may not be available in the future. Tenant acknowledges that the insurance described in this Section 4.04 is for the primary benefit of Landlord. If at any time during the Lease Term, Tenant is unable to maintain the insurance required under the Lease, Tenant shall nevertheless maintain insurance coverage which is customary and commercially reasonable in the insurance industry for Tenant's type of business, as that coverage may change from time to time. Landlord makes no representation as to the adequacy of such insurance to protect Landlord's or Tenant's interests. Therefore, Tenant shall obtain any such additional property or liability insurance which Tenant deems necessary to protect Landlord and Tenant. (iv) Unless prohibited under any applicable insurance policies maintained, Landlord and Tenant each hereby waive any and all rights of recovery against the other, or against the officers, employees, agents or representatives of the other, for loss of or damage to its property or the property of others under its control, if such loss or damage is covered by any insurance policy in force (whether or not described in this Lease) at the time of such loss or damage. Upon obtaining the required policies of insurance, Landlord and Tenant shall give notice to the insurance carriers of this mutual waiver of subrogation. -9- 10 Section 4.05. COMMON AREAS; USE, MAINTENANCE AND COSTS. (a) COMMON AREAS. As used in this Lease, "Common Areas" shall mean all areas within the Project which are available for the common use of tenants of the Project and which are not leased or held for the exclusive use of Tenant or other tenants, including, but not limited to, parking areas, driveways, sidewalks, loading areas, access roads, corridors, landscaping and planted areas. Landlord, from time to time, may change the size, location, nature and use of any of the Common Areas into leaseable areas, construct additional parking facilities (including parking structures) in the Common Areas, and increase or decrease Common Area land and/or facilities. Tenant acknowledges that such activity may result in inconvenience to Tenant. Such activities and changes are permitted if they do not materially affect Tenant's use of the Property. (b) USE OF COMMON AREAS. Tenant shall have the nonexclusive right (in common with other tenants and all others to whom Landlord has granted or may grant such rights) to use the Common Areas for the purposes intended, subject to such reasonable rules and regulations as Landlord may establish from time to time. Tenant shall abide by such rules and regulations and shall use its best effort to cause others who use the Common Areas with Tenant's express or implied permission to abide by Landlord's rules and regulations. At any time, Landlord may close any Common Areas to perform any acts in the Common Area as, in Landlord's judgment, are desirable to improve the Project. Tenant shall not interfere with the rights of Landlord, other tenants or any other person entitled to use the Common Areas. (c) SPECIFIC PROVISION RE: VEHICLE PARKING. Tenant shall be entitled to use the number of vehicle parking spaces in the Project allocated to Tenant in Section 1.11 of the Lease without paying any additional rent. Tenant's parking shall not be reserved and shall be limited to vehicles no larger than the standard size automobiles or pickup utility vehicles. Tenant shall not cause large trucks or other large vehicles to be parked within the Project or on the adjacent public streets. Temporary parking of large delivery vehicles in the Project may be permitted by the rules and regulations established by the Landlord. Vehicles shall be parked only in striped parking spaces and not in driveways, loading areas or other locations not specifically designated for parking. Handicapped spaces shall only be used by those legally permitted to use them. If Tenant parks more vehicles in the parking area than the number set forth in Section 1.11 of this Lease, such conduct shall be a material breach of this Lease. In addition to Landlord's other remedies under the Lease, Tenant shall pay a daily charge determined by Landlord for each additional vehicle. (d) MAINTENANCE OF COMMON AREAS. Landlord shall maintain Common Areas in good order, condition and repair and shall operate the Project, in Landlord's sole discretion, as a first-class industrial/commercial real property development. Tenant shall pay Tenant's pro rata share (as determined below) of all costs -10- 11 incurred by Landlord for the operation and maintenance of the Common Areas. Common Area costs include, but are not limited to, costs and expenses for the following: gardening and landscaping; utilities, water and sewage charges; maintenance of signs (other than tenants' signs); premiums for liability, property damage, fire and other types of casualty insurance on the Common Areas and worker's compensation insurance; all property taxes and assessments levied on or attributable to the Common Area and all Common Area improvements; all personal property taxes levied on or attributable to personal property used in connection with the Common Areas; straight-line depreciation on personal property owned by Landlord which is consumed in the operation or maintenance of the Common Areas; rental or lease payments paid by Landlord for rented or leased personal property used in the operation or maintenance of the Common Areas; fees for required licenses and permits; repairing, resurfacing, repaving, maintaining, painting, lighting, cleaning, refuse removal, security, underground piping, fire sprinkler repair, and similar items; reserves for roof replacement and exterior painting and other appropriate reserves; and a reasonable allowance to Landlord for Landlord's supervision of the Common Areas (not to exceed ten percent (10%) of the common area costs, property tax and insurance pass-through for the Project for the calendar year). Landlord may cause any or all of such services to be provided by third parties and the cost of such services shall be included in Common Area costs. Common Area costs shall not include depreciation of real property which forms part of the Common Areas. (e) TENANT'S SHARE AND PAYMENT. Tenant shall pay Tenant's annual pro rata share of all Common Area costs (prorated for any fractional month) upon notice from Landlord that such costs are due and payable, and in any event prior to delinquency. Tenant's pro rata share shall be calculated by dividing the square footage area of the Property, as set forth in Section 1.04 of the Lease, by the aggregate square foot area of the Project which is leased or held for lease by tenants, as of the date on which the computation is made. Tenant's initial pro rata share is set out in Paragraph 4.03. Any changes in the Common Area costs and/or the aggregate area of the Project, leased or held for lease during the Lease Term shall be effective on the first day of the month after such change occurs. Landlord may, at Landlord's election, estimate in advance and charge to Tenant as Common Area costs, all maintenance and repair costs for which Tenant is liable under Section 6.04 of the Lease, and all other Common Area costs payable by Tenant hereunder. At Landlord's election, such statements of estimated Common Area costs shall be delivered monthly, quarterly or at any other periodic intervals to be designated by Landlord. Landlord may adjust such estimates at any time based upon Landlord's experience and reasonable anticipation of costs. Such adjustments shall be effective as of the next rent payment date after notice to Tenant. Within sixty (60) days after the end of each calendar year of the Lease Term, Landlord shall deliver to Tenant a statement prepared in accordance with generally accepted accounting principles setting forth, in reasonable detail, the Common Area costs paid or incurred by Landlord during the preceding calendar year and Tenant's pro rata share. Upon receipt of such statement, there shall be an -11- 12 adjustment between Landlord and Tenant, with payment to or credit given by Landlord (as the case may be) so that Landlord shall receive the entire amount of Tenant's share of such costs and expenses for such period. Section 4.06. LATE CHARGES. Tenant's failure to pay rent promptly may cause Landlord to incur unanticipated costs. The exact amount of such costs are impractical or extremely difficult to ascertain. Such costs may include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord by any ground lease, mortgage or trust deed encumbering the Property. Therefore, if Landlord does not receive any rent payment within five (5) days after it becomes due, Tenant shall pay Landlord a late charge equal to five percent (5%) of the overdue amount. The parties agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of such late payment. Section 4.07. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant to Landlord which is not paid when due shall bear interest at the rate of fifteen percent (15%) per annum from the due date of such amount. However, interest shall not be payable on late charges to be paid by Tenant under this Lease. The payment of interest on such amounts shall not excuse or cure any default by Tenant under this Lease. If the interest rate specified in this Lease is higher than the rate permitted by law, the interest rate is hereby decreased to the maximum legal interest rate permitted by law. Section 4.08. IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES. If requested by any ground lessor or lender to whom landlord has granted or may hereafter grant a security interest in the Property, or if Tenant is more than ten (10) days late in the payment of rent more than once in any consecutive twelve (12) month period, Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the annual real property taxes and insurance premiums payable by Tenant under this Lease, together with each payment of Base Rent. Landlord shall hold such payments in a non-interest bearing impound account. If unknown, Landlord shall reasonably estimate the amount of real property taxes and insurance premiums when due. Tenant shall pay any deficiency of funds in the impound account to Landlord upon written request. If Tenant defaults under this Lease, Landlord may apply any funds in the impound account to any obligation then due under this lease. ARTICLE FIVE: USE OF PROPERTY Section 5.01. PERMITTED USES. Tenant may use the Property only for the Permitted Uses set forth in Section 1.06 above. Section 5.02. MANNER OF USE. Tenant shall not cause or permit the Property to be used in any way which constitutes a violation of any law, ordinance, or governmental regulation or order, which annoys or interferes with the rights of tenants of the Project, or which constitutes a nuisance or waste. Tenant shall obtain and pay for all permits, including a Certificate of Occupancy, required for Tenant's occupancy of the Property and shall promptly take all actions necessary to comply with all applicable statues, ordinances, rules, regulations, -12- 13 orders and requirements regulating the use by Tenant of the Property, including the Occupational Safety and Health Act. Section 5.03. HAZARDOUS MATERIALS. As used in this Lease, the term "Hazardous Material" means any flammable items, explosives, radioactive materials, hazardous or toxic substances, material or waste or related materials, including any substances defined as or included in the definition "hazardous substances", "hazardous wastes", "hazardous materials" or "toxic substances" now or subsequently regulated under any applicable federal, state or local laws or regulations, including without limitation petroleum-based products, paints, solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonia compounds and other chemical products, asbestos, PCBs and similar compounds, and including any different products and materials which are subsequently found to have adverse effects on the environment or the health and safety of persons. Tenant shall not cause or permit any Hazardous material to be generated, produced, brought upon, used, stored, treated or disposed of in or about the Property by Tenant, its agents, employees, contractors, sublessees or invitees without the prior written consent of Landlord. Landlord shall be entitled to take into account such other factors or facts as Landlord may reasonably determine to be relevant in determining whether to grant or withhold consent to Tenant's proposed activity with respect to Hazardous Material. In no event, however, shall Landlord be required to consent to the installation or use of any storage tanks on the Property. Section 5.04. SIGNS AND AUCTIONS. Tenant shall not place any signs on the Property without Landlord's prior written consent. Tenant shall not conduct or permit any auctions or sheriff's sales at the Property. Section 5.05. INDEMNITY. Tenant shall indemnify Landlord against and hold Landlord harmless from any and all costs, claims or liability arising from: (a) Tenant's use of the Property; (b) The conduct of Tenant's business or anything else done or permitted by Tenant to be done in or about the property, including any contamination of the Property or any other property resulting from the presence or use of Hazardous Material caused or permitted by Tenant; (c) Any breach or default in the performance of Tenant's obligations under this Lease; (d) Any misrepresentation or breach of warranty by Tenant under this Lease; or (e) Other acts or omissions of Tenant. Tenant shall defend Landlord against any such cost, claim or liability at Tenant's expense with counsel reasonably acceptable to Landlord, or at Landlord's election, Tenant shall reimburse Landlord for any reasonable legal fees or costs incurred by Landlord in connection with any such claim. As a material part of the consideration to Landlord, Tenant assumes all risk of damage to property or injury to persons in or about the Property arising from any cause, and Tenant hereby waives all claims in respect thereof against Landlord, except for any claim arising out of -13- 14 Landlord's gross negligence or willful misconduct. As used in this Section, the term "Tenant" shall include Tenant's employees, agents, contractors, and invitees, if applicable. Section 5.06. LANDLORD'S ACCESS. Landlord or its agents may enter the Property at all reasonable times to show the Property to potential buyers, investors or tenants or other parties; to do any other act or to inspect and conduct tests in order to monitor Tenant's compliance with all applicable environmental laws and all laws governing the presence and use of Hazardous Material; or for any other purpose Landlord deems necessary. Landlord shall give Tenant prior notice of such entry, except in the case of an emergency. Landlord may place customary "For Sale" or "For Lease" signs on the Property. Section 5.07. QUIET POSSESSION. If Tenant pays the rent and complies with all other terms of this Lease, Tenant may occupy and enjoy the Property for the full Lease Term, subject to the provisions of this Lease. ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS. Section 6.01. EXISTING CONDITIONS. Tenant accepts the Property in its condition as of the execution of the Lease, subject to all recorded matters, laws, ordinances, and governmental regulations and order. Except as provided herein, Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation as to the condition of the Property or the suitability of the Property for Tenant's intended use. Tenant represents and warrants that Tenant has made its own inspection of and inquiry regarding the condition of the Property and is not relying on any representations of Landlord or any Broker with respect thereto. If Landlord or Landlord's Broker has provided a Property Information Sheet or other Disclosure Statement regarding the Property, a copy is attached as an exhibit to the Lease. Section 6.02. EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not be liable for any damage or injury to the person, business (or any loss of income therefrom), goods, wares, merchandise or other property of Tenant, Tenant's employees, invitees, customers or any other person in or about the Property, whether such damage or injury is caused by or results from: (a) Fire, steam, electricity, water, gas or rain; (b) The breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures or any other cause; (c) Conditions arising in or about the Property or upon other portions of the Project, or from other sources or places; or (d) Any act or omission of any other tenant of the Project. Landlord shall not be liable for any such damage or injury even though the cause of or the means of repairing such damage or injury are not accessible to Tenant. -14- 15 The provisions of this Section 6.02 shall not, however, exempt Landlord from liability for Landlord's gross negligence or willful misconduct. Section 6.03. LANDLORD'S OBLIGATION. (a) Except as provided in Article Seven (Damage or Destruction) and Article Eight (Condemnation), Landlord shall keep the following in good order, condition and repair: the foundations, exterior walls and roof of the Property (including painting the exterior surface of the exterior walls of the property not more often than once every five (5) years, if necessary) and all components of electrical, mechanical, plumbing, heating and air conditioning systems and facilities located in the Property which are concealed or used in common by tenants of the Project. However, Landlord shall not be obligated to maintain or repair window, doors, plate glass or the interior surfaces of exterior walls. Landlord shall make repairs under this Section 6.03 within a reasonable time after receipt of written notice from Tenant of the need for such repairs. (b) Tenant shall pay or reimburse Landlord for all costs Landlord incurs under Paragraph 6.03(a) above as Common Area costs as provided for in Section 4.05 of the Lease. Tenant waives the benefit of any statute in effect now or in the future which might give Tenant the right to make repairs at Landlord's expense or to terminate this Lease due to Landlord's failure to keep the Property in good order, condition and repair. Section 6.04. TENANT'S OBLIGATIONS. (a) Except as provided in Section 6.03, Article Seven (Damage or Destruction) and Article Eight (Condemnation), Tenant shall keep all portions of the Property (including nonstructural, interior, systems and equipment installed by Tenant) in good order, condition and repair (including interior repainting and refinishing, as needed). If any portion of the Property or any system or equipment in the Property which Tenant is obligated to repair cannot be fully repaired or restored, Tenant shall promptly replace such portion of the Property or system or equipment in the Property, regardless of whether the benefit of such replacement extends beyond the Lease Term; but if the benefit or useful life of such replacement extends beyond the Lease Term (as such term may be extended by exercise of any options), the useful life of such replacement shall be prorated over the remaining portion of the Lease Term (as extended), and Tenant shall be liable only for that portion of the cost which is applicable to the Lease Term (as extended). Tenant shall maintain a preventive maintenance contract providing for the regular inspection and maintenance of the heating and air conditioning system by a licensed heating and air conditioning contractor, unless Landlord maintains such equipment under Section 6.03 above. If any part of the Property or the Project is damaged by any act or omission of Tenant, Tenant shall pay Landlord the cost of repairing or replacing such damaged property, whether or not Landlord would otherwise be obligated to pay the cost of maintaining or repairing such property. It is the -15- 16 intention of Landlord and Tenant that at all times Tenant shall maintain the portions of the Property which Tenant is obligated to maintain in an attractive, first-class and full operative condition. (b) Tenant shall fulfill all of Tenant's obligations under this Section 6.04 at Tenant's sole expense. If Tenant fails to maintain, repair or replace the Property as required by this Section 6.04, Landlord may, upon ten (10) days' prior notice to Tenant (except that no notice shall be required in the case of an emergency), enter the Property and perform such maintenance or repair (including replacement, as needed) on behalf of Tenant. In such case, Tenant shall reimburse Landlord for all costs incurred in performing such maintenance or repair immediately upon demand. Section 6.05. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS. (a) Tenant shall not make any alterations, additions, or improvements to the Property without Landlord's prior written consent, except for non-structural alterations which do not exceed Ten Thousand Dollars ($10,000) in cost cumulatively over the Lease Term and which are not visible from the outside of the building of which the Property is part. Landlord may require Tenant to provide demolition and/or lien and completion bonds in form and amount satisfactory to Landlord. Tenant shall promptly remove any alterations, additions, or improvements constructed in violation of this Paragraph 6.05(a) upon Landlord's written request. All alterations, additions, and improvements shall be done in a good and workmanlike manner, in conformity with all applicable laws and regulations, and by a contractor approved by Landlord. Upon completion of any such work, Tenant shall provide Landlord with "as built" plans, copies of all construction contracts, and proof of payment for all labor and materials. (b) Tenant shall pay when due all claims for labor and material furnished to the Property. Tenant shall give Landlord at least twenty (20) days' prior written notice of the commencement of any work on the Property, regardless of whether Landlord's consent to such work is required. Landlord may elect to record and post notices of non-responsibility on the Property. Section 6.06. CONDITION UPON TERMINATION. Upon the termination of the Lease, Tenant shall surrender the Property to Landlord, broom clean and in the same condition as received except for ordinary wear and tear which Tenant was not otherwise obligated to remedy under any provision of this Lease. However, Tenant shall not be obligated to repair any damage which Landlord is required to repair under Article Seven (Damage or Destruction). In addition, Landlord may require Tenant to remove any alterations, additions or improvements (whether or not made with Landlord's consent) prior to the expiration of the Lease and to restore the Property to its prior condition, all at Tenant's expense. All alterations, additions and improvements which Landlord has not required Tenant to remove shall become Landlord's property and shall be surrendered to Landlord upon the expiration or earlier termination fo the Lease, except Tenant may remove any of Tenant's machinery or equipment which can be -16- 17 removed without material damage to the Property. Tenant shall repair, at Tenant's expense, any damage to the Property caused by the removal of any such equipment. In no event, however, shall Tenant remove any of the following materials or equipment (which shall be deemed Landlord's property) without Landlord's prior written consent: any power wiring or power panels; lighting or lighting fixtures; wall coverings; drapes, blinds or other window coverings; carpets or other floor coverings; heaters, air conditioners or any other heating or air conditioning equipment; fencing or security gates; or other similar building operating equipment and decorations. ARTICLE SEVEN: DAMAGE OR DESTRUCTION Section 7.01. PARTIAL DAMAGE TO PROPERTY. (a) Tenant shall notify Landlord in writing immediately upon the occurrence of any damage to the Property. If the Property is only partially damaged (i.e., less than fifty percent (50%) of the Property is untenantable as a result of such damage or less than fifty percent (50%) of Tenant's operations are materially impaired) and if the proceeds received by Landlord from the insurance policies described in Paragraph 4.04(b) are sufficient to pay for the necessary repairs, this Lease shall remain in effect and Landlord shall repair the damage as soon as reasonably possible. Landlord may elect (but is not required) to repair any damage to Tenant's fixtures, equipment, or improvements. (b) If the insurance proceeds received by Landlord are not sufficient to pay the entire cost of repair, of if the cause of damage is not covered by the insurance policies which Landlord maintains under Paragraph 4.04(b), Landlord may elect either to (i) repair the damage as soon as reasonably possibly, in which case this Lease shall remain in full force and effect, or (ii) terminate this Lease as of the date the damage occurred. Landlord shall notify Tenant within thirty (30) days after receipt of notice of the occurrence of the damage whether Landlord elects to repair the damage or terminate the Lease. If Landlord elects to repair the damage, Tenant shall pay Landlord Tenant's pro rata share of the "deductible amount" (if any) under Landlord's insurance policies and, if the damage was due to an act or omission of Tenant, or Tenant's employees, agents, contractors or invitees, the difference between the actual cost of repair and any insurance proceeds received by Landlord. If Landlord elects to terminate this Lease, Tenant may elect to continue this Lease in full force and effect, in which case Tenant shall repair any damage to the Property and any building in which Property is located. Tenant shall pay the cost of such repairs, except that upon satisfactory completion of such repairs, Landlord shall deliver to Tenant any insurance proceeds received by Landlord for the damage repaired by Tenant. Tenant shall give Landlord written notice of such election within ten (10) days after receiving Landlord's termination notice. (c) If the damage to the Property occurs during the last six (6) months of the Lease Term and such damage will require more than thirty (30) days to repair, either -17- 18 Landlord or Tenant may elect to terminate this Lease as of the date the damage occurred, regardless of the sufficiency of any insurance proceeds. The party electing to terminate this Lease shall give written notification to the other party of such election within thirty (30) days after Tenant's notice to Landlord of the occurrence of the damage. Section 7.02. SUBSTANTIAL OR TOTAL DESTRUCTION. If the Property is substantially or totally destroyed by any cause whatsoever (i.e., the damage to the Property is greater than partial damage as described in Section 7.01), and regardless of whether Landlord receives any insurance proceeds, this Lease shall terminate as of the date the destruction occurred. Notwithstanding the preceding sentence, if the Property can be rebuilt within six (6) months after the date of destruction, Landlord may elect to rebuild the Property at Landlord's own expense, in which case this Lease shall remain in full force and effect. Landlord shall notify Tenant of such election within thirty (30) days after Tenant's notice of the occurrence of total or substantial destruction. If Landlord so elects, Landlord shall rebuild the Property at Landlord's sole expense, except that if the destruction was caused by an act or omission of Tenant, Tenant shall pay Landlord the difference between the actual cost of rebuilding and any insurance proceeds received by Landlord. Section 7.03. TEMPORARY REDUCTION OF RENT. If the Property is destroyed or damaged and Landlord or Tenant repairs or restores the Property pursuant to the provisions of this Article Seven, any rent payable during the period of such damage, repair and/or restoration shall be reduced according to the degree, if any, to which Tenant's use of the Property is impaired. However, the reduction shall not exceed the sum of one year's payment of Base rent, insurance premiums and real property taxes. Except for such possible reduction in Base rent, insurance premiums and real property taxes, Tenant shall not be entitled to any other compensation, reduction, or reimbursement from Landlord as a result of any damage, destruction, repair, or restoration of or to the Property. Section 7.04. WAIVER. Tenant waives the protection of any statute, code or judicial decision which grants a tenant the right to terminate a lease in the event of the substantial or total destruction of the leased property. Tenant agrees that the provisions of Section 7.02 above shall govern the rights and obligations of Landlord and Tenant in the event of any substantial or total destruction of the Property. ARTICLE EIGHT: CONDEMNATION If all or any portion of the Property is taken under the power of eminent domain or sold under the threat of that power (all of which are called "Condemnation"), this Lease shall terminate as to the part taken or sold on the date the condemning authority takes title or possession, whichever occurs first. If more than twenty percent (20%) of the floor area of the building in which the Property is located, or which is located on the Property, is taken, either Landlord or Tenant may terminate this Lease as of the date the condemning authority takes title or possession, by delivering written notice ten (10) days after the condemning authority takes title or possession). If neither Landlord nor Tenant terminates this Lease, this Lease shall remain in effect as to the portion of the Property not taken, except that the Base Rent and Additional -18- 19 Rent shall be reduced in proportion to the reduction in the floor area of the Property. Any Condemnation award or payment shall be distributed in the following order: (a) First, to any ground lessor, mortgagee or beneficiary under a deed of trust encumbering the Property, the amount of its interest in the Property; (b) Second, to Tenant, only the amount of any award specifically designated for loss of or damage to Tenant's trade fixtures or removable personal property; and (c) Third to Landlord, the remainder of such award, whether as compensation for reduction in the value of the leasehold, the taking of the fee, or otherwise. If this Lease is not terminated, Landlord shall repair any damage for which Tenant has been reimbursed by the condemning authority. If the severance damages received by Landlord are not sufficient to pay for such repair, Landlord shall have the right to either terminate this Lease or make such repair at Landlord's expense. ARTICLE NINE: ASSIGNMENT AND SUBLETTING Section 9.01. LANDLORD'S CONSENT REQUIRED. No portion of the Property or of Tenant's interest in this Lease may be acquired by any other person or entity, whether by sale, assignment, mortgage, sublease, transfer, operation of law, or act of Tenant, without Landlord's prior written consent, except as provided in Section 9.02 below. Landlord has the right to grant or withhold its consent as provided in Section 9.05 below. Any attempted transfer without consent shall be void and shall constitute a non-curable breach of this Lease. If Tenant is a partnership, any cumulative transfer of more than twenty percent (20%) of the partnership interests shall require Landlord's consent. If Tenant is a corporation, any change in the ownership of a controlling interest of the voting stock of the corporation shall require Landlord's consent, unless the change is due to a public offering of Tenant's capital stock. Section 9.02. TENANT AFFILIATE. Tenant may assign this Lease or sublease the Property, without Landlord's consent, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from the merger of or consolidation with Tenant ("Tenant's Affiliate"). In such case, any Tenant's Affiliate shall assume in writing all of Tenant's obligations under this Lease. Section 9.03. NO RELEASE OF TENANT. No transfer permitted by this Article Nine, whether with or without Landlord's consent, shall release Tenant or change Tenant's primary liability to pay the rent and to perform all other obligations of Tenant under this Lease. Landlord's acceptance of rent from any other person is not a waiver of any provision of this Article Nine. Consent to one transfer is not a consent to any subsequent transfer. If Tenant's transferee defaults under this Lease, Landlord may proceed directly against Tenant without pursuing remedies against the transferee. Landlord may consent to subsequent assignments or modifications of this Lease by Tenant's transferee, without notifying Tenant or obtaining its consent. Such action shall not relieve Tenant's liability under this Lease. -19- 20 Section 9.04. OFFER TO TERMINATE. If Tenant desires to assign the Lease or sublease the Property, Tenant shall have the right to offer, in writing, to terminate the Lease as of a date specified in the offer. If Landlord elects in writing to accept the offer to terminate within twenty (20) days after notice of the offer, the Lease shall terminate as of the date specified and all terms and provisions of the Lease governing termination shall apply. If Landlord does not so elect, the Lease shall continue in effect until otherwise terminated and the provisions of Section 9.05 with respect to any proposed transfer shall continue to apply. Section 9.05. LANDLORD'S CONSENT. (a) Tenant's request for consent to any transfer described in Section 9.02 shall set forth in writing the details of the proposed transfer, including the name, business and financial condition of the prospective transferee, financial details of the proposed transfer (e.g., the term of and the rent and security deposit payable under any proposed assignment or sublease), and any other information Landlord deems relevant. Landlord shall have the right to withhold consent, if reasonable, or to grant consent, based on the following factors: (i) the business of the proposed assignee or subtenant and the proposed use of the Property; (ii) the net worth and financial reputation of the proposed assignee or subtenant; (iii) Tenant's compliance with all of its obligations under the Lease; and (iv) such other factors as Landlord may reasonably deem relevant. If Landlord objects to a proposed assignment solely because of the net worth and/or financial reputation of the proposed assignee, Tenant may nonetheless sublease (but not assign), all or a portion of the Property to the proposed transferee, but only on the terms of the proposed transfer. (b) If Tenant assigns or subleases, the following shall apply: (i) Tenant shall pay to Landlord as Additional Rent under the Lease the Landlord's Share (stated in Section 1.13) of the Profit (defined below) on such transaction as and when received by Tenant, unless Landlord gives written notice to Tenant and the assignee or subtenant that Landlord's Share shall be paid by the assignee or subtenant to Landlord directly. The "Profit" means (A) all amounts paid to Tenant for such assignment or sublease, including "key" money, monthly rent in excess of the monthly rent payable under the Lease, and all fees and other consideration paid for the assignment or sublease, including fees under any collateral agreements, less (B) costs and expenses directly incurred by Tenant in connection with the execution and performance of such assignment or sublease for real estate broker's commissions, reasonable attorney's fees and costs of renovation or construction of tenant improvements required under such assignment or sublease. Tenant is entitled to recover such costs and expenses before Tenant is obligated to pay Landlord's Share to Landlord. The Profit in the case of a sublease of less than all the Property is the rent allocable to the subleased space as a percentage on a square footage basis. -20- 21 (ii) Tenant shall provide Landlord a written statement certifying all amounts to be paid from any assignment or sublease of the Property within thirty (30) days after the transaction documentation is signed, and landlord may inspect Tenant's books and records to verify the accuracy of such statement. On written request, Tenant shall promptly furnish to Landlord copies of all transaction documentation, all of which shall be certified by Tenant to be complete, true and correct. Landlord's receipt of Landlord's Share shall not be a consent to any further assignment or subletting. The breach of Tenant's obligation under this Paragraph 9.05(b) shall be a material default of the Lease. Section 9.06. NO MERGER. No merger shall result from Tenant's sublease of the Property under this Article Nine, Tenant's surrender of this Lease or the termination of this Lease in any other manner. In any such event, Landlord may terminate any or all subtenancies or succeed to the interest of Tenant as sublandlord under any or all subtenancies. ARTICLE TEN: DEFAULTS; REMEDIES Section 10.01. COVENANTS AND CONDITIONS. Tenant's performance of each of Tenant's obligations under this Lease is a condition as well as a covenant. Tenant's right to continue in possession of the Property is conditioned upon such performance. Time is of the essence in the performance of all covenants and conditions. Section 10.02. DEFAULTS. Tenant shall be in material default under this Lease: (a) If Tenant abandons the Property or if Tenant's vacation of the Property results in the cancellation of any insurance described in Section 4.04; (b) If Tenant fails to pay rent or any other charge within three (3) business days from the date when due, and after written notice from Landlord. (c) If Tenant fails to perform any of Tenant's non-monetary obligations under this Lease for a period of thirty (30) days after written notice from Landlord; provided that if more than thirty (30) days are required to complete such performance, Tenant shall not be in default if Tenant commences such performance within the thirty (30) day period and thereafter diligently pursues its completion. However, Landlord shall not be required to give such notice if Tenant's failure to perform constitutes a non-curable breach of this Lease. The notice required by this Paragraph is intended to satisfy any and all notice requirements imposed by law on Landlord and is not in addition to any such requirement. (d) (i) If Tenant makes a general assignment or general arrangement for the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or for reorganization or rearrangement is filed by or against Tenant and is not dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed to take possession of substantially all of Tenant's assets located at the Property or of Tenant's interest -21- 22 in this Lease and possession is not restored to Tenant within thirty (30) days; or (iv) if substantially all of Tenant's assets located at the Property or of Tenant's interest in this Lease is subjected to attachment, execution or other judicial seizure which is not discharged within thirty (30) days. If a court of competent jurisdiction determines that any of the acts described in this subparagraph (d) is not a default under this Lease, and a trustee is appointed to take possession (or if Tenant remains a debtor in possession) and such trustee or Tenant transfers Tenant's interest hereunder, then Landlord shall receive, as Additional Rent, the excess, if any, of the rent (or any consideration) paid in connection with such assignment or sublease over the rent payable by Tenant under this Lease. (e) If any guarantor of this Lease revokes or otherwise terminates, or purports to revoke or otherwise terminate, any guaranty of all or any portion of Tenant's obligations under this Lease. Unless otherwise expressly provided, no guaranty of the Lease is revocable. Section 10.03. REMEDIES. On the occurrence of any material default by Tenant, Landlord may, at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of any right or remedy which Landlord may have: (a) Terminate Tenant's right to possession of the Property by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Property 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 (i) the worth at the time of the award of the unpaid Base Rent, Additional Rent and other charges which Landlord had earned at the time of the termination; (ii) the worth at the time of the award of the amount by which the unpaid Base rent, Additional Rent and other charges which Landlord would have earned after termination until the time of the award exceeds the amount of such rental loss that Tenant proves Landlord could have reasonably avoided; (iii) the worth at the time of the award of the amount by which the unpaid Base Rent, Additional Rent and other charges which Tenant would have paid for the balance of the Lease term after the time of award exceeds the amount of such rental loss that Tenant proves Landlord could have reasonably avoided; and (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under the Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, any costs or expenses Landlord incurs in maintaining or preserving the Property after such default, the cost of recovering possession of the Property, expenses of reletting, including necessary renovation or alteration of th Property, Landlord's reasonable attorneys' fees incurred in connection therewith, and any real estate commission paid or payable. As used in subparts (i) and (ii) above, the "worth at the time of the award" is computed by allowing interest on unpaid amounts at the rate of fifteen percent (15%) per annum, or such lesser amount as may then be the maximum lawful rate. As used in subpart (iii) the "worth at the time of the award" is computed by discounting such amount at the discount rate of -22- 23 the Federal Reserve Bank of San Francisco at the time of the award, plus one percent (1%). If Tenant has abandoned the Property, Landlord shall have the option of (i) retaking possession of the Property and recovering from Tenant the amount specified in this Paragraph 10.03(a), or (ii) proceeding under Paragraph 10.03(b); (b) Maintain Tenant's right to possession, in which case this Lease shall continue in effect whether or not Tenant has abandoned the Property. 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; (c) Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of the state in which the Property is located. Section 10.04. REPAYMENT OF "FREE" RENT. (INTENTIONALLY DELETED). Section 10.05. AUTOMATIC TERMINATION. Notwithstanding any other term or provision hereof to the contrary, the Lease shall terminate on the occurrence of any act which affirms the Landlord's intention to terminate the Lease as provided in Section 10.03 hereof, including the filing of an unlawful detainer action against Tenant. On such termination Landlord's damages for default shall include all costs and fees, including reasonable attorneys' fees that Landlord incurs in connection with the filing, commencement, pursuing and/or defaulting of any action in any bankruptcy court or other court with respect to the Lease; the obtaining of relief from any stay in bankruptcy restraining any action to evict Tenant; or the pursuing of any action with respect to Landlord's right to possession of the Property. All such damages suffered (apart from Base rent and other rent payable hereunder) shall constitute pecuniary damages which must be reimbursed to Landlord prior to assumption of the Lease by Tenant or any successor to Tenant in any bankruptcy or other proceeding. Section 10.06. CUMULATIVE REMEDIES. Landlord's exercise of any right or remedy shall not prevent it from exercising any other right or remedy. ARTICLE ELEVEN: PROTECTION OF LENDERS Section 11.01. SUBORDINATION. Landlord shall have the right to subordinate this Lease to any ground lease, deed of trust, mortgage encumbering the Property, any advances made on the security thereof and any renewals, modifications, consolidations, replacements or extensions thereof, whenever made or recorded. Tenant shall cooperate with Landlord and any lender which is acquiring a security interest in the Property or the Lease. Tenant shall execute such further documents and assurances as such lender may require, provided that Tenant's obligations under this Lese shall not be increased in any material way (the performance of ministerial acts shall not be deemed material), and Tenant shall not be deprived of its rights under this Lease Tenant's right to quiet possession of the Property during the Lease Term shall not be disturbed if Tenant pays the rent and performs all of Tenant's obligations under this Lease and is not otherwise in default. If any ground lessor, beneficiary or mortgagee elects to have this Lease prior to the lien on its ground lease, deed of trust or mortgage and gives written notice -23- 24 thereof to Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or mortgage whether this Lease is dated prior or subsequent to the date of said ground lease, deed of trust or mortgage or the date of recording thereof. Section 11.02. ATTORNMENT. If Landlord's interest in the Property is acquired by any ground lessor, beneficiary under a deed of trust, or purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or successor to Landlord's interest in the Property and recognize such transferee or successor as Landlord under this Lease. Tenant waives the protection of any statute or rule of law which gives or purports to give Tenant any right to terminate this Lease or surrender possession of the Property upon the transfer of Landlord's interest. Section 11.03. SIGNING OF DOCUMENTS. Tenant shall sign and deliver any instrument or documents necessary or appropriate to evidence any such attornment or subordination or agreement to do so. If Tenant fails to do so within ten (10) business days after written request, Tenant hereby makes, constitutes and irrevocably appoints Landlord, or any transferee or successor of Landlord, the attorney-in-fact of Tenant to execute and deliver any such instrument or document. Section 11.04. ESTOPPEL CERTIFICATES. (a) Upon Landlord's written request, Tenant shall execute, acknowledge and deliver to Landlord a written statement certifying: (i) that none of the terms or provisions of this Lease have been changed (or if they have been changed, stating how they have been changed; (ii) that this Lease has not been cancelled or terminated; (iii) the last date of payment of the Base Rent and other charges and the time period covered by such payment; (iv) that Landlord is not in default under this Lease (or, if Landlord is claimed to be in default, stating why); and (v) such other representations or information with respect to Tenant or the Lease as Landlord may reasonably request or which any prospective purchaser or encumbrancer of the Property may require. Tenant shall deliver such statement to Landlord within ten (10) business days after Landlord's request. Landlord may give any such statement by Tenant to any prospective purchaser or encumbrancer of the Property. Such purchaser or encumbrancer may rely conclusively upon such statement as true and correct. (b) If Tenant does not deliver such statement to Landlord within such ten (10) business day period, Landlord and any prospective purchaser or encumbrancer, may conclusively presume and rely upon the following facts: (i) that the terms and provisions of this Lease have not been changed except as otherwise represented by Landlord; (ii) that this Lease has not been cancelled or terminated except as otherwise represented by Landlord; (iii) that not more than one month's Base Rent or other charges have been paid in advance; and (iv) that Landlord is not in default under the Lease. In such event, Tenant shall be estopped from denying the truth of such facts. -24- 25 Section 11.05. TENANT'S FINANCIAL CONDITION. Within ten (10) business days after written request from Landlord, Tenant shall deliver to Landlord such financial statements as Landlord reasonably requires to verify the net worth of Tenant or any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall deliver to any lender designated by Landlord any financial statements required by such lender to facilitate the financing or refinancing of the Property. Tenant represents and warrants to Landlord that each such financial statement is a true and accurate statement as of the date of such statement. All financial statements shall be confidential and shall be used only for the purposes set forth in this Lease. ARTICLE TWELVE: LEGAL COSTS Section 12.01. LEGAL PROCEEDINGS. If Tenant or Landlord shall be in breach or default under this Lease, such party (the "Defaulting Party") shall reimburse the other party (the "Nondefaulting Party") upon demand for any costs or expenses that the Nondefaulting Party incurs in connection with any breach or default of the Defaulting Party under this Lease, whether or not suit is commenced or judgment entered. Such costs shall include legal fees and costs incurred for the negotiation of a settlement, enforcement of rights or otherwise. Furthermore, if any action for breach of or to enforce the provisions of this Lease is commenced, the court in such action shall award to the party in whose favor a judgment is entered, a reasonable sum as attorneys' fees and costs. The losing party in such action shall pay such attorneys' fees and costs. Tenant shall also indemnify Landlord against and hold Landlord harmless from all costs, expenses, demands and liability Landlord may incur if Landlord becomes or is made a party to any claims or action: (a) Instituted by Tenant against any third party, or by any third party against Tenant, or by or against any person holding any interest under or using the Property by license of or agreement with Tenant; (b) For any foreclosure of any lien for labor or material furnished to or for Tenant or such other person; (c) Otherwise arising out of or resulting from any act or transaction of tenant or such other person; or (d) Necessary to protect Landlord's interest under this Lease in a bankruptcy proceeding of Tenant, or other proceeding of Tenant under Title 11 of the United States Code, as amended. Tenant shall defend Landlord against any such claim or action at Tenant's expense with counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant shall reimburse Landlord for any legal fees or costs Landlord incurs in any such claim or action. Section 12.02. LANDLORD'S CONSENT. Tenant shall pay Landlord's reasonable attorneys' fees incurred in connection with Tenant's request for Landlord's consent under Article Nine (Assignment and Subletting), or in connection with any other act which Tenant proposes to do and which requires Landlord's consent. -25- 26 ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS Section 13.01. NON-DISCRIMINATION. Tenant promises, and it is a condition to the continuance of this Lease, that there will be no discrimination against, or segregation of, any person or group of persons on the basis of race, color, sex, creed, national origin or ancestry in the leasing, subleasing, transferring, occupancy, tenure or use of the Property or any portion thereof. Section 13.02. LANDLORD'S LIABILITY; CERTAIN DUTIES. (a) As used in this Lease, the term "Landlord" means only the current owner or owners of the fee title to the Property or Project or the leasehold estate under a ground lease of the Property or Project at the time in question. Each Landlord is obligated to perform the obligations of Landlord under this Lease only during the time such Landlord owns such interest or title. Any Landlord who transfers its title or interest is relieved of all liability with respect to the obligations of Landlord under this Lease to be performed on or after the date of transfer. However, each Landlord shall deliver to its transferee all funds that Tenant previously paid if such funds have not yet been applied under the terms of this Lease. (b) Tenant shall give written notice of any failure by Landlord to perform any of its obligations under this Lese to Landlord and to any ground lessor, mortgagee or beneficiary under any deed of trust encumbering the Property whose name and address have been furnished to Tenant in writing. Landlord shall not be in default under this Lease unless Landlord (or such ground lessor, mortgagee or beneficiary) fails to cure such non-performance within thirty (30) days after receipt of Tenant's notice. However, if such non-performance reasonably requires more than thirty (30) days to cure, Landlord shall not be in default if such cure is commenced within such thirty (30) day period and thereafter diligently pursued to completion. (c) Notwithstanding any term or provision herein to the contrary, the liability of Landlord for the performance of its duties and obligations under this Lease is limited to Landlord's interest in the Property and the Project, and neither the Landlord nor its partners, shareholders, officers or other principals shall have any personal liability under this Lease. Section 13.03. SEVERABILITY. A determination by a court of competent jurisdiction that any provision of this Lease or any part thereof is illegal or unenforceable shall not cancel or invalidate the remainder of such provision or this Lease, which shall remain in full force and effect. Section 13.04. INTERPRETATION. The captions of the Articles of Sections of this Lease are to assist the parties in reading this Lease and are not a part of the terms or provisions of -26- 27 this Lease. Whenever required by the context of this Lease, the singular shall include the plural and the plural shall include the singular. The masculine, feminine and neuter genders shall each include the other. In any provision related to the conduct, acts or omissions of Tenant, the term "Tenant" shall include Tenant's agents, employees, contractors, invitees, successors or others using the Property with Tenant's expressed or implied permission. Section 13.05. INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This Lease is the only agreement between the parties pertaining to the lease of the Property and no other agreements are effective. All amendments to this Lease shall be in writing and signed by all parties. Any other attempted amendment shall be void. Section 13.06. NOTICES. All notices required or permitted under this Lease shall be in writing and shall be personally delivered or sent by certified mail, return receipt requested, postage prepaid. Notices to Tenant shall be delivered to the address specified in Section 1.03 above, except that upon Tenant's taking possession of the Property, the Property shall be Tenant's address for notice purposes. Notices to Landlord shall be delivered to the address specified in Section 1.02 above. All notices shall be effective upon delivery. Either party may change its notice address upon written notice to the other party. Section 13.07. WAIVERS. All waivers must be in writing and signed by the waiving party. Landlord's failure to enforce any provision of this Lease or its acceptance of rent shall not be a waiver and shall not prevent Landlord from enforcing that provision or any other provision of this Lease in the future. No statement on a payment check from Tenant or in a letter accompanying a payment check shall be binding on Landlord. Landlord may, with or without notice to Tenant, negotiate such check without being bound to the conditions of such statement. Section 13.08. NO RECORDATION. Tenant shall not record this Lease without prior written consent from Landlord. However, either Landlord or Tenant may require that a "Short Form" memorandum of this Lease executed by both parties be recorded. The party requiring such recording shall pay all transfer taxes and recording fees. Section 13.09. BINDING EFFECT; CHOICE OF LAW. This Lease binds any party who legally acquires any rights or interest in this Lease from Landlord or Tenant. However, Landlord shall have no obligation to Tenant's successor unless the rights or interests of Tenant's successor are acquired in accordance with the terms of this Lease. The laws of the state in which the Property is located shall govern this Lease. Section 13.10 CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is a corporation, each person signing this Lease on behalf of Tenant represents and warrants that he has full authority to do so and that this Lease binds the corporation. Within thirty (30) days after this Lease is signed, Tenant shall deliver to Landlord a certified copy of a resolution of Tenant's Board of Directors authorizing the execution of this Lease or other evidence of such authority reasonably acceptable to Landlord. If Tenant is a partnership, each person or entity signing this Lease for Tenant represents and warrants that he or it is a general partner of the partnership, that he or it has full authority to sign for the partnership and that this Lease binds the partnership and all general partners of the partnership. Tenant shall give written notice to Landlord of any -27- 28 general partner's withdrawal or addition. Within thirty (30) days after this Lease is signed, Tenant shall deliver to Landlord a copy of Tenant's recorded statement of partnership or certificate of limited partners. Section 13.11. JOINT AND SEVERAL LIABILITY. All parties signing this Lease as Tenant shall be jointly and severally liable for all obligations of Tenant. Section 13.12. FORCE MAJEURE. If Landlord cannot perform any of its obligations due to events beyond Landlord's control, the time provided for performing such obligations shall be extended by a period of time equal to the duration of such events. Events beyond Landlord's control include, but are not limited to, acts of God, war, civil commotion, labor disputes, strikes, fire, flood or other casualty, shortages of labor or material, government regulation or restriction and weather conditions. Section 13.13. EXECUTION OF LEASE. This Lease may be executed in counterparts and, when all counterpart documents are executed, the counterpart shall constitute a single binding instrument. Landlord's delivery of this Lease to Tenant shall not be deemed to be an offer to lease and shall not be binding upon either party until executed and delivered by both parties. Section 13.14. SURVIVAL. All representations and warranties of Landlord and Tenant shall survive the termination of this Lease. ARTICLE FOURTEEN: BROKERS Section 14.01. BROKER'S FEE. When this Lease is signed by and delivered to both Landlord and Tenant, Landlord shall pay a real estate commission to Landlord's Broker named in Section 1.08 above, if any, as provided in the written agreement between Landlord and Landlord's Broker. Landlord shall pay Landlord's Broker a commission if Tenant exercises any option to extend the Lease Term or to buy the Property, or any similar option or right which Landlord may grant to Tenant, or if Landlord's Broker is the procuring cause of any other lease or sale entered into between Landlord and Tenant covering the Property. Such commission shall be the amount set forth in Landlord's Broker's commission schedule in effect as of the execution of this Lease. If a Tenant's Broker is named in Section 1.08 above, Landlord's Broker shall pay an appropriate portion of its commission to Tenant's Broker if so provided in any agreement between Landlord's Broker and Tenant's Broker. Nothing contained in this Lease shall impose any obligation on Landlord to pay a commission or fee to any party other than Landlord's Broker. Section 14.02. PROTECTION OF BROKERS. If Landlord sells the Property, or assigns Landlord's interest in this Lease, the buyer or assignee shall, by accepting such conveyance of the Property or assignment of the Lease, be conclusively deemed to have agreed to make all payments to Landlord's Broker thereafter required of Landlord under this Article Fourteen. Landlord's Broker shall have the right to bring a legal action to enforce or declare rights under this provision. The prevailing party in such action shall be entitled to reasonable attorneys' fees to be paid by the losing party. Such attorneys' fees shall be fixed by the court in such action. -28- 29 This Paragraph is included in this Lease for the benefit of Landlord's Broker. Section 14.03. BROKER'S DISCLOSURE OF AGENCY. Landlord's Broker hereby discloses to Landlord and Tenant and Landlord and Tenant hereby consent to Landlord's Broker acting in this transaction as the agent of (check one): [ ] Landlord exclusively, or [ ] both Landlord and Tenant. Section 14.04. NO OTHER BROKERS. Tenant represents and warrants to Landlord that the brokers named in Section 1.08 above are the only agents, brokers, finders or other parties with whom Tenant has dealt who are or may be entitled to any commission or fee with respect to this Lease or the Property. -29- 30 Landlord and Tenant have signed this Lease at the place and on the dates specified adjacent to their signatures below and have initialed all Riders which are attached to or incorporated by reference to this Lease. "LANDLORD" Signed on July 23, 1999. NATIONAL DISTRIBUTION AGENCY, INC., a Delaware corporation at Santa Monica, CA By: /s/ John N. Alphson ------------------------------------- JOHN N. ALPHSON Its: CORPORATE SECRETARY By: /s/ Robert Bernardo ------------------------------------- ROBERT BERNARDO Its GENERAL MANAGER "TENANT" Signed on July 26, 1999. PETS.COM, INC., a California corporation at San Francisco, CA By: /s/ Julie Wainwright ------------------------------------- JULIE WAINWRIGHT Its: CHIEF EXECUTIVE OFFICER By: /s/ Chris Deyo ------------------------------------- Its: President ------------------------------------ SECRETARY IN ANY SUCH REAL ESTATE ACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH A PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST, OR OTHER PERSON WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING THE POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND STORAGE TANKS. -30- 31 FIRST AMENDMENT TO INDUSTRIAL REAL ESTATE SUBLEASE (MULTI-TENANT FACILITY) This First Amendment is made for the purpose of amending that certain Agreement dated July 1, 1999, constituting a sublease of a portion of the premises at 33201 Dowe Avenue, Union City, California (the "Property"), between National Distribution Agency, Inc., a Delaware corporation ("Landlord or Sublessor"), and Pets.com, Inc., a California corporation ("Tenant" or "Sublessee"), for (the "Lease" or the "Sublease"). Said Sublease dated July 1, 1999, is herein referred to as the "Primary Sublease". This First Amendment to Lease is subject to that certain lease between Landlord as Lessee and Chino Pacific Warehouse Corporation as Lessor, dated September 25, 1997, (the "Master Lease"). In connection with the execution of this First Amendment to Sublease, the following provisions and representations of the Primary Sublease are incorporated herein: Landlord warrants and represents to Tenant that the Master Lease has not been amended or modified except as expressly set forth herein, that Landlord is not now, and as of the commencement of the Term hereof will not be, in default or breach of any of the provisions of the Master Lease, and the Landlord has no knowledge of any claim by the Master Lessor that Landlord is in default or breach of any of the provisions of the Master Lease. Tenant shall not commit or suffer any act or omission that will violate any of the provisions of the Master Lease. Landlord shall exercise due diligence in attempting to cause the Master Lessor to perform its obligations under the Master Lease for the benefit of Tenant. If the Master Lease terminates this Sublease shall terminate and the parties shall be relieved of any further liability or obligation under this Sublease provided however, that if the Master Lease terminates as a result of a default or breach by Landlord or Tenant under this Sublease and/or the Master Lease, then the defaulting party shall be liable to the non-defaulting party for the damage suffered as a result of such termination. Notwithstanding the foregoing, if the Master Lease gives Landlord any right to terminate the Master Lease in the event of the partial or total damage, destruction, or condemnation of the Master Premises or the building or project of which the Master Premises are a part, the exercise of such right by Landlord shall not constitute a default or breach hereunder, provided that Tenant receives a pro rata portion of any proceeds, or other remuneration, if any, which Landlord receives as a result of such termination. The provisions of this First Amendment to Sublease are made to reflect the desire of Tenant to increase its Primary leased space of approximately 73,920 square feet of warehouse space and 4,800 square feet of office space under the Primary Sublease, in two separate phases described as First Expansion Space of approximately 32,256 square feet of warehouse space, and Second Expansion Space of approximately 32,256 square feet of office space, as more specifically reflected in amended Exhibit "A" attached. The provisions and terms of the Primary Sublease are amended, supplemented and/or -31- 32 modified as hereafter set forth. If not amended, supplemented or modified, the terms are identified as "no change". To the extent not amended, superseded, or modified herein, the terms of the Primary Sublease shall constitute a part of this amendment and are hereby incorporated by reference. ARTICLE ONE: BASIC TERMS - ADDED AND MODIFIED AS FOLLOWS: Section 1.01. DATE OF LEASE. THE FOLLOWING PROVISIONS SPECIFIED BELOW ARE ADDED: FIRST EXPANSION SPACE: October 15, 1999. SECOND EXPANSION SPACE: November 15, 1999 Section 1.02. LANDLORD (INCLUDE LEGAL ENTITY): NO CHANGE. Section 1.03. TENANT (INCLUDED LEGAL ENTITY): NO CHANGE. Section 1.04. PROPERTY. THE FOLLOWING PROVISIONS ARE ADDED: The First Expansion space includes approximately 32,256 square feet of warehouse space; the Second Expansion Space includes approximately 32,256 square feet of warehouse space, both of which areas are more fully reflected in Exhibit "A", as amended and outlined in red. Section 1.05. LEASE TERM: THE FOLLOWING PROVISIONS ARE ADDED: The Lease Term for the First Expansion Space shall become effective beginning October 15, 1999, and ending on August 14, 2004, a period of Fifty-six and one-half (56.5) months. Tenant shall pay no Base Rent for the period October 15, 1999 to November 30, 1999. During the period of free rent, Tenant shall be obligated to pay its pro rata share of taxes, insurance, maintenance and utilities, effective commencing November 1, 1999, and as provided in Section 1.12(b) herein. The Lease Term for the Second Expansion Space shall become effective beginning November 15, 1999, and ending on August 14, 2004, a period of Fifty-five and one-half (55.5) months. Tenant shall pay no base rent for the period November 15, 1999 to December 31, 1999. During the period of free rent, Tenant shall be obligated to pay its pro rata share of taxes, insurance, maintenance and utilities, effective commencing November 1, 1999, and as provided in Section 1.12(b) herein. In the event Lessor fails to deliver the First Expansion Space on or before October 15, 1999, -32- 33 Lessor shall compensate Lessee for the delay in possession as follows: - Beginning October 15, 1999, one (1) day free rent for each day possession is delayed. In the event Lessor fails to deliver the Second Expansion Space on or before November 15, 1999, Lessor shall compensate Lessee for the delay in possession as follows: - Beginning November 15, 1999, one (1) day free rent for each day possession is delayed. Notwithstanding the above, should Lessor deliver either Expansion space at any time prior to the original commencement date of the Term of the particular Expansion Space, Lessee agrees to begin the Lease term for the particular Expansion Space, upon receipt of the space. The Option to Renew referenced herein, shall include both Expansion Spaces. Section 1.06. PERMITTED USES: (See Article Five) NO CHANGE. Section 1.07. TENANT'S GUARANTOR: NO CHANGE. Section 1.08. BROKERS: (See Article Fourteen) NO CHANGE. Section 1.09. NO CHANGE. COMMISSION PAYABLE TO LANDLORD'S BROKER: Section 1.10. INITIAL SECURITY DEPOSIT: These provisions are MODIFIED AND/OR ADDED TO as set forth below: The existing initial security deposit of [*] shall be increased by [*], by November 15, 1999, for a total Security Deposit of [*]. The Letter-of-Credit for [*] shall be increased by [*] by November 15, 1999, for a total Letter-of-Credit of [*]. Provided the Tenant is not in default of the Sublease, the Letter-of-Credit in the sum of [*], shall be reduced to [*] as of August 14, 2000. As of August 14, 2001, no Letter-of-Credit shall be required to be on deposit. Section 1.11. VEHICLE PARKING SPACES ALLOCATED TO TENANT. THE FOLLOWING PROVISIONS ARE ADDED: Upon occupancy of the Second Expansion Space, Tenant shall be entitled to an additional -33- * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 34 35 unassigned parking spaces. Section 1.12. RENT AND OTHER CHARGES PAYABLE BY TENANT: MODIFIED AS SET FORTH BELOW. (a) BASE RENT: MODIFIED AS FOLLOWS: (i) EXISTING SPACE:
BASE RENTAL RATE PER SQ. FT. AMOUNT MONTHS PER MO. PER MO. ------ ------- ------- July 1 - Aug. 14, 1999 Free rent Aug. 15, 1999 - April 14, 2001 [*] psf/mth/nnn [*] April 15, 2001 - Dec. 14, 2002 Annual minimum CPI (All Consumers S.F. Bay Area) increase of [*]; annual maximum CPI (All Consumers S.F. Bay Area) of [*] over base rental rate in months 1 - 20. Dec. 15, 2002 - Aug. 14, 2004 Annual Minimum CPI (All Consumers S.F. Bay Area) increase of [*]; annual maximum CPI (All Consumers S.F. Bay Area) of [*] over base rental rate in months 21 - 40.
(ii) FIRST EXPANSION SPACE:
BASE RENTAL RATE PER SQ. FT. AMOUNT MONTHS PER MO. PER MO. ------ ------- ------- Oct. 15, 1999 - Nov. 30, 1999 Free rent. Dec. 1, 1999 - April 14, 2001 [*] psf/mth/nnn [*] April 15, 2001 - Dec. 14, 2002 Increase concurrently per subsection (i) above Dec. 15, 2002 - Aug. 14, 2004 Increase concurrently per subsection (i) above
(iii) SECOND EXPANSION SPACE:
BASE RENTAL RATE PER SQ. FT. AMOUNT MONTHS PER MO. PER MO. Nov. 15, 1999 - Dec. 31, 1999 Free rent. Jan. 1, 2000 - April 14, 2001 [*] psf/mtn/nnn [*] April 15, 2001 - Dec. 14, 2002 Increase concurrently per subsection (i) above Dec. 15, 2002 - Aug. 14, 2004 Increase concurrently per subsection (i) above
-34- * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 35 The Base Rents payable hereunder are more fully set forth in REVISED Lease Rider No. 1 attached and incorporated herein by reference, and as referred to in REVISED Lease Rider No. 3, also attached and incorporated herein by reference. In the event that Landlord is in default under the Master Lease and either Landlord or Tenant receive notice of such default from the Master Lessor under the Master Lease, Tenant shall have the right (without any obligation to do so), to pay rent provided in this section, and all other sums due Landlord hereunder, which Landlord is obligated to pay directly to the Master Lessor. (b) OTHER PERIODIC PAYMENTS INCLUDED AS RENT - REVISED TO READ IN FULL AS FOLLOWS: (i) Real Property Taxes (See Section 4.02); (ii) Utilities (See Section 4.03); (iii) Insurance Premiums (See Section 4.04); (iv) Tenant's Initial Pro Rata Share of Common Area Expenses presently at 25.67% shall be increased to (46.7%) effective November 1, 1999. (See Section 4.05); (v) Impounds for Insurance Premiums and Property Taxes (See Section 4.08); (vi) Maintenance, Repairs and Alterations (See Article Six). Section 1.13. LANDLORD'S SHARE OF PROFIT ON ASSIGNMENT OR SUBLEASE: NO CHANGE. Section 1.14. RIDERS: The following Riders ARE REVISED as indicated and are attached and made a part of this Lease: Rider No. 1 - Base Rent Schedule - REVISED TO READ IN FULL AS ATTACHED. Rider No. 2 - Tenant Improvement Allowance - NO CHANGE. All Tenant Improvements to Expansion Spaces are to be made at Tenant's sole cost and expense and in accordance with Section 6.05 (a) and (b) of the Primary Lease. Rider No. 3 - Options to Renew and to Expand Space - REVISED TO READ IN FULL AS ATTACHED. ARTICLE TWO: LEASE TERM Section 2.01. LEASE OF PROPERTY FOR LEASE TERM. REVISED AS FOLLOWS: Landlord leases the Property to Tenant and Tenant leases the Property from Landlord for the Lease Term, as amended. The Lease term is for the period stated in Section 1.05, as amended, and shall begin and end on the dates specified in Section 1.05, as amended, unless the beginning or end of the Lease Term is changed under any provision of this Lease. The "Commencement Date" shall be the dates specified in Section 1.05, as amended, for the beginning of the Lease Term, unless advanced or delayed under any provision of this Lease. The Lease Term for all space shall end on August 14, 2004, unless extended by exercise of any option provided, or under any applicable provision of the Lease. Section 2.02. DELAY IN COMMENCEMENT. NO CHANGE. -35- 36 Section 2.03. EARLY OCCUPANCY. NO CHANGE. Section 2.04. HOLDING OVER. NO CHANGE. ARTICLE THREE: BASE RENT - MODIFIED AS SET FORTH BELOW. Section 3.01. TIME AND MANNER OF PAYMENT. Upon execution of this First Amendment to Lease, Tenant shall continue to pay Landlord the Base Rent for the existing space in the amount stated in Paragraph 1.12(a)(i) above, on the first day of the each month of the Lease Term. On December 1, 1999, Tenant shall pay, in addition to such rent, the Base Rent for the First Expansion Space for the first month and each month thereafter as provided in Section 1.12(a)(ii). On January 1, 2000, Tenant shall pay additional Base Rent for the Second Expansion Space for first month and each month thereafter, as provided in Section 1.12(a)(iii). Tenant shall pay Landlord the Base Rent, in advance within five (5) business days after the commencement of each month, without offset, deduction or prior demand. The Base Rent shall be payable at Landlord's address or at such other place as Landlord may designate in writing. If the Term of either the First Expansion Space or the Second Expansion Space commences other than on the first day of a month, then the Base Rent provided for such partial month shall be prorated based upon a thirty (30) day month and the prorated installment shall be paid on the first day of the calendar month next succeeding the Term Commencement Date together with the other amounts payable on that day. If such Term terminates on other than the last day of a calendar month, then the Rent provided for such partial month shall be prorated based upon a thirty (30) day month and the prorated installment shall be paid on the first day of the calendar month in which the date of termination occurs. Section 3.02. COST OF LIVING INCREASE. The Base Rent for all space shall be increased on each date (the "Rental Adjustment Date") as provided in Paragraph 1.12(a) above in accordance with the increase in the United States Department of Labor, Bureau of Labor Statistics, Consumer Price Index for All Urban Consumer (all items for the geographical Statistical Area in which the Property is located on the basis of 1982-1984 = 100) (the "Index") as follows: (a) The Base Rent (the "Comparison Base Rent") in effect immediately before each Rental Adjustment Date shall be increased by the percentage that the Index has increased from the date (the "Comparison Date') on which payment of the Comparison Base Rent began through the month in which the applicable Rental Adjustment Date occurs. The Base Rent shall not be reduced by reason of such computation. Landlord shall notify Tenant of each increase by a written statement which shall include the Index for the applicable Comparison Date, the Index for the increase in the Base Rent provided for in this Section 3.02 shall be subject to any minimum or maximum increase, if provided for in Paragraph 1.12(a). (b) Tenant shall pay the new Base Rent from the applicable Rental Adjustment Date -36- 37 until the next Rental Adjustment Date. Landlord's notice may be given after the applicable Rental Adjustment Date of the increase, and Tenant shall pay Landlord the accrued rental adjustment for the months elapsed between the effective date of the increase and Landlord's notice of such increase within ten (10) days after Landlord's notice. If the format or components of the Index are materially changed after the Commencement Date, Landlord shall substitute an index which is published by the Bureau of labor Statistics or similar agency and which is most nearly equivalent to the Index in effect on the Commencement Date. The substitute index shall be used to calculate the increase in the Base Rent unless Tenant objects to such index in writing within fifteen (15) days after receipt of Landlord's notice. If Tenant objects, Landlord and Tenant shall submit the selection of the substitute index for binding arbitration in accordance with the rules and regulations of the American Arbitration Association at its office closest to the Property. The costs of arbitration shall be borne equally by Landlord and Tenant. Section 3.03. SECURITY DEPOSIT; INCREASES. NO CHANGE. Section 3.04. TERMINATION; ADVANCE PAYMENT. NO CHANGE. ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT - NO CHANGE, EXCEPT FOR REVISIONS IN SUBPARAGRAPH 4.02(c) AND 4.03. Section 4.01. ADDITIONAL RENT. NO CHANGE. Section 4.02. PROPERTY TAXES. NO CHANGE, EXCEPT FOR SUBSECTIONS (c) JOINT ASSESSMENT. (a) REAL PROPERTY TAXES. NO CHANGE. (b) DEFINITION OF "REAL PROPERTY TAX". NO CHANGE. (c) JOINT ASSESSMENT. REVISED AS SHOWN: If the Property is not separately assessed, Landlord shall reasonably determine Tenant's share of the real property tax payable by Tenant under Paragraph 4.02(a) from the assessor's worksheets or other reasonably available information. Tenant shall pay such share to Landlord within fifteen (15) days after receipt of Landlord's written statement. Until November 1, 1999, Tenant's share of such real property tax shall be 25.67% of the total amount assessed on the Project, based on the total square footage occupied at the time of the execution of this Sublease, divided by the total square footage of the premises (78,720 square feet / 306,650 square feet = 25.67%). Effective November 1, 1999, the Tenant's share shall be 46.7% based upon the total square footage, including Expansion Spaces, covered by the Lease, as amended, divided by the total square footage of the premises. (143,232 / 306,650 = 46.7%). -37- 38 (d) PERSONAL PROPERTY TAXES. NO CHANGE. Section 4.03. UTILITIES - REVISED AS FOLLOWS: Tenant shall pay, directly to the appropriate supplier, the cost of all natural gas, heat, light, power, sewer service, telephone, water, refuse disposal and other utilities and services supplied to the Property. However, if any services or utilities are jointly metered with other property, Landlord shall make a reasonable determination of Tenant's proportionate share of the cost of such utilities and services and Tenant shall pay its share to Landlord within fifteen (15) days after receipt of Landlord's written statement. Tenant's share of such non-jointly metered costs shall be 25.67% of the total charged to the Project, based on the square footage occupied by Tenant at the time prior to and at the execution of this Sublease, and 46.7% as of November 1, 1999. Section 4.04. INSURANCE POLICIES. NO CHANGE. (a) LIABILITY INSURANCE. NO CHANGE. (b) PROPERTY AND RENTAL INCOME INSURANCE. NO CHANGE. (c) PAYMENT OF PREMIUMS. NO CHANGE. (d) GENERAL PROVISIONS. NO CHANGE. Section 4.05. COMMON AREAS; USE, MAINTENANCE AND COSTS. REVISED PER SUBSECTION (e) AS FOLLOWS: (a) COMMON AREAS. NO CHANGE. (b) USE OF COMMON AREAS. NO CHANGE. (c) SPECIFIC PROVISION RE: VEHICLE PARKING. NO CHANGE. (d) MAINTENANCE OF COMMON AREAS. NO CHANGE. (e) TENANT'S SHARE AND PAYMENT. REVISED TO READ IN FULL AS FOLLOWS: Tenant shall pay Tenant's annual pro rata share of all Common Area costs (prorated for any fractional month) upon notice from Landlord that such costs are due and payable, and in any event prior to delinquency. Tenant's pro rata share shall be calculated by dividing the square footage area of the Property, as set forth in Section 1.04 of the Lease, by the aggregate square foot area of the Project which is leased or held for lease by tenants, as of the date on which the computation is made. Tenant's initial and subsequent pro rata share is set out in Section 1.12(b), AS AMENDED. Any changes in the Common Area costs and/or the aggregate area of the Project, leased or held for lease during the Lease Term shall be effective on the first day of the month after such change occurs. Landlord may, at Landlord's election, -38- 39 estimate in advance and charge to Tenant as Common Area costs, all maintenance and repair costs for which Tenant is liable under Section 6.04 of the Lease, and all other Common Area costs payable by Tenant hereunder. At Landlord's election, such statements of estimated Common Area costs shall be delivered monthly, quarterly or at any other periodic intervals to be designated by Landlord. Landlord may adjust such estimates at any time based upon Landlord's experience and reasonable anticipation of costs. Such adjustments shall be effective as of the next rent payment date after notice to Tenant. Within sixty (60) days after the end of each calendar year of the Lease Term, Landlord shall deliver to Tenant a statement prepared in accordance with generally accepted accounting principles setting forth, in reasonable detail, the Common Area costs paid or incurred by Landlord during the preceding calendar year and Tenant's pro rata share. Upon receipt of such statement, there shall be an adjustment between Landlord and Tenant, with payment to or credit given by Landlord (as the case may be) so that Landlord shall receive the entire amount of Tenant's share of such costs and expenses for such period. Section 4.06. LATE CHARGES. NO CHANGE. Section 4.07. INTEREST ON PAST DUE OBLIGATIONS. NO CHANGE. Section 4.08. IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES. NO CHANGE. ARTICLE FIVE: USE OF PROPERTY - NO CHANGE. Section 5.01. PERMITTED USES. NO CHANGE. Section 5.02. MANNER OF USE. NO CHANGE. Section 5.03. HAZARDOUS MATERIALS. NO CHANGE. Section 5.04. SIGNS AND AUCTIONS. NO CHANGE. Section 5.05. INDEMNITY. NO CHANGE. Section 5.06. LANDLORD'S ACCESS. NO CHANGE. Section 5.07. QUIET POSSESSION. NO CHANGE. ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS. NO CHANGE. Section 6.01. EXISTING CONDITIONS. NO CHANGE. -39- 40 Section 6.02. EXEMPTION OF LANDLORD FROM LIABILITY. NO CHANGE. Section 6.03. LANDLORD'S OBLIGATION. NO CHANGE. Section 6.04. TENANT'S OBLIGATIONS. NO CHANGE. Section 6.05. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS. NO CHANGE. Section 6.06. CONDITION UPON TERMINATION. NO CHANGE. ARTICLE SEVEN: DAMAGE OR DESTRUCTION - NO CHANGE. ARTICLE EIGHT: CONDEMNATION - NO CHANGE. ARTICLE NINE: ASSIGNMENT AND SUBLETTING - NO CHANGE. ARTICLE TEN: DEFAULTS; REMEDIES - NO CHANGE. ARTICLE ELEVEN: PROTECTION OF LENDERS - NO CHANGE. ARTICLE TWELVE: LEGAL COSTS - NO CHANGE. ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS - THE PROVISIONS OF SECTIONS 13.15 AND 13.16 ARE ADDED: Section 13.01. NON-DISCRIMINATION. NO CHANGE. Section 13.02. LANDLORD'S LIABILITY; CERTAIN DUTIES. NO CHANGE. Section 13.03. SEVERABILITY. NO CHANGE. Section 13.04. INTERPRETATION. NO CHANGE. Section 13.05. INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. NO CHANGE. Section 13.06. NOTICES. NO CHANGE. Section 13.07. WAIVERS. NO CHANGE. Section 13.08. NO RECORDATION. NO CHANGE. Section 13.09. BINDING EFFECT; CHOICE OF LAW. NO CHANGE. Section 13.10. CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. NO CHANGE. -40- 41 Section 13.11. JOINT AND SEVERAL LIABILITY. NO CHANGE. Section 13.12. FORCE MAJEURE. NO CHANGE. Section 13.13. EXECUTION OF LEASE. NO CHANGE. Section 13.14. SURVIVAL. NO CHANGE. Section 13.15. TENANT'S RESTROOM FACILITY. JOINT RESTROOM USE. The parties agree that during the term of this Sublease, they shall be jointly entitled to use the restroom facility marked as "JOINT RESTROOM" on Exhibit "A", and Landlord agrees to provide for Tenant's access as indicated in solid Green lines on Exhibit "A" at Tenant's sole cost for alterations for access, security and other requirements to permit joint use but retaining security for the respective operation of Landlord and Tenant. TENANT'S SEPARATE RESTROOM. Alternatively, the parties agree that during the term of this Sublease, Tenant at its election, may be exclusively entitled to construct and use the restroom facility marked as "RESTROOM" on Exhibit "A", as indicated in Green. Tenant shall install such facility at its sole cost and expense at the approximate location indicated in dotted Green lines on Exhibit "A", and according to plans and specifications approved by Landlord. Section 13.16. TENANT'S CONTRIBUTION TO LANDLORD'S RELOCATION EXPENSE. Tenant agrees, in further consideration, for this Sublease, to pay Landlord the sum of $43,947 to defray, to that extent, Landlords cost of relocating its existing customers and facility in the Expansion Spaces. Said payment shall be made by Tenant concurrently with execution by Tenant of this Sublease. Tenant further agrees to disassemble, remove, transport, and reinstall, Landlord's existing racking in the Expansion Spaces to Landlord's facilities at 1345 Doolittle Rd., San Leandro, California, at Tenant's sole cost and expense. Tenant shall accomplish such relocation of racking on occupation of the First Expansion Space and in coordination with Landlord's on-site management. ARTICLE FOURTEEN: BROKERS - NO CHANGE. Landlord and Tenant have signed this Amendment to Lease at the place and on the dates specified adjacent to their signatures below and have initialed all Riders which are attached to or incorporated by reference to this Lease. "LANDLORD" Signed on October 20, 1999. NATIONAL DISTRIBUTION AGENCY, INC., a Delaware corporation -41- 42 at Santa Monica, CA By: /s/ John N. Alphson ------------------------------------- JOHN N. ALPHSON Its: CORPORATE SECRETARY By: -------------------------------------- ROBERT BERNARDO Its GENERAL MANAGER "TENANT" Signed on October 22, 1999. PETS.COM, INC., a California corporation at San Francisco, CA ----------------------------------------- By: /s/ Julie Wainwright ------------------------------------- JULIE WAINWRIGHT Its: CHIEF EXECUTIVE OFFICER By: -------------------------------------- Its: ------------------------------------- SECRETARY IN ANY SUCH REAL ESTATE ACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH A PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST, OR OTHER PERSON WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING THE POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND STORAGE TANKS. -42- EX-10.27 33 LEASE AGREEMENT WITH BRYANT SPRINGS L.L.C. 1 EXHIBIT 10.27 STANDARD INDUSTRIAL "GROSS" LEASE FOR SINGLE TENANT This Lease is made as of September 20, 1999 ("Execution Date"), between Bryant Springs LLC, a California limited liability company ("Landlord"), and Pets.com, a California corporation ("Tenant"). 1. BASIC LEASE INFORMATION; DEFINITIONS 1.1 Basic Lease Information. If there is a conflict between the Basic Lease Information in this Section 1.1 and the remainder of the Lease, the latter shall control. Premises: The entire building at 945 Bryant Street, San Francisco, California ("Building"), as outlined on the site plan attached as Exhibit A, as further described in Sections 2.1 and 2.2. Rentable Area: Approximately 40,410 rentable square feet, subject to verification under Section 2.1 Term: Ten (10) years from Commencement Date (see Section 3.1) Extension Option: One (1) 5-year extension option (see Section 3.3) Commencement Date: If Landlord performs the "Tenant Improvement Work" (as defined in Section 2.4), then the Commencement Date shall be the later of (a) the date Landlord delivers the Premises to Tenant with the Tenant Improvement Work substantially completed in accordance with the Work Letter attached as Exhibit B, or (b) April 1, 2000. If Tenant elects to perform the Tenant Improvement Work pursuant to the Work Letter; the Commencement Date shall be fixed at seventy-five (75) days from Landlord's Delivery Date (as defined in Section 3.2(b)). Estimated Commencement Date: April 1, 2000
Monthly Base Rent: Year Rent/Square Foot Monthly Base Rent* - ------------------ ---- ---------------- ------------------ 1-2 [*]/Year [*] 3-4 [*]/Year [*] 5-6 [*]/Year [*] 7-8 [*]/Year [*] 9-10 [*]/Year [*]
* Based on 40,410 rentable square feet, subject to recalculation pursuant to Section 2.1 -1- * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 2 Base Year: 2000, except that with respect to Property Taxes (as defined in Section 26), the Base Year shall be tax year 2000/2001 Security Deposit: [*] irrevocable letter of credit (see Section 4.5, including Tenant's right thereunder to reduce the letter of credit) Permitted Use: Multimedia, business services and general office, to the extent general office use is permitted under applicable zoning and other Laws (see Section 6.1) Parking Allotment: Thirty-three (33) unassigned parking spaces (see Section 7) Tenant's Liability Insurance: $2,000,000 (see Section 12.1) Address of Landlord: Bryant Springs LLC 1981 N. Broadway, Suite 415 Walnut Creek, CA 94596 Attn: Michael Kelly Phone: (925) 937-4111 Fax: (925) 937-4173 Address of Tenant: Before Commencement Date Pets.com 435 Brannan Street San Francisco, CA 94107 Attn: Mark Lemma Phone: (415) 343-1547 Fax: (415) 222-9998 After Commencement Date 945 Bryant Street San Francisco, CA 94107 Attn: Mark Lemma Phone: (415) 343-1547 Fax: (415) 222-9998 Brokers: Colliers International (Michael D. McCarthy) (Landlord's broker); BT Commercial (Chad Clemetson) (Tenant's broker) (see Section 27.14) TI Allowance: [*]/rentable square foot (see Work Letter attached as Exhibit B) 1.2 Definitions. Unless otherwise provided, definitions of capitalized words and phrases are set forth in Section 26 of this Lease. -2- * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 3 2. PREMISES; CONDITION PRECEDENT 2.1 Demise of Premises. Landlord leases to Tenant and Tenant leases from Landlord the premises described in the Basic Lease Information in Section 1.1 ("Premises"), on and subject to the terms and conditions of this Lease. Tenant acknowledges that, as of the Execution Date, the Premises consist of a two-story building to which Landlord will add a third floor before the Commencement Date. Before the Commencement Date, Landlord's architect shall verify the number of rentable square feet in the Premises in accordance with standards published by the Building Owners and Managers Association. Tenant's architect may consult with Landlord's architect regarding such verification. Once the rentable square footage of the Premises has been verified, the Monthly Base Rent stated in the Basic Lease Information shall be recalculated if needed to reflect the correct amount. Upon such verification, Tenant shall have no claim against Landlord or defense to enforcing this Lease based on any difference between the agreed upon rentable square footage and the actual rentable square footage in the Premises. 2.2 Landlord's Reserved Rights. Notwithstanding anything to the contrary in this Lease, the Premises shall exclude the exterior walls, the foundation, the roof and the structural components of the Building. In addition, Landlord reserves the right, from time to time, to: (a) locate, install, repair and replace any pipes, utility lines, ducts, wires, mains and structural elements through the Premises in locations that will not materially interfere with Tenant's use of or access to the Premises; (b) change the lines of the lot on which the Building stands ("Lot") and make other reasonable changes and grant others rights thereto, including without limitation grant easements, rights of way and rights of ingress and egress and similar rights to users and owners of adjacent parcels; and (c) alter or relocate any Base Building Facilities (as defined in Section 26), without material impairment (other than temporary interruptions as may be necessary in the case of emergency) to Tenant's use of or access to the Premises. 2.3 Condition of Premises. Landlord agrees to perform, at its cost, the addition of a third story to the Building, work on the Base Building Facilities and other related work, all described as "Landlord's Work" in Exhibit C attached. Landlord also agrees to perform, on Tenant's behalf, that certain tenant improvement work described as "Tenant Improvement Work" in the Work Letter attached as Exhibit B, in accordance with the terms and conditions of the Work Letter, unless Tenant elects to perform the Tenant Improvement Work pursuant to the Work Letter. Except for Landlord's Work and, if Tenant elects not to perform the Tenant Improvement Work, the Tenant Improvement Work, Landlord shall have no obligation to improve or otherwise modify the Premises for Tenant's use. Subject to Landlord's representations and warranties in Section 2.4, Tenant shall accept the Premises in its "as is" condition as of the Execution Date, including but not limited to title, physical condition, size or dimensions of the Premises, and the zoning, building and land use restrictions applicable to the Premises. 2.4 Landlord's Representations. If Landlord performs the Tenant Improvement Work, Landlord represents and warrants that, as of the Commencement Date, the Premises and the Building are in good condition and repair, all Building systems and equipment are in good operating condition, and the Premises and the Building comply in all material respects with all -3- 4 Laws (as defined in Section 26). If Tenant performs the Tenant Improvement Work, Landlord represents and warrants that, as of the Commencement Date, Landlord's Work is in good condition and repair and comply in all material respects with all Laws. If Landlord becomes aware that any of the foregoing representations and warranties was not true as of the Commencement Date, Landlord shall remedy or cure any such violation promptly and diligently at Landlord's sole cost and expense. This Lease shall not be void or voidable as a result of Landlord's violation of any representation and warranty, nor shall Landlord or its Authorized Representatives (as defined in Section 26) have any liability to Tenant therefor provided Landlord remedies or cures any such violation promptly and diligently at Landlord's sole cost and expense. Tenant acknowledges that, except for the representations and warranties in this Section, neither Landlord nor its Authorized Representatives have made any representations or warranties to Tenant regarding the Premises or the Building. 2.5 Condition Precedent to Obligations. The obligations of the parties under this Lease are expressly conditioned upon the issuance by the City of San Francisco of a building permit for the Tenant Improvement Work for the Permitted Use ("Permit"). If the City refuses to issue the Permit, then either Landlord or Tenant shall have the right to terminate this Lease by written notice to the other, delivered within fifteen (15) days after receipt of the City's notice. Upon such termination, Landlord and Tenant shall have no further liability under the Lease and each party shall be responsible for paying its own costs and fees. 3. TERM; EXTENSION OPTION; HOLDING OVER 3.1 Term. The initial term of this Lease shall be for the period specified in the Basic Lease Information ("Initial Term"), unless sooner terminated pursuant to other provisions of this Lease; provided, however, if the Commencement Date is not the first day of the month, the Term will expire on the last day of the calendar month during which the Term would otherwise expire. All references in this Lease to "Term" shall mean the Initial Term and, upon the exercise of the Extension Option (as defined in Section 3.3), shall mean the Initial Term as extended by such Extension Option. 3.2 Term Commencement. (a) If Landlord performs the Tenant Improvement Work, this paragraph (a) shall govern. Landlord shall use reasonable diligence to cause the Commencement Date to occur on or before the Estimated Commencement Date specified in the Basic Lease Information, as such date is extended for any delays caused by Force Majeure (as defined in Section 26) or Tenant Delays (as defined in the Work Letter). The actual Commencement Date shall be the later of the Estimated Commencement Date or the date Landlord delivers the Premises to Tenant with Substantial Completion (as defined in the Work Letter) of the Tenant Improvement Work. Notwithstanding the foregoing, if Landlord is delayed in the Substantial Completion of the Tenant Improvement Work as a result of a Tenant Delay, Landlord may determine, in its sole good-faith judgment, that the actual Commencement Date is the date that Substantial Completion of the Tenant Improvement Work would have occurred but for such delay. (b) If Tenant elects to perform the Tenant Improvement Work, this paragraph (b) shall govern. The Commencement Date shall be fixed at seventy-five (75) days after -4- 5 Landlord's Delivery Date. "Landlord's Delivery Date" shall be the date that Landlord delivers the Premises to Landlord with the Minimal Landlord's Work substantially completed. "Minimal Landlord's Work" shall consist of that portion of Landlord's Work that, in Landlord's good-faith judgment, must be completed in order for Tenant to commence the Tenant Improvement Work, including the construction of the third floor of the Building. Tenant acknowledges that Landlord shall continue to perform Landlord's Work even after Landlord's Delivery Date, and that Landlord and Tenant shall cooperate with each other in coordinating the performance of Landlord's Work and the Tenant Improvement Work. (c) As soon as the actual Commencement Date is known, the parties will execute an addendum to this Lease stating the actual Commencement Date and termination date of this Lease. 3.3 Extension Option. Tenant shall have the option to renew this Lease as to the entire Premises then demised under this Lease ("Extension Option") for one (1) additional consecutive period of five (5) years ("Extended Term"), commencing on expiration of the Initial Term on the following terms and conditions: (a) Tenant shall exercise the Extension Option, if at all, by delivering to Landlord an irrevocable notice of option exercise no later than nine (9) months and no earlier than twelve (12) months before the expiration of the Initial Term. Any notice of option exercise delivered after the deadline shall, at Landlord's option, be void. (b) All terms and conditions of this Lease shall apply during the Extended Term except that: (i) there shall be no further Extension Option; and (ii) the Monthly Base Rent for the Extended Term shall be the greater of (x) "Fair Market Rent" for the Premises as determined in Section 4.3 below, or (y) the Monthly Base Rent for the last month of the Initial Term. (c) Notwithstanding anything to the contrary in this Lease, the Extension Option is personal to the Tenant originally named in the Lease (or its Permitted Transferee, as defined in Section 15.10 below) and may be exercised only if the Tenant originally named in the Lease physically occupies at least two full floors of the Premises as of the date Tenant exercises the Extension Option and as of the commencement of the Extension Term. At Landlord's option, Tenant shall not have the right to exercise the Extension Option (and any Extension Option exercised by Tenant will be voided) if (a) Landlord has given Tenant written notice, on or before the date Tenant exercises the Extension Option or the commencement of the Extension Term, that a default has occurred and Tenant has not yet cured such default, or (b) Landlord has given Tenant written notice from Landlord, on more than two (2) occasions in the preceding twelve (12) month period, that a default in the payment of Rent or any other material default has occurred (regardless of whether such defaults subsequently are cured). 3.4 No Liability for Landlord. This Lease shall not be void or voidable, nor shall Landlord or its Authorized Representatives have any liability to Tenant, by reason of Landlord's failure to deliver the Premises by the Estimated Commencement Date. Postponement of the Commencement Date shall be Tenant's exclusive remedy and in sole satisfaction of all Claims -5- 6 Tenant might otherwise have by reason of Landlord's failure to deliver the Premises by the Estimated Commencement Date. 3.5 Holding Over. If Tenant, with Landlord's written consent, remains in possession of the Premises after the Term ends, such holding over by Tenant shall be a month-to-month tenancy only, terminable on thirty (30) days' notice at any time by either party. The Monthly Base Rent during such holdover tenancy shall be: (a) for the initial thirty (30) days of such holdover, one hundred fifty percent (150%) of the Monthly Base Rent in effect for the month before the Term end, and (b) thereafter, two hundred percent (200%) of the Monthly Base Rent in effect for the month before the end of the Term, and all other terms and conditions of this Lease shall apply to the holdover tenancy except those pertaining to the Extension Option or the Right of First Offer in Section 25. Nothing contained in this Lease shall be construed as Landlord's consent to any holding over by Tenant, and Landlord expressly reserves the right to require Tenant to surrender possession of the Premises to Landlord as provided in this Lease upon the expiration or other termination of this Lease. If Tenant fails to surrender the Premises upon the termination or expiration of this Lease, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall indemnify, defend and hold Landlord harmless from all Claims resulting from such failure, including, without limitation, any Claims by any succeeding tenant based on such failure to surrender, and any lost profits to Landlord resulting therefrom. 4. RENT 4.1 Monthly Base Rent. From and after the Commencement Date, Tenant shall pay to Landlord as monthly base rent for the Premises the amount stated in the Basic Lease Information as "Monthly Base Rent." Monthly Base Rent for the first full month after the Commencement Date shall be paid upon Tenant's execution of this Lease. Thereafter, Tenant shall pay the Monthly Base Rent on the first day of each calendar month, in advance, without deduction, setoff, prior notice or demand. If the Commencement Date is not the first day of the month, then, on the Commencement Date, Tenant shall pay the prorated portion of the Monthly Base Rent for the partial month during which the Commencement Date falls. 4.2 Additional Rent. Tenant shall pay to Landlord, as additional Rent (as defined in Section 26), any increase in Operating Costs (as defined in Section 26) for each calendar year over the Operating Costs for the Base Year ("Increased Operating Costs"), in accordance with Section 5. Tenant shall pay the Increased Operating Costs, together with Tenant's payment of the Monthly Base Rent, without deduction, setoff, prior notice or demand except as provided in Section 5. 4.3 Fair Market Rent. "Fair Market Rent" under Section 3.3 shall be the then going market rental rate (including escalations and an adjusted base year), calculated at the average effective rate after taking into account any "free rent" or other equivalent concessions in lieu of free rent and tenant improvements or allowances (including the value of the existing improvements in the Premises, whether paid for by Landlord or Tenant), for comparable space in comparable buildings in the area known as "South of Market" in San Francisco, California, for a term equivalent to the Extended Term. -6- 7 (a) If Landlord and Tenant do not agree on the Fair Market Rent for the Premises within thirty (30) days after Landlord's receipt of Tenant's notice exercising the Extension Option, the Fair Market Rent of the Premises will be determined as follows: (b) Each of Landlord and Tenant shall, by notice to the other, appoint an appraiser with at least five (5) years' experience appraising the rental values of buildings comparable to the Building in the South of Market area. The appraisers appointed by the parties shall be independent and have no economic interest in the outcome of the appraisal procedure apart from the payment of customary appraisal fees. (c) If either party fails to give notice of appointment of an appraiser within ten (10) business days after receipt of the other party's notice of appointment, the appraiser selected by the first party will solely determine the Fair Market Rent of the Premises and, in the absence of fraud or intentional misconduct, such appraiser's determination will be conclusive and binding on the parties. If Fair Market Rent is determined by only one appraiser, Landlord and Tenant each shall pay one-half of such appraiser's fees and costs. (d) If two appraisers are timely appointed as described above, they will jointly select an independent third appraiser who shall be a member of the American Appraisal Institute holding the "MAI" designation and meeting the qualifications described above. If the two appraisers appointed by the parties cannot agree on a qualified third appraiser within ten (10) business days after they have both been appointed, either Landlord or Tenant may apply to the President or any Vice President of the local chapter of the American Appraisal Institute for appointment of an independent appraiser meeting such qualifications, in which case the appraiser first selected by such procedure will serve as the third appraiser. (e) Within thirty (30) days after the appointment of the third appraiser, the appraisers will meet and attempt to determine the Fair Market Rent for the Premises. If at least two (2) of the appraisers agree on the Fair Market Rent for the Premises, such agreement will be conclusive and binding on the parties and the appraisers will notify Landlord and Tenant of the Fair Market Rent agreed upon. (f) If at least two (2) appraisers cannot agree on the Fair Market Rent for the Premises at their meeting, all appraisers shall submit to Landlord and Tenant simultaneously an independent appraisal of the Fair Market Rent for the Premises within thirty (30) days after appointment of the third appraiser. The parties shall then determine the Fair Market Rent for the Premises by averaging the appraisals, provided, however, that any high or low appraisal that differs from the averaged appraisal by more than ten percent (10%) shall be disregarded and the two remaining appraisals shall be averaged. Each party shall pay the fees and costs of the appraiser it selects, and one-half of the fees and costs of the third appraiser, if any. (g) Upon determining the Fair Market Rent of the Premises, Landlord and Tenant shall execute an amendment to this Lease setting forth the Monthly Base Rent, the new Base Year and any other relevant economic terms and conditions for the Extended Term. If such determination of Fair Market Rent is not made before the commencement of the Extended Term, Tenant will continue paying Monthly Base Rent at the rental rate in effect immediately before -7- 8 the commencement of the Extended Term and an adjustment shall be made retroactively when the Fair Market Rent is determined. 4.4 Late Charge and Interest. Late payment of Rent will cause Landlord to lose the use of such funds and incur costs not contemplated by this Lease, the exact amount of which is difficult and impracticable to fix. Accordingly, if any Rent is not paid by the due date, Tenant shall pay to Landlord a late charge equal to ten percent (10%) of the overdue amount. In addition, if any Rent is not paid by the due date, all such past due Rent shall bear interest from the due date until paid at the Interest Rate (as defined in Section 26). At any time that Rent has been paid after the due date for two (2) consecutive months for whatever reason, Landlord shall have the option to require that, beginning with the first payment of Rent due following the second late payment, Tenant shall pay Rent in quarterly installments (i.e., three months' Rent shall be paid with each installment) until Tenant has made four (4) consecutive quarterly installments on or before the due date at which time Tenant may commence paying Rent on a monthly basis. Landlord's acceptance of late payment charges and interest is not a release or waiver by Landlord of a default by Tenant. 4.5 Security Deposit. (a) Within five (5) business days after execution of this Lease, Tenant shall deposit with Landlord the amount specified in the Basic Lease Information as security deposit ("Security Deposit") in the form of a clean, irrevocable, standby letter of credit meeting the requirements in Section 4.5(b) ("Letter of Credit"). The Security Deposit shall secure Tenant's obligations under this Lease, including Tenant's obligation to pay Rent and other monetary amounts. If Tenant defaults under this Lease (even if an Event of Default (as defined in Section 16.1) has not occurred), Landlord may, but without any obligation to do so, apply any portion of the Security Deposit towards fulfilling Tenant's unperformed obligations. If Landlord draws down the Letter of Credit and uses, retains or applies all or a portion of the funds received therefrom to cure Tenant's default under this Lease or to compensate Landlord for damages resulting from Tenant's default, Tenant shall deposit with Landlord cash in an amount equal to that used, retained or applied by Landlord so that the total amount of Security Deposit held by Landlord equals that the amount shown in the Basic Lease Information. Tenant 's failure to do so within five (5) days after receipt of such demand shall constitute an incurable Event of Default. Landlord shall hold the Security Deposit without liability for interest on the same. Landlord is entitled to commingle the Security Deposit with its own funds. Upon termination of this Lease, Landlord shall return the Security Deposit to Tenant, less any amounts needed to compensate Landlord for Tenant's failure to comply with the terms of this Lease. If Landlord sells or otherwise transfers Landlord's right or interest under this Lease, Landlord shall deliver the Security Deposit to the transferee, whereupon Landlord shall be released from any further liability to Tenant with respect to the Security Deposit. (b) The Letter of Credit shall be issued in favor of Landlord by a reputable California financial institution reasonably satisfactory to Landlord ("Issuing Bank"). The Letter of Credit shall: (i) have a maturity date not less than one (1) year from the date of issuance; (ii) require the Issuing Bank to provide notice to Landlord of the scheduled expiration date not less than thirty (30) days nor more than forty-five (45) days before the scheduled expiration of the Letter of Credit; (iii) permit full or partial drawings to be made by Landlord at any time before -8- 9 expiration; (iv) require the Issuing Bank to pay on the Letter of Credit upon Landlord's presentation thereof, together with a sight draft and a statement signed by Landlord certifying that, under the provisions of Section 4.5 of the Lease, Landlord is entitled to draw upon the Letter of Credit; and (v) prevent Tenant from revoking, canceling, or otherwise modifying the Letter of Credit before the Term expires. (c) If the Letter of Credit is due to expire before the expiration date of the Lease and the Issuing Bank has not issued and Tenant has not delivered to Landlord, at least thirty (30) days before the scheduled expiration of the Letter of Credit, a new Letter of Credit meeting all of the requirements stated above (except that the expiration date of the new Letter of Credit need not extend beyond the expiration date of the Lease), then Landlord may draw down the entire amount of the expiring Letter of Credit and retain such amount as a cash Security Deposit and use any such amount pursuant to Section 4.5(a) above. If an Event of Default occurs, Landlord shall have the right to draw down the Letter of Credit, in whole or in part, and to use, retain or apply the funds thereupon obtained by Landlord in the manner permitted under Section 4.5(a) above. (d) Provided an Event of Default has not occurred, Tenant shall have the right to reduce the Letter of Credit to [*] after the second year of the Initial Term, [*] after the fourth year of the Initial Term, [*] after the sixth year of the Initial Term and [*] after the eighth year of the Initial Term (which Tenant shall maintain for the remaining Term). 5. OPERATING COSTS 5.1 Increased Operating Costs. Before the start of each calendar year during the Term, or as soon thereafter as practicable, Landlord shall furnish Tenant with a statement of its estimate of the Increased Operating Costs for the following calendar year ("Landlord's Estimate"). On the first day of each calendar month during such calendar year, Tenant shall pay to Landlord one-twelfth (1/12th) of the amount in Landlord's Estimate, together with the Monthly Base Rent. 5.2 Reconciliation of Operating Costs. By April 30th after the end of each calendar year, or as soon thereafter as Landlord has sufficient data, Landlord shall submit to Tenant a statement showing the actual Operating Costs paid or incurred by Landlord during the previous calendar year. If the actual Increased Operating Costs is less than the amount Tenant paid under Section 5.1 for such calendar year, then Landlord shall credit the amount of such difference against the next payments of Increased Operating Costs coming due or, if the Term has expired, pay such difference directly to Tenant . If the actual Increased Operating Costs is more than the amount Tenant paid under Section 5.1 for such calendar year, Tenant shall pay to Landlord the full amount of such difference at the monthly rent payment date next following the submittal of such statement to Tenant. 5.3 Tenant's Inspection Rights. Provided there is no Event of Default, within thirty (30) days after receipt of Landlord's annual statement ("Audit Period"), Tenant may, upon reasonable prior written notice to Landlord and during normal business hours at the place where Landlord's records for the Building are maintained, cause a certified public accountant ("CPA") -9- * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 10 to copy (at Tenant's expense), inspect and audit those books and records of Landlord relating to the determination of Operating Costs for the calendar year for which such statement was prepared. If Landlord's computation of Increased Operation Costs exceeds the actual Increased Operation Costs by more than five percent (5%) and Tenant has conducted such an audit, Landlord shall pay within thirty (30) days of its receipt of an invoice, the reasonable costs and expenses of the audit which shall not exceed One Thousand Dollars ($1,000). If Tenant fails to exercise its inspection rights or dispute Landlord's annual statement within the Audit Period, Landlord's annual statement shall conclusively be deemed to be correct, and Tenant shall be bound by Landlord's determination. 5.4 Proration. If the Term commences on a date other than January 1, or ends on a date other than December 31, the Increased Operating Costs for such first or last calendar year of the Term shall be prorated based on what the number of days in the Term in that year bears to 365; and any amounts owed or to be credited pursuant to Section 5.2 shall be paid in the year immediately following the year in which the Term ends, in accordance with Section 5.2. 6. USE OF PREMISES 6.1 Permitted Use. Tenant shall use the Premises solely for the uses specified in the Basic Lease Information as a "Permitted Use," and shall not use or permit the Premises to be used for any other purpose, except with Landlord's prior written consent (which may be withheld in Landlord's sole and absolute discretion). 6.2 Limitations on Use. Tenant shall not do, bring, or keep anything in or about the Premises that will cancel any insurance covering the Building. If any insurance rate increases as a result of Tenant's use of the Premises, Tenant shall pay for any such increase within ten (10) days after Landlord's notice. Tenant shall not use or permit the Premises to be used in any way that will constitute waste, nuisance, or unreasonable annoyance to other tenants in the Building. 6.3 Compliance with Laws. Tenant shall comply with all Laws concerning the Premises or Tenant's use and occupancy of the Premises, including, without limitation, the obligation, at Tenant's cost, to alter, maintain, or restore the Premises in compliance with all Laws. Notwithstanding the foregoing, except with respect to the Tenant Improvement Work, Tenant shall not be responsible for performing capital improvements to the Premises or the Building except to the extent they arise from Tenant's particular use of the Premises, Tenant's Alterations (as defined in Section 26), Tenant's employment practices or Tenant's space design. 6.4 Heavy Load. Tenant shall not bring into the Building, or keep in the Premises, any furniture, equipment, or other objects which individually or collectively overload the Premises or the Building. Landlord reserves the right to prescribe the weight and position of all safes, fixtures and heavy installations in the Premises so as to distribute properly the weight, or to require plans prepared by a qualified structural engineer, at Tenant's sole cost, for such heavy objects. Furthermore, Tenant shall take such measures as Landlord requires to eliminate any noise and/or vibration caused by Tenant's machines and equipment if such noise and/or vibration may be transmitted to the Building's structure. Notwithstanding the foregoing, Landlord shall have no liability for damage caused by the installation of safes and heavy equipment, or by the noise and/or vibration caused by Tenant's machines and equipment. -10- 11 6.5 Hazardous Substances. Tenant shall not use, produce, manage, contain, store, treat or dispose of ("Use") Hazardous Substances (as defined in Section 26) in, on or about the Premises, except with Landlord's prior written consent and in compliance with all Laws. Notwithstanding the foregoing, Tenant may Use any ordinary and customary materials that are used as a routine part of Tenant's business, so long as such Use (i) complies with all Laws, (ii) does not require a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and (iii) does not expose the Premises or the Building, or the neighboring properties to any meaningful risk of contamination or damage or expose Landlord to any liability. Tenant shall notify Landlord in writing of the presence of any Hazardous Substance in, on or about the Premises, of any regulatory action or notice, and of any third party claim arising from any Hazardous Substance. 7. PARKING 7.1 Tenant's Right to Use. Tenant shall have the right to use up to thirty-three (33) unassigned parking spaces ("Parking Allotment") in the parking lot located behind the Building ("Parking Lot"), provided Tenant pays the parking fee for such spaces ("Parking Fee"). For the first year of the Term, the Parking Fee shall be $200 per month per parking space. Thereafter, the Parking Fee shall be adjusted as of each anniversary of the Commencement Date to its then current market rate as determined by Landlord in its sole determination exercised in good faith, provided, however, that the Parking Fee shall not be less than $200 per month per parking space. The Parking Fee shall be payable on the first day of each calendar month during the Term. If at any time during the Term Tenant elects to use fewer parking spaces than the Parking Allotment, Tenant shall be able to use additional parking spaces up to the Parking Allotment only as such spaces become available from time to time for rental. Thus, for example, if in year three of the Lease, Tenant elects to use twenty-five (25) parking spaces, and in year six of the Lease, Tenant desires to use the four (4) parking spaces remaining in the Parking Allotment, Tenant shall have the right to use those spaces only if they are then available for rental. Notwithstanding anything to the contrary in this Lease, if Landlord "recaptures" a portion of the Premises pursuant to Section 15.3, the Parking Allotment shall be proportionately reduced to reflect the decreased size of the Premises leased by Tenant. 7.2 Landlord's Management of Parking Lot. Landlord shall manage, operate and control the Parking Lot in such manner as Landlord in its sole discretion deems appropriate. Provided Tenant's right to use the permitted number of parking spaces is not adversely and materially affected, Landlord shall have the right to: (a) establish and enforce reasonable rules and regulations applicable to all users of the Parking Lot (and Tenant and its Authorized Representatives shall observe such rules and regulations); (b) change, alter or add to the Parking Lot, or rearrange parking spaces therein, (c) temporarily close the Parking Lot so long as Landlord makes alternative, temporary parking arrangements for Tenant, and (d) repair, maintain, restore and perform such other acts with respect to the Parking Lot that Landlord deem appropriate. 7.3 Additional Parking Rights. Once Landlord has received all required approvals and permits to construct the building at 840 Brannan Street ("Brannan Building") and has constructed the Brannan Building and the parking facilities therefor, Tenant shall have the right to lease an additional eight (8) unassigned parking spaces ("Additional Parking") on the same -11- 12 terms and conditions as the Parking Allotment except as otherwise provided in this Section 7.3. The right to the Additional Parking shall be personal to the Tenant originally named in the Lease and shall terminate automatically if Landlord is no longer the owner of the Brannan Building. Landlord shall also have the right to terminate Tenant's right to the Additional Parking by giving Tenant thirty days' written notice, in which case Tenant shall have the right, without payment of additional Parking Fees, to park eight (8) additional cars in a tandem configuration ("Tandem Spaces") within the spaces originally used in the Parking Lot for the Parking Allotment, but only to the extent the Tandem Spaces permitted under Laws and do not interfere with driveways, firelanes and the like. Notwithstanding anything to the contrary in this Lease, if Landlord "recaptures" a portion of the Premises pursuant to Section 15.3, the Additional Parking and the Tandem Spaces shall be proportionately reduced to reflect the decreased size of the Premises leased by Tenant. 8. UTILITIES AND SERVICES 8.1 Tenant's Responsibility. Landlord shall cause gas, electricity, water and sewer utility lines to be made available up to the Premises as part of Landlord's Work. Tenant shall make all arrangements for and pay for all utilities and services furnished to or used by it, including, without limitation, gas, electricity, water, telephone service, trash removal, telecommunications, fiber optic cable, and for all connection charges. Tenant agrees that its normal business hours shall be from 7 AM to 6:30 PM Mondays through Fridays, excluding holidays. Tenant shall also make all arrangements for and pay for janitorial services to the Premises pursuant to a janitorial contract with a provider approved by Landlord (which shall not unreasonably be withheld). Tenant shall also be responsible for all trash removal from the Premises. 8.2 No Liability for Interruption. Landlord shall not be liable in damages or otherwise for any failure or interruption of any utility service or other service being furnished to the Premises and no such failure or interruption shall entitle Tenant to an abatement of Rent or to terminate this Lease. Except as may be installed as part of the Tenant Improvement Work, Tenant shall not, except with Landlord's prior written consent, either: (a) use any heating or cooling apparatus or device in the Premises; or (b) connect with electric current or water pipes any device or apparatus for the purpose of using electrical current or water. 9. TENANT'S TAXES 9.1 Payment by Tenant. Tenant shall pay before delinquency all taxes, assessments, license fees, and other charges (collectively, "Taxes") that are levied or assessed against Tenant during the Term, including, but not limited to, Taxes levied or assessed against Tenant's leasehold interest or Tenant's Personal Property (as defined in Section 26), Alterations, Tenant Improvement Work, or Tenant's Trade Fixtures (as defined in Section 26) installed or located in or on the Premises. On demand by Landlord, Tenant shall furnish Landlord with satisfactory evidence of these payments. 9.2 Reimbursement of Landlord. If any Taxes are levied against Landlord or Landlord's property, or if the assessed value of the Building, or any portion thereof, is increased by the inclusion of a value placed on Tenant's Personal Property, Alterations, Tenant -12- 13 Improvement Work or Tenant's Trade Fixtures (or Tenant's leasehold interest), and if Landlord pays the Taxes on any of these items or the Taxes based on the increased assessment of these items, Tenant, on demand, shall immediately reimburse Landlord for the sum of the Taxes levied against Landlord, or the proportion of the Taxes resulting from the increase in Landlord's assessment. Landlord shall have the right but not the obligation to pay and be immediately reimbursed by Tenant for these Taxes regardless of the validity of the levy. 10. MAINTENANCE AND REPAIR 10.1 Landlord's Obligations. Except as provided in Sections 13 and 14, Landlord shall maintain in good condition, reasonable wear and tear excepted: (a) at Landlord's cost, the foundation, bearing and exterior walls (but excluding any glass, windows, doors and the interior surfaces of exterior walls), subflooring, and the structural portions of the roof (and excluding gutters and downspouts) of the Building, and (b) subject to Section 5 of this Lease, the Base Building Facilities, the sidewalks and landscaped areas around the Building and the Parking Lot. If any such maintenance and repair to any part of the Building which Landlord is obligated to maintain or the Parking Lot is required because of the acts or omissions of Tenant or Tenant's Authorized Representatives, Landlord shall perform such maintenance and repair at Tenant's sole cost. Tenant waives the benefit of any statute, ordinance or judicial decision now or hereafter existing which permits Tenant to make repairs at Landlord's expense. 10.2 Tenant's Maintenance. Except as provided in Sections 10.1, 13 and 14, Tenant at its cost shall maintain, in good operating condition and repair, all portions of the Premises, including, without limitation, all fixtures, interior walls, ceilings, floors, floor coverings, windows, doors, Tenant's Personal Property, Alterations, Tenant Improvement Work and Tenant's Trade Fixtures and signs. If Tenant fails to perform its obligations under this Section, Landlord may, but need not, make such repairs and replacements and Tenant shall pay Landlord the cost thereof as Rent under this Lease upon being billed for same. 10.3 ADDITIONS AND ALTERATIONS 10.4 Landlord's Consent. Except for Minor Alterations (as defined below), Tenant shall make any Alterations to the Premises only with Landlord's prior written consent, which shall not be unreasonably withheld, conditioned or delayed. Landlord hereby consents to Tenant's installation of a security system in the Premises (which system shall include coverage of the stairwells), provided, however, that all such work shall be performed at Tenant's sole cost and in accordance with Section 11.2 below, and Tenant shall be responsible, at its cost, for the maintenance and repair of such system. "Minor Alterations" shall consist of nonstructural alterations, additions and improvements to the Premises not involving the Base Building Facilities, not affecting the exterior of the Building, not involving Alterations that may materially and adversely affect the value of the Building and not exceeding Fifteen Thousand Dollars ($15,000) in hard costs per project. While Landlord's prior written consent shall not be required for Minor Alterations, Tenant shall give Landlord at least thirty (30) days' prior written notice describing the proposed Minor Alterations and the construction schedule therefor. 10.5 Manner of Construction. Landlord may impose, as a condition of its consent to any Alterations, such requirements as Landlord in its reasonable discretion may deem desirable, -13- 14 including (but not limited to) the requirement that Tenant use for such purposes only contractors selected by Tenant and approved by Landlord (which approval shall not be unreasonably withheld); provided, however, that Tenant shall use subcontractors of Landlord's selection to perform all work that may affect the Building systems and equipment, structural aspects of the Building, or exterior appearance of the Building. Tenant shall construct all Alterations (including Minor Alterations) in compliance with all Laws and pursuant to a valid building permit, issued by the City of San Francisco and in accordance with Landlord's construction rules and regulations. Any Alterations shall be performed in conformance with plans, specifications and working drawings ("Plans") first approved by Landlord. Landlord's approval of the Plans shall create no responsibility or liability on Landlord's part for their completeness, design sufficiency, or compliance with Laws. Tenant agrees to carry "Builder's All Risk" insurance in an amount approved by Landlord, and such other insurance as Landlord may reasonably require. In addition, for projects which will cost more than One Hundred Thousand Dollars ($100,000), Landlord may, in its discretion, require Tenant to obtain a lien and completion bond or some alternate form of security satisfactory to Landlord in an amount sufficient to ensure the lien-free completion of such Alterations and naming Landlord as a co-obligee. Upon completion of any Alterations, Tenant agrees to cause a Notice of Completion to be recorded in the Office of the Recorder of the City and County of San Francisco in accordance with Section 3093 of the California Civil Code or any successor statute and Tenant shall deliver to the Building management office a reproducible copy of the "as built" drawings of the Alterations. 10.6 Payment for Alterations. Tenant shall pay for the cost of all Alterations, even if such Alterations involve or affect areas outside the Premises. If Tenant orders any Alteration directly from Landlord (or from Landlord's contractor), the charges for such work shall be deemed Additional Rent under this Lease, payable upon billing therefor. Once the Alterations are completed, Tenant shall deliver to Landlord, if Tenant has paid contractors directly, evidence of payment, contractors' affidavits and full and final waivers of all liens for labor, services or materials. If Tenant does not order any work directly from Landlord, Tenant shall reimburse Landlord for Landlord's reasonable out-of-pocket costs and expenses actually incurred in connection with Landlord's review of and/or involvement with such work. 10.7 Landlord's Property and Fixtures. All Alterations shall become Landlord's property ad shall be surrendered with the Premises at the end of the Term, except that Tenant may remove any Alterations which Tenant can substantiate to Landlord have not been paid for with any funds from Landlord, provided Tenant repairs any damage to the Premises and Building caused by such removal. Furthermore, Landlord can elect at the end of the Term, by written notice, to require Tenant to remove any Alterations. If Landlord so elects, Tenant at its sole cost shall remove such Alterations and restore the Premises to the condition designated by Landlord, before the last day of the Term. At Tenant's request, Landlord shall advise Tenant in writing when Tenant requests Landlord's consent to an Alteration whether Landlord will require Tenant to remove such Alteration at the end of the Term. If Tenant fails to promptly complete such removal and/or to repair any damage caused by the removal of any Alterations, Landlord may do so and may charge the cost thereof to Tenant. Tenant hereby indemnifies, defends and holds Landlord harmless from any Claims (as defined in Section 26) relating to the installation, placement, removal or financing of any Alterations. -14- 15 10.8 Covenant Against Liens. Tenant shall give Landlord at least ten (10) business days' written notice before commencing any Alterations so that Landlord can post and record a notice of nonresponsibility. Tenant shall keep the Building free of all liens resulting from work done or materials furnished by or for Tenant. Tenant may contest such lien if Tenant records a lien release bond for one and one-half times the lien amount. If such lien is not released and removed within thirty (30) days after the date Landlord delivers notice of such lien to Tenant, Landlord, at its sole option, may immediately take all action necessary to release and remove such lien, without any duty to investigate the validity thereof, and all sums, costs and expenses, including attorneys' fees and costs, that Landlord incurs in connection with such lien shall be deemed Additional Rent under this Lease and shall immediately be due and payable by Tenant. 11. INSURANCE, WAIVERS, INDEMNIFICATION 11.1 Tenant's Liability Insurance. Tenant, at its cost, shall maintain liability insurance on an occurrence basis, in the minimum amount specified in the Basic Lease Information, insuring against all liability of Tenant and its Authorized Representatives arising out of and in connection with Tenant's use or occupancy of the Premises or the Building and the business conducted by Tenant or any other persons within the Premises. Such insurance shall include contractual liability insurance coverage insuring performance by Tenant of the indemnity provisions of Section 12.7. Such coverage shall also contain endorsements reasonably required by Landlord from time to time. Tenant shall also maintain Workers' Compensation insurance in accordance with California law. 11.2 Tenant's Personal Property Insurance. Tenant, at its cost, shall maintain on all Tenant's Personal Property, Tenant's Work and Alterations, in, on, or about the Premises, an "all risk" policy, with vandalism and malicious mischief endorsements, for one hundred percent (100%) of their replacement cost. If there is any plate glass in the Premises, Tenant shall also, at its cost, maintain full coverage plate glass insurance on the Premises. 11.3 Landlord's Insurance. Landlord shall maintain an "all risk" policy, with vandalism and malicious mischief endorsements, for at least ninety percent (90%) of replacement cost of the Building. Landlord shall maintain a policy of public liability and property damage insurance insuring against death or injury to persons or damage to property occurring in or about the Building. Landlord may procure and maintain such other forms of insurance coverage as Landlord deems necessary or appropriate for the protection of the Building or Landlord's interest in the Building (including, without limitation, insurance for loss of rental income or damage due to earthquake), or as may be required by any Landlord's Lender (as defined in Section 20). 11.4 General Insurance Requirements. All insurance required to be maintained by Tenant under this Lease shall: (a) be issued by insurance companies authorized to do business in California, with a financial rating of at least A-XII as rated in the most recent edition of Best's Insurance Reports; (b) be issued as a primary policy, and any insurance held by Landlord shall be excess insurance; (c) contain an endorsement requiring thirty (30) days' prior written notice from the insurance company to both parties and Landlord's Lender, if any, before cancellation or change in the coverage or amount of any policy; (d) require Tenant to deposit with Landlord before the commencement of the Term, a certificate of all insurance policies required under this -15- 16 Lease and Tenant shall also deliver certificates of renewal at least thirty (30) days before the term of each policy expires; (e) name Landlord and Landlord's Lender as additional insureds; (f) provide for severability of interests and that an act or omission of one of the parties insured under the policy shall not reduce or avoid coverage to the other parties insured under the policy; (g) contain an endorsement deleting any employee exclusion on personal injury covered, endorsement including employees as additional insureds, endorsement deleting any liquor liability exclusion and endorsement providing for coverage of employer's automobile liability; and (h) be subject to increase, not more frequently than every two (2) years, if in Landlord's broker's opinion, the amount of insurance coverage maintained by Tenant at that time is not adequate. In such case, Tenant shall increase the insurance coverage as required by Landlord's insurance broker. 11.5 Waiver of Subrogation. Notwithstanding anything to the contrary in the Lease, the parties release each other from any Claims for loss or damage that are caused by risks covered under any insurance policies required by this Lease and/or maintained in effect by the parties at the time of such damage. Each party shall cause its insurer(s) to waive all right of recovery by way of subrogation against either party for any loss or damage covered by such party's insurance policy. Each party shall provide written notice to the other party if such waiver is not obtained and shall indemnify, defend and hold the other harmless from all Claims arising from the indemnifying party's failure to obtain such a waiver from its insurance company unless such a waiver is not customarily available. 11.6 Exculpation of Landlord. Neither Landlord nor Landlord's Authorized Representatives shall be liable to Tenant for any damage to Tenant or Tenant's property, including, but not limited to, lost profits and consequential damages from any cause, except to the extent it is determined that the gross negligence or wilful misconduct of Landlord or its Authorized Representatives acting within the scope of their authority caused such damage. 11.7 Indemnification. Tenant shall indemnify, defend and hold Landlord and Landlord's Authorized Representatives harmless from all Claims arising from any cause in, on or about the Premises during the Term, or resulting from the acts or omissions of Tenant or its Authorized Representatives (including, without limitation, the Use of any Hazardous Substances or breach of Section 6.3), except to the extent it is determined that the gross negligence or wilful misconduct of Landlord or its Authorized Representatives acting within the scope of their authority caused such Claims. 12. DAMAGE AND DESTRUCTION 12.1 Repair of Damage. If during the Term the Premises are totally or partially damaged ("Damage"), subject to Section 13.2, Landlord shall restore the Premises (but excluding any of Tenant's Personal Property, equipment or fixtures) to substantially the same condition as they were in immediately before such damage, except for modifications required by zoning and building codes and other Laws or by the Lender. If Landlord restores the Premises, Tenant shall be required to restore Tenant's Alterations, Tenant Improvement Work, Tenant's Trade Fixtures, and Tenant's Personal Property. Notwithstanding the foregoing, Landlord may require Tenant to assign to Landlord all insurance proceeds payable to Tenant under Tenant's insurance required under this Lease with respect to the Alterations (including Tenant's payment of any deductible -16- 17 amounts there under), and Landlord shall repair any damage to the Alterations. Such items shall be the sole responsibility of Tenant to restore and Landlord shall have no responsibility for such restoration. 12.2 Termination Rights. Landlord may terminate this Lease by written notice to Tenant if: (a) Landlord's restoration costs exceed the amount of Landlord's insurance proceeds released by Lender for restoration purposes plus any deductible maintained by Landlord in connection therewith by more than Fifty Thousand Dollars ($50,000); (b) restoration by Landlord will take longer than two hundred and ten (210) days (in the opinion of a licensed architect, contractor or engineer appointed by Landlord), or actually takes longer than two hundred and ten (210) days; or (c) the damage results from a risk not covered by insurance required to be carried by Landlord in Section 12.3. In addition, either party may terminate this Lease by written notice to the other party if: (x) existing Laws do not permit the restoration, (y) the Damage to the Building exceeds fifty percent (50%) of the then replacement value of that Building or (z) the Premises are materially damaged during the last twelve (12) months of the Term. Such notice must be given within fifteen (15) days after determining that the restoration cost will exceed such insurance proceeds or that restoration will take longer than the above-specified period (as the case may be) or, in the case of (c) or (z) above, within thirty (30) days of the casualty, in which case this Lease shall terminate on the date as specified in the notice given by the terminating party. 12.3 Tenant's Remedies; Rent Abatement. Tenant shall have no claim against Landlord for any damage suffered by Tenant by reason of any such damage, destruction, repair or restoration, and Landlord shall not be liable for any inconvenience or annoyance to Tenant, or injury to Tenant's business resulting therefrom. Notwithstanding the foregoing, unless the acts or omissions of Tenant or its Authorized Representatives resulted in the Damage, Monthly Base Rent and the Increased Operating Costs payable under this Lease shall be abated in proportion to the degree to which Tenant's use of the Premises is impaired from the date of the damage to the date repairs are completed. 12.4 Lease to Control Rights. This Lease will exclusively govern the parties' obligations with respect to any damage or destruction of the Premises or the Building. Accordingly, Landlord and Tenant waive any Law, including (without limitation) California Civil Code Sections 1932(2) and 1933(4), or any successor statutes, with respect to any damage or destruction of the Premises. 13. CONDEMNATION 13.1 Partial Condemnation. If any portion of the Premises is taken for public or quasi-public use by right of eminent domain (with or without litigation), or transferred by agreement in connection with public or quasi-public use ("Condemnation"), this Lease shall remain in effect, except that either party can elect to terminate this Lease if twenty-five percent (25%) or more of the total rentable square footage in the Premises is taken. To terminate this Lease, effective as of the date the condemnor has the right to possession ("Date of Taking"), Landlord or Tenant must give written notice to the other party within thirty (30) days after the nature and the extent of the Condemnation have been finally determined. All Rent shall be apportioned as of the date of such termination, or the Date of Taking, whichever occurs first. -17- 18 13.2 Temporary Taking. Notwithstanding anything to the contrary, in the event of a temporary taking of all or any portion of the Premises for a period of one hundred and eighty (180) days or less, then this Lease shall not terminate but the Rent shall be abated for the period of such taking in proportion to the ratio that the amount of rentable square feet of the Premises taken bears to the total rentable square feet of the Premises. Landlord shall be entitled to receive the entire award made in connection with any such temporary taking. 13.3 Total Taking. A total taking of the Building shall automatically terminate this Lease. 13.4 Restoration of Premises. If there is a partial Condemnation of the Premises and this Lease remains in effect, Landlord shall restore the Premises to an architectural whole, except that Tenant shall be solely responsible for Tenant Improvement Work, Tenant's Personal Property, Tenant's Trade Fixtures and Alterations made to the Premises by Tenant. 13.5 Award-Distribution. Landlord shall receive the entire award for any Condemnation, except that Tenant may receive any sum specifically awarded on account of Tenant's Personal Property, Tenant's Trade Fixtures, or for moving expenses. 14. ASSIGNMENT AND SUBLEASE 14.1 Landlord's Consent Required. Except with respect to Permitted Transferees, Tenant shall not assign, mortgage, pledge, hypothecate, encumber or otherwise transfer this Lease or any interest in this Lease, and shall not sublet the Premises ("Transfer"), or suffer or permit the Premises to be occupied by any third person other than Tenant's Authorized Representatives, without Landlord's prior written consent. Subject to the terms and conditions of this Section, Landlord shall not unreasonably withhold its consent to a Transfer so long as the Transfer does not involve any change in the use of the Premises authorized under Section 6.1. 14.2 Tenant's Application. Tenant shall submit in writing to Landlord, at least fifteen (15) business days before the proposed effective date of the Transfer ("Proposed Effective Date") the following information ("Tenant's Application"): (a) the Proposed Effective Date; (b) the name, use and business of the proposed transferee of the Transfer ("Transferee"); (c) the terms of the proposed Transfer; (d) such certified financial information or other information as Landlord may reasonably request; and (e) evidence satisfactory to Landlord that the proposed Transferee will immediately occupy and thereafter use the affected portion of the Premises for the entire term of the Transfer agreement. If Landlord approves the proposed Transfer, it shall notify Tenant in writing thereof. No purported Transfer shall be deemed effective and no proposed Transferee shall take occupancy until Landlord has received a copy of the executed Transfer document(s) and executed Landlord's consent thereto. If Landlord disapproves the proposed Transfer, it shall notify Tenant in writing thereof, specifying the reason(s) therefor. However, if Landlord and Tenant dispute the reasonableness of Landlord's disapproval of the proposed Transfer, Landlord shall not be limited to the reason(s) specified in its notice. 14.3 Landlord's Recapture Right. Notwithstanding anything to the contrary, Landlord shall have the right, to be exercised in writing within fifteen (15) days after receiving the completed Tenant's Application, to terminate this Lease in the case of an assignment of the Lease -18- 19 or to recapture the portion of the Premises subject to the proposed Transfer. Such termination or recapture shall be effective as of the date specified in Landlord's notice exercising such option, which effective date of termination or recapture shall not be less than thirty (30) nor more than ninety (90) days following the receipt of such notice. Notwithstanding the foregoing, Landlord's recapture right shall not apply to subleases of the Premises (a) during the first three (3) years of the Initial Term, provided no more than fifty percent (50%) of the rentable area of the Premises is subleased at any one time during such period (or, if Tenant leases the entire Brannan Building from Landlord, no more than two (2) floors of the Premises are subleased at any one time during such period) and (b) at any time thereafter, provided no more than one-third (1/3) of the rentable area of the Premises is subleased at any one time thereafter. If the area subleased exceeds those areas specified in clauses (a) or (b) of the immediately preceding sentence, Landlord may, at any time, terminate or recapture any and all spaces sublet. If Landlord exercises any cancellation or recapture rights hereunder, Tenant and any subtenants shall surrender possession of the Premises on the date specified in such notice and in accordance with the provisions of this Lease relating to surrender of the Premises at the expiration of the Term. 14.4 No Release of Tenant. Landlord's consent to any Transfer shall not relieve Tenant of its obligations under this Lease. Landlord's consent to any Transfer shall not relieve Tenant from the obligation to obtain Landlord's prior written consent to any other Transfer. Landlord's acceptance of payment from any other person shall not be deemed a waiver by Landlord of any provision of this Lease, or a consent to any Transfer, or a release of Tenant from any obligation under this Lease. If this Lease is Transferred, or if the Premises are occupied by any person other than Tenant, Landlord may, after default by Tenant, collect the Rent from any such Transferee or occupant and apply the net amount collected to the Rent payable under this Lease, and no such action by Landlord shall be deemed a consent to such Transfer or occupancy. 14.5 Assumption of Obligations. Each Transferee shall assume Tenant's obligations under this Lease and shall be liable, jointly and severally, with Tenant under this Lease. Each Transferee shall observe and perform the provisions of this Lease so far as applicable under the Transfer document. All Transfer agreements shall be expressly subject and subordinate to this Lease and shall not change this Lease in any way. No Transfer shall be binding on Landlord unless the Transferee or Tenant delivers to Landlord a counterpart of the Transfer document in a form approved by Landlord, duly executed by all parties. Landlord shall have no obligation to perform any duty to or respond to any request from any subtenant, it being the obligation of Tenant to administer the terms of its subleases. 14.6 Deemed Transfers. If Tenant is a privately held corporation, or an unincorporated association or partnership, the Transfer of any stock or interest in such corporation, association or partnership in the aggregate from the date of execution of this Lease in excess of fifty percent (50%) shall be deemed a Transfer. 14.7 Assignment of Sublease Rents. Tenant immediately and irrevocably assigns to Landlord all rent from any subletting of the Premises, and Landlord, as assignee and as attorney-in-fact for Tenant for purposes hereof, or a receiver for Tenant appointed on Landlord's application, may collect such rents and apply same toward Tenant's obligations under this Lease; provided, however, that Tenant shall have the right to collect such rents so long as an Event of Default does not exist under this Lease. -19- 20 14.8 Excess Rent. Landlord shall receive fifty percent (50%) of all Excess Rent payable in connection with any Transfer. "Excess Rent" means the excess of (a) all consideration received by Tenant from a Transfer over (b) Rent payable under this Lease after deducting reasonable leasing commissions, amortized cost of any improvement and any other reasonable out-of-pocket costs paid by Tenant as a result of the Transfer. If Tenant has the license to collect the rents from the Transferee under Section 15.6 above, within fifteen (15) days after written request by Landlord, Tenant shall provide and certify to Landlord all financial information required for the calculation of Excess Rent. 14.9 Fee for Review. Tenant shall pay, within thirty (30) days of request, Landlord's legal fees and costs reasonably incurred in processing, approving and documenting any Transfer. 14.10 Permitted Transfers. Notwithstanding anything to the contrary, Tenant may, without Landlord's prior written consent, but upon at least thirty (30) days' prior written notice to Landlord, and without being subject to Sections 15.3 and 15.8 above, Transfer the Lease to the following parties ("Permitted Transferees"): (a) a corporation controlling, controlled by or under common control with Tenant, (b) a successor corporation related to Tenant by merger, consolidation, non-bankruptcy reorganization or government action, or (c) a purchaser of substantially all of Tenant's assets, provided that in each of the foregoing Transfers, the net worth of the surviving entity is equal to or greater than that of Tenant immediately before the Transfer, and provided further that, Tenant shall not be released from any liability hereunder. Additionally, any sale or transfer of Tenant's capital stock in connection with any public or private securities offering or any sale of Tenant's capital stock over any nationally recognized public exchange (as opposed to a so-called "penny stock" exchange) shall not be deemed a Transfer hereunder. 15. TENANT'S DEFAULT 15.1 Curable Defaults. An "Event of Default" shall be deemed to have occurred if Tenant: (a) fails to pay Rent within three (3) days after notice to Tenant; (b) fails to perform any obligation described in Sections 12, 20 and 24 of this Lease within three (3) days after notice to Tenant; or (c) fails to perform any other obligation of this Lease (other than those obligations described in Section 16.2 as incurable) within thirty (30) days after notice to Tenant (except that if the failure to perform cannot reasonably be cured within thirty (30) days, Tenant shall not be in default of this Lease if Tenant commences to cure within five (5) days after Landlord's notice and diligently pursues the cure to completion). The notice periods under this Section are in lieu of and not in addition to any notice required under California Code of Civil Procedure Sections 1161 and 1162. 15.2 Incurable Defaults. The following constitute a incurable Event of Default by Tenant: (a) any default identified as an incurable Event of Default in this Lease or which is not capable of being cured, (b) if Tenant breaches its obligations under Sections 4.5 or 15.1, (c) Tenant admits in writing its inability to pay its debts as they mature; (d) Tenant makes an assignment or takes other action for the benefit of creditors; (e) any action is taken or suffered by Tenant under any insolvency, bankruptcy, reorganization or other debtor relief law; (f) a trustee or receiver is appointed to take possession of substantially all of Tenant's assets or Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days, or (g) -20- 21 substantially all of Tenant's assets or Tenant's interest is attached, executed upon or judicially seized, where such seizure is not discharged within thirty (30) days. 15.3 Landlord's Remedies. Landlord shall have the following remedies if Tenant commits a default. These remedies are not exclusive and are cumulative and in addition to any remedies now or later allowed by law. (a) Landlord can continue this Lease in effect and enforce all its rights and remedies under this Lease, including the right to recover Rent when due, for so long as Landlord does not terminate Tenant's right to possession, as provided in California Civil Code Section 1951.4. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect Landlord's interests shall not constitute a termination of Tenant's right to possession. No act by Landlord shall terminate this Lease unless Landlord notifies Tenant in writing that Landlord elects to terminate this Lease. (b) Landlord can terminate this Lease and recover the worth at the time of award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of Rent loss for the same period that Tenant proves could reasonably be avoided, as computed under California Civil Code Section 1951.2. (c) Landlord can cure Tenant's default at Tenant's cost. Any sum paid by Landlord shall bear interest at the Interest Rate from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant. The sum, together with interest on it, shall be additional Rent. (d) All third party costs and expenses (including attorneys' fees) incurred by Landlord in collecting Rent or enforcing Tenant's obligations under the Lease shall be paid by Tenant to Landlord upon demand. 16. LANDLORD'S DEFAULT 16.1 Cure Periods. Landlord shall have ten (10) days after written notice from Tenant to cure a monetary default, and thirty (30) days after written notice from Tenant to cure a nonmonetary default. However, if the non-monetary default cannot be cured within thirty (30) days, Landlord shall have such additional time as reasonably necessary to complete its performance so long as Landlord diligently seeks to cure such default. 16.2 Notice to Landlord's Lender. Tenant shall deliver a copy of any written notice of Landlord's default at the same time to any Lender (as defined in Section 20), provided Landlord has delivered to Tenant prior notice of the identity and address of Lender. Any such Lender shall have the same time periods within which to cure Landlord's defaults as Landlord has to cure such defaults; provided, however, such periods for the Lender shall commence ten (10) days after Landlord's cure period commences and the Lender shall have such additional time as may be needed to obtain control or ownership of the Building. In this connection, any representative of Landlord's Lender shall have the right to enter upon the Premises for the purpose of curing Landlord's default. -21- 22 16.3 Limitation on Landlord's Liability. Notwithstanding anything to the contrary in this Lease, if Tenant recovers any judgment against Landlord for a default by Landlord under this Lease, the judgment shall be satisfied only out of the interest of Landlord in the Building; the partners, including the general partner, officers, employees and agents of Landlord shall not be personally liable for any such default or for any deficiency. The foregoing limitation on liability shall not apply to Landlord's obligation to return the Security Deposit or if Landlord draws on the Letter of Credit without the right to do so. 17. SIGNAGE 17.1 Landlord's Consent. Tenant shall not place (or permit to be placed) in or upon the Premises where visible from outside the Premises or any part of the Building, any signs, notices, drapes, shutters, blinds or window coatings, or displays of any type without Landlord's prior written consent (which shall not unreasonably be denied or delayed). Landlord shall consent to one exterior sign on the west side of the northwest corner of the Building ("Exterior Sign"), on the terms and conditions of Section 18.2. The right to the Exterior Sign shall be personal to the Tenant originally named in the Lease (and its Permitted Transferees) and shall not be transferable to any party. 17.2 Tenant's Obligations. Tenant shall comply with the following terms and conditions with respect to all signage, including the Exterior Sign: (a) Tenant shall obtain, at its cost, all necessary governmental approvals (Landlord makes no representation with respect to Tenant's ability to obtain such approvals); (b) the signage shall be in accordance with detailed signage specifications which Tenant shall submit to Landlord for its prior approval; (c) Tenant shall be responsible, at its cost, for installing and maintaining the signage strictly in accordance with all Laws; (d) Tenant shall be responsible, at its sole cost, for installing, maintaining and repairing the signage and removing it at the termination or expiration of the Lease and repairing any damage resulting from such removal; (e) the location of the Exterior Sign shall be determined on or before the Commencement Date of this Lease by Tenant, with Landlord's reasonable approval; (f) Landlord shall have the right, at its cost, to relocate the Exterior Sign from time to time, with Tenant's reasonable approval over the new location of the Exterior Sign; (g) if any signage affects the structural integrity of the Building, the signage shall be relocated, or if needed, removed, at Tenant's sole cost and expense. Tenant shall indemnify, defend, and hold Landlord harmless from and against any and all Claims arising from or in connection with the signage, unless solely caused by the gross negligence or wilful misconduct of Landlord or its Authorized Representatives (it being agreed that Tenant's indemnity obligation shall cover the negligence of Landlord, its agents, contractors or employees). 17.3 Landlord's Rights. Landlord reserves the right in Landlord's sole discretion to place and locate on the roof and exterior of the Building and in any area of the Building not leased to Tenant, such signs, notices, displays and similar items as Landlord deems appropriate in the proper operation of the Building. 18. LANDLORD'S ENTRY ON PREMISES Landlord and its Authorized Representatives shall have the right to enter the Premises at all reasonable times (with reasonable prior notice except in an emergency when no notice is -22- 23 required) for any reasonable purpose, including, without limitation, the following: (a) to inspect the Premises; (b) to alter, improve or maintain the Premises and the Building; (c) to show the Premises to prospective brokers, agents, buyers, tenants or lenders; and (d) to post notices of nonresponsibility, all without reduction or abatement of Rent. Landlord shall have at all times a key to unlock all the doors in and about the Premises, excluding Tenant's vaults and safes and other secure areas identified by Tenant in a written notice to Landlord. Landlord shall have the right to use any means which Landlord deems in good-faith to be proper to open the doors in an emergency. Any such entry by Landlord and Landlord's Representatives shall comply with all reasonable security measures of Tenant of which Landlord has been given prior written notice and shall not impair Tenant's operations more than reasonably necessary. Landlord shall not be liable in any manner for any inconvenience, disturbance, loss of business, nuisance, or other damage arising out of such entry on the Premises as provided in this Section, except damage resulting from the gross negligence or wilful misconduct of Landlord or its Authorized Representatives acting within the scope of their authority, and Tenant waives any Claims arising thereunder. 19. SUBORDINATION AND NONDISTURBANCE "Lender" means the holder of any ground or underlying lease or loan (including all extensions and modifications of, and any additional advances under, such loan) affecting the Building or Landlord's interest therein, now or later entered into by Landlord, and any deed of trust, mortgage or other device securing such lease or loan ("Loan"). This Lease is and subordinate to any Loan. Within ten (10) business days of Landlord's written request, Tenant shall from time to time execute and deliver an agreement in Lender's customary form to effectuate such subordination, which agreement shall contain commercially common protections for Lender's benefit. Landlord agrees to obtain from Lender a nondisturbance agreement in such Lender's customary form providing that Lender shall not disturb Tenant's possession of the Premises or terminate the Lease, provided Tenant is not in default under this Lease and Tenant recognizes or "attorns" to Lender (or the buyer of the Building at a foreclosure or as a result of a transfer in lieu of foreclosure) as the new Landlord. 20. NONWAIVER No delay, waiver or omission in either party's exercise of any right or remedy on a default of any provision by the other party shall be construed as a waiver of such provision. Landlord's receipt and acceptance shall not constitute a waiver of any other default. No act or conduct of Landlord, including, without limitation, the acceptance of the keys to the Premises, shall constitute an acceptance of Tenant's surrender of the Premises before the Term expires. Any waiver by Landlord or Tenant of any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision of this Lease. 21. SALE OR TRANSFER OF PREMISES If Landlord sells or transfers all or any portion of the Premises or the Building, on consummation of the sale or transfer, Landlord shall be released from any liability thereafter accruing under this Lease if Landlord's successor has assumed in writing Landlord's obligations under this Lease and Landlord has transferred the Security Deposit to Landlord's successor. -23- 24 22. SURRENDER OF PREMISES 22.1 Condition. At the end of the Term, Tenant shall surrender to Landlord the Premises and all Alterations and the Tenant Improvement Work in good condition and repair (except for ordinary wear and tear and damage and destruction to the Premises) except for Alterations that Tenant is obligated to remove under Section 11.4, with all of Tenant's Personal Property and Tenant's Trade Fixtures removed. Before the end of the Term, Tenant shall repair any damage caused by the removal of any Alterations, Tenant's Personal Property or Tenant's Trade Fixtures. 22.2 Removal of Tenant's Property. If, within ten (10) days after written notice from Landlord to Tenant, Tenant fails to remove at the end of the Term all Alterations that Tenant is obligated to remove at such time and all Tenant's Personal Property and Tenant's Trade Fixtures from the Premises, Landlord can elect to retain or dispose of such Alterations, Tenant's Personal Property or Tenant's Trade Fixtures. Tenant waives all Claims against Landlord for any damage resulting from Landlord's retention or disposition of any such Alterations, Tenant's Personal Property or Tenant's Trade Fixtures. Tenant shall be liable to Landlord for Landlord's costs for storing, removing, and disposing of any such Alterations, Tenant's Personal Property or Tenant's Trade Fixtures. 23. ESTOPPEL CERTIFICATE, FINANCIALS 23.1 Estoppel Certificate. Tenant shall, within ten (10) business days of Landlord's written request, execute and deliver to Landlord a statement in writing (i) certifying that this Lease (including any modifications) is in full force and effect, the Rent is as stated in this Lease, and the dates to which the Rent is paid in advance, any, (ii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults by Landlord under this Lease, or specifying such defaults if any are claimed, and (iii) covering such other matters as may be reasonably requested by Landlord or by any present or prospective Lender. Any such statement may be relied upon by any prospective purchaser, ground lessor or encumbrancer of the Premises or of all or any portion of the real property of which the Premises are a part. 23.2 Failure to Deliver. Tenant's failure to deliver such statement within such time shall constitute an incurable Event of Default and shall be conclusive upon Tenant (i) that this Lease is in full force and effect, without modification except as may be represented by Landlord, (ii) that there are no uncured defaults in Landlord's performance, (iii) that not more than one month's Monthly Base Rent has been paid in advance, and (iv) as to such other matters as may be specified in the requested statement. 23.3 Tenant's Financial Data. Within fifteen (15) days after Landlord's written request, Tenant shall furnish Landlord with accurate financial statements and other documentation (such as organizational documents) reasonably required by Landlord, Lender or a prospective buyer of the Building. Landlord shall keep such statements confidential except from those with a reasonable business need to know, provided, however, that Landlord shall not be liable for the inadvertent disclosure of any information or the disclosure of any information that is publicly available or is required by Laws to be disclosed. -24- 25 24. RIGHT OF FIRST OFFER 24.1 Grant of Right. Landlord grants to Tenant a one-time right of first offer ("First Offer Right") during the Term with respect to that certain building adjacent to the Building, to be known as 840 Brannan Street ("Brannan Building") on the terms and conditions of Section 25. The First Offer Right shall be with respect to the entire Brannan Building and not any portion thereof. Notwithstanding anything to the contrary in this Lease, the First Offer Right shall be personal to the Tenant originally named in the Lease (or its Permitted Transferee) and shall be exercisable only if the Tenant originally named in the Lease (or its Permitted Transferee) occupies two full floors in the Building as of the date of Landlord's Notice and as of the Projected Delivery Date (as those terms are defined in Section 25.2). 24.2 Procedure. (a) If Landlord desires to lease the Brannan Building, Landlord shall notify Tenant of the availability of the Brannan Building for leasing ("Landlord's Notice"). Landlord's Notice shall state the approximate square footage of the Brannan Building, the projected delivery date for the Brannan Building in its then "as is" condition ("Projected Delivery Date") and the rent and other economic and major terms acceptable to Landlord. If Tenant wishes to exercise the First Offer Right, Tenant shall so notify Landlord in writing immediately and Landlord and Tenant shall negotiate for a period of ten (10) business days after delivery of Landlord's Notice to Tenant ("Negotiation Period"). (b) If Landlord and Tenant fail to execute in writing within the Negotiation Period an agreement regarding the rent and other economic and major terms acceptable to both parties in their sole discretion ("Basic Agreement"), the First Offer Right shall terminate and Landlord shall be free to lease the Brannan Building to any party on any terms whatsoever. If Landlord and Tenant execute a Basic Agreement within the Negotiation Period, the parties shall promptly execute a new lease for the Brannan Building using the terms and conditions of this Lease except for the terms contained in the Basic Agreement and that Landlord shall grant to Tenant the right to use all available parking on the property of which the Brannan Building is a part. 24.3 Limitations on Tenant's Rights. At Landlord's option, Tenant shall not have the right to exercise the First Offer Right or the First Parking Offer Right (and any First Offer Right and First Parking Offer Right exercised by Tenant will be voided) if (a) Landlord has given Tenant written notice, on or before the date of Landlord's Notice or the Project Delivery Date, that a default has occurred and Tenant has not yet cured such default, or (b) Landlord has given Tenant written notice from Landlord, on more than two (2) occasions in the preceding twelve (12) month period, that a default in the payment of Rent or any other material default has occurred (regardless of whether such defaults subsequently are cured). Notwithstanding anything to the contrary in this Lease, in no event shall Tenant be allowed to exercise the First Offer Right if fewer than twelve (12) months remain in the Term after Landlord's Notice. 25. DEFINITIONS. Unless otherwise provided, definitions of capitalized words and phrases are as follows: -25- 26 25.1 "Alterations" means any addition, change, improvement, alteration or modification to the Premises by Tenant, including, without limitation, fixtures, but excluding Tenant's Trade Fixtures as defined below and the Tenant Improvement Work as defined in the Work Letter. 25.2 "Authorized Representatives" means any director, officer, agent, partner, employee, or independent contractor of the specified party, including Landlord's Property Manager. 25.3 "Base Building Facilities" means the primary heating, ventilation and air-conditioning equipment for the Building, the utility closets, the life safety systems (including the sprinkler systems), the main telephone terminal panels, the conduit for the fiber optic line (but not the actual extension or connection thereof), the passenger elevators, and other improvements customarily considered to be part of "Base Building" but only to the extent any of the foregoing is installed as part of Landlord's Work". 25.4 "Claims" means losses, judgments, liabilities, demands, claims, causes of action, costs and expenses (including the reasonable fees and costs of attorneys and other consultants). 25.5 "Force Majeure" shall mean any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God, inability to obtain labor or materials or reasonable substitutes therefor, governmental restrictions, governmental regulations, governmental controls, judicial orders, enemy or hostile governmental action, civil commotion, fire or other casualty, and other causes (except financial) beyond the reasonable control of the party obligated to perform. 25.6 "Hazardous Substance" means any substance, material, waste, pollutant or contaminant which is regulated by law as being hazardous, toxic, flammable, carcinogenic, explosive or radioactive, or is potentially injurious to the public health, safety or welfare or the environment. 25.7 "Interest Rate" means the lesser of (a) four per cent (4%) per annum over the prime rate of interest announced from time to time by Bank of America, San Francisco, California (or its successor), or (b) the maximum lawful rate. 25.8 "Law(s)" means all laws, statutes, ordinances (including zoning ordinances), judicial decisions, or other governmental rules, regulations, orders or requirements (including those of a quasi-official entity or body such as the board of fire examiners or public utilities or those imposed in connection with conditional use permits or other governmental actions), now or hereafter in force. 25.9 "Operating Costs" means all expenses, costs and disbursements of every kind and nature which Landlord shall pay or become obligated to pay because of or in connection with the ownership, management, operation, maintenance and repair of the Building, except those items which are expressly excluded below. Operating Costs shall include, without limitation, the following: -26- 27 (a) Wages, salaries, taxes, insurance and related expenses and benefits of all onsite and offsite employees to the extent engaged in the operation or maintenance of the Building. (b) All supplies, tools, equipment and materials used in operating and maintaining the Building, including any lease payments therefor. (c) Cost of utilities for the Building to the extent not payable by Tenant under Section 6. (d) Cost of all maintenance, repair and replacement expenses, janitorial, building engineering, landscaping, security, legal, other consulting fees and service agreements for the Building and the equipment therein which are not otherwise directly paid by Tenant, including without limitation window cleaning and elevator maintenance. (e) Cost of all insurance carried by Landlord in connection with the Building and Landlord's personal property used in connection therewith, including any deductible amounts paid by Landlord with respect to such insurance. (f) All Property Taxes (as defined below). (g) Repairs, replacements and general maintenance (excluding sums paid by insurance proceeds or by Tenant or other third parties). (h) All maintenance and repair costs relating to the sidewalks, landscaped areas and, to the extent Operating Costs therefor exceed the Parking Fees received with respect to the same, the Parking Lot. (i) Amortization over the useful life of the cost of capital improvement items, including interest at the one per cent (1%) per annum over the prime rate of interest announced from time to time by Bank of America, San Francisco, California (or its successor), which may reasonably reduce Operating Costs or enhance the Building's operational efficiency or which may be required by governmental authority. (j) Landlord's central accounting costs and audit fees attributable to the Building. (k) A fee for building management, provided such fee does not exceed ten percent (10%) of Operating Costs. Notwithstanding the foregoing to the contrary, Operating Costs shall exclude the following: the cost of repairs or other work occasioned by fire or other casualty or hazard to the extent that Landlord receives insurance proceeds; charges and fees incurred on debt and ground leases, including fines and penalties incurred thereunder; cost for which Landlord receives reimbursement from insurance carriers or any other third party; cost for any service for which Tenant pays (either Landlord or a third party provider) on a direct basis; any costs incurred in connection with repairing the structural parts of the Building under Section 11.1. -27- 28 25.10 "Property Taxes" means all taxes, assessments and government charges levied against the real property and improvements in the Building and the Lot, all personal property taxes levied on Landlord's personal property used in managing, operating, maintaining and repairing the Building, all taxes, assessments and reassessments of every kind and nature whatsoever levied or assessed in lieu of or in substitution for existing or additional real or personal property taxes and assessments on the Building, service payment in lieu of taxes, excises, transit charges and fees, development and other assessments, reassessments, levies, fees or charges, general and special, ordinary and extraordinary, unforeseen as well as foreseen, of any kind which are assessed, levied, charged, confirmed, or imposed during the Term by any public authority upon the Building, the Building's operations or the rent received from the Building, or amounts required to be expended because of governmental orders for public improvements, services, benefits, or other similar purposes. Property Taxes shall also include all expenses reasonably incurred by Landlord in contesting or otherwise seeking reduction of Property Taxes if Landlord realizes tax savings equal or greater to such expenses. Notwithstanding anything to the contrary, Property Taxes shall exclude any franchise, estate, inheritance or succession transfer tax of Landlord, or any income, profits or revenue tax or charge, upon Landlord's net income from all sources. 25.11 "Rent" means all amounts payable by Tenant to Landlord under this Lease, including, but not limited to, Monthly Base Rent, Increased Operating Costs, late charges, interest on late payments and reimbursements of costs. Landlord shall have the same remedies against Tenant for the failure to pay any Rent when and as due, as Landlord has for Tenant's failure to pay Monthly Base Rent. 25.12 "Tenant's Personal Property" means Tenant's equipment, furniture, merchandise, inventory, accounts receivable, insurance proceeds, contracts, intangibles and movable property placed in the Premises by Tenant, including Tenant's Trade Fixtures. 25.13 "Tenant's Trade Fixtures" means any property installed in or on the Premises by Tenant for purpose of trade, manufacture, ornament or related use, provided the same may be removed without material damage to the Premises. 26. MISCELLANEOUS 26.1 Rules and Regulations. Landlord shall have the right from time to time to promulgate rules and regulations for the safety, care and cleanliness of the Premises, the Building, and the Parking, or for the preservation of good order ("Rules and Regulations"). Attached to this Lease as Exhibit D is a set of the current Rules and Regulations. Tenant shall comply with the Rules and Regulations, together with all modifications and additions thereto adopted by Landlord from time to time of which Tenant has been given prior written notice. If there is a conflict between the Rules and Regulations and the remainder of this Lease, the remainder of this Lease shall prevail. 26.2 Keys and Locks. Landlord shall furnish Tenant with a reasonable number of keys to the Premises. Additional keys shall be furnished at a charge by Landlord on an order signed by Tenant. All such keys shall remain Landlord's property. Tenant shall not install any additional locks without Landlord's prior written consent, and Tenant shall not make or permit to -28- 29 be made any duplicate keys. Upon termination of this Lease, Tenant shall surrender to Landlord all keys of the Premises. 26.3 Force Majeure. Force Majeure shall excuse the performance by that party for a period equal to the prevention, delay or stoppage, except the obligations imposed with regard to Rent to be paid by Tenant pursuant to this Lease; provided the party prevented, delayed or stopped shall have given the other party written notice thereof within thirty (30) days of such event causing the prevention, delay or stoppage. Notwithstanding anything to the contrary contained in this Section 27.2, if any work performed by Tenant or Tenant's contractor results in a strike, lockout and/or labor dispute, the strike, lockout and/or labor dispute shall not excuse the performance by Tenant of this Lease. 26.4 Time of Essence. Except as to performance of the Tenant Improvement Work and delivery to Tenant of possession of the Premises, time is of the essence of each provision of this Lease in which time is an element. 26.5 Construction. The definitions contained in this Lease shall be used to interpret the Lease. All rights and remedies of Landlord and Tenant, except as otherwise expressly provided, are cumulative and non-exclusive of any other remedy at law or in equity. Tenant acknowledges that it has been represented by counsel and the terms of this Lease have been fully negotiated; accordingly, neither Landlord nor Tenant shall be deemed the drafter of the Lease in interpreting any ambiguities in the provisions of this Lease. 26.6 Corporate Authority. If Tenant is a corporation, Tenant shall deliver to Landlord on execution of this Lease a certified copy of a resolution of Tenant's board of directors authorizing the execution of this Lease and naming the officers that are authorized to execute this Lease on behalf of Tenant. 26.7 Successors. Subject to Section 15 and except as otherwise specified in this Lease, this Lease shall be binding on and inure to the benefit of the parties and their successors and assigns. 26.8 Governing Law. This Lease shall be construed and interpreted in accordance with the Laws of the State of California. 26.9 Joint and Several Obligations. If more than one person or entity is Landlord or Tenant, the obligations imposed on that party shall be joint and several. 26.10 Severability. The unenforceability, invalidity or illegality of any provision of this Lease shall not render the other provisions unenforceable, invalid, or illegal. 26.11 Entire Agreement; Amendments. This Lease contains the entire agreement of the parties with respect to the subject matter contained herein and supersedes any previous negotiations or agreements. This Lease cannot be amended or modified except by a written agreement signed by the parties. -29- 30 26.12 Attorneys' Fees. If either party commences an action against the other party arising out of or in connection with this Lease, the prevailing party shall be entitled to have and recover from the losing party reasonable attorney's fees and costs of suit. 26.13 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 given personally, by overnight courier, by facsimile transmission during regular business hours (in which case a copy thereof shall also be sent by prepaid, certified or registered mail) or by prepaid, certified or registered mail, addressed to the other party at the address set forth in the Basic Lease Information. Either party may change its address by notifying the other party of the change of address in writing. Notice shall be deemed communicated on the date of delivery except that, with respect to notices sent by certified or registered mail, notice shall be deemed received within forty-eight (48) hours from the time of mailing. 26.14 Brokers. Landlord and Tenant each represents and warrants that it has had no dealings with any real estate broker or agent in connection with this Lease other than the brokers identified in the Basic Lease Information, whose commissions shall be paid by Landlord. Landlord and Tenant shall indemnify, defend and hold Landlord harmless from and against all Claims arising from any breach of the warranty specified in this Section. 26.15 Recording. Tenant shall not record this Lease or a memorandum hereof without Landlord's prior written consent which may be withheld in Landlord's sole discretion. Tenant agrees to execute and acknowledge a short form lease in recordable form at Landlord's request, which may be recorded by Landlord. 26.16 Survival of Tenant's Obligations. All of Tenant's indemnities, waivers, assumptions of liability, duties and obligations under this Lease shall survive the termination of this Lease to the extent required for the full observance and performance thereof. 26.17 Execution by Landlord. The submission of this document for examination and negotiation does not constitute an offer to lease, or a reservation of, or option for, the Premises. This document becomes effective and binding only upon execution and delivery hereof by Tenant and by Landlord. No act or omission of any employee or agent of Landlord or of Landlord's broker shall alter, change or modify any of the provisions hereof. -30- 31 IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the Execution Date. Landlord: Tenant: Bryant Springs LLC, Pets.com, a California limited liability company a California corporation By: /s/ Paul D. Menzies By: /s/ Julie Wainwright ----------------------------------- --------------------------------- Name: Paul D. Menzies Name: Julie Wainwright --------------------------------- ------------------------------- Title: Manager Title: CEO -------------------------------- ------------------------------ By: /s/ D. Michael Kelly By: /s/ Chris Deyo ----------------------------------- --------------------------------- Name: D. Michael Kelly Name: Chris Deyo --------------------------------- ------------------------------- Title: Manager Title: President -------------------------------- ------------------------------ -31- EX-10.28 34 LEASE AGREEMENT WITH SOMA INVESTMENTS IV, L.L.C. 1 EXHIBIT 10.28 STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-GROSS AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. BASIC PROVISIONS ("BASIC PROVISIONS"). 1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only, September 27, 1999, is made by and between Rosenberg SOMA Investments IV, LLC, a Delaware Limited Liability Co. ("LESSOR") and Pets.com, Inc., a California Corporation ("LESSEE"), (collectively the "PARTIES," or individually a "PARTY"). 1.2(a) PREMISES: That certain portion of the Building, including all improvements therein or to be provided by Lessor under the terms of this Lease, commonly known by the street address of 150-160 King Street, a portion of the ground floor, located in the City of San Francisco, County of San Francisco, State of California, with zip code 94107, as outlined on Exhibit A attached hereto ("PREMISES"). The "BUILDING" is that certain building containing the Premises and generally described as (describe briefly the nature of the Building): 150-160 King Street / 151-165 Townsend Street. In addition to Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to the roof, exterior walls or utility raceways of the Building or to any other buildings in the Industrial Center. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "INDUSTRIAL CENTER." (Also see Paragraph 2.) 1.2(b) PARKING: 0 unreserved vehicle parking spaces ("UNRESERVED PARKING SPACES"); and 0 reserved vehicle parking spaces ("RESERVED PARKING SPACES"). (Also see Paragraph 2.6.) 1.3 TERM: 0 years and 3 months ("ORIGINAL TERM") commencing 0ctober 1, 1999 ("COMMENCEMENT DATE") and ending December 31, 1999 ("EXPIRATION DATE"). (Also see Paragraph 3.) Month-to-month thereafter with 30 (thirty) days prior written notice by either Landlord or Tenant. 1.4 EARLY POSSESSION: N/A ("EARLY POSSESSION DATE"). (Also see Paragraphs 3.2 and 3.3.) 1.5 BASE RENT: [*] per month ("BASE RENT"), payable on the _______ day of each month commencing _______. (Also see Paragraph 4.) [ ] If this box is checked, this Lease provides for the Base Rent to be adjusted per Addendum _____, attached hereto. 1.6(a) BASE RENT PAID UPON EXECUTION: [*] as Base Rent for the period October 1, 1999 - October 31, 1999. 1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: N/A percent (_____%) ("Lessee's Share") as determined by [ ] prorata square footage of the Premises as compared to the total square footage of the Building or [ ] other criteria as described in Addendum ___. 1.7 SECURITY DEPOSIT: [*] ("SECURITY DEPOSIT"). (Also see Paragraph 5.) 1.8 PERMITTED USE: Warehouse/Storage/Light Industrial ("PERMITTED USE"). (Also see Paragraph 6.) 1.9 INSURING PARTY. Lessor is the "INSURING PARTY." (Also see Paragraph 8.) * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 2 1.10(a) REAL ESTATE BROKERS. The following real estate broker(s) (collectively, the "BROKERS") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): [ ] _________________ represents Lessor exclusively ("LESSOR'S BROKER"); [X] ROK Properties, Inc. represents Lessee exclusively ("LESSEE'S BROKER"); or [ ] ____________________ represents both Lessor and Lessee ("Dual Agency"). (Also see Paragraph 15.) 1.10(b) PAYMENT TO BROKERS. Upon the execution of this Lease by both Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Broker(s) (or in the event there is no separate written agreement between Lessor and said Broker(s), the sum of $900) for brokerage services rendered by said Broker(s) in connection with this transaction. 1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be guaranteed by N/A ("GUARANTOR"). (Also see Paragraph 37.) 1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda consisting of Paragraphs _____ through _____, and Exhibits A through _____, all of which constitute a part of this Lease. 2. PREMISES, PARKING AND COMMON AREAS. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental and/or Common Area Operating Expenses, is an approximation which Lessor and Lessee agree is reasonable and the rental and Lessee's Share (as defined in Paragraph 1.6(b) based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that is has been advised by the Broker(s) to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, seismic and earthquake requirements, and compliance with the Americans with Disabilities Act and applicable zoning, municipal, county, state and federal laws, ordinances and regulations and any covenants or restrictions of record (collectively, "APPLICABLE LAWS") and the present and future suitability of the Premises for Lessee's intended use; (b) that Lessee has made such investigation as it deems necessary with reference to such matters, is satisfied with reference thereto, and assumes all responsibility therefore as the same relate to Lessee's occupancy of the Premises and/or the terms of this Lease; and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. 2.3 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non-compliance of the Premises with said warranties. 2.4 COMMON AREAS--DEFINITION. The term "COMMON AREAS" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Industrial Center and interior utility raceways within the Premises that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and other lessees of -2- 3 the Industrial Center and their respective employees, suppliers, shippers, customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas. 2.5 COMMON AREAS--LESSEE'S RIGHTS. Lessor hereby grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Industrial Center. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.6 COMMON AREAS--RULES AND REGULATIONS. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable Rules and Regulations with respect thereto in accordance with Paragraph 40. Lessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees of the Industrial Center. 2.7 COMMON AREAS--CHANGES. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land outside the boundaries of the Industrial Center to be a part of the Common Areas; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Industrial Center, or any portion thereof; and (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Industrial Center as Lessor may, in the exercise of sound business judgement, deem to be appropriate. 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 DELAY IN POSSESSION. If for any reason Lessor cannot deliver possession of the Premises to Lessee by the Early Possession Date, if one is specified in Paragraph 1.4, or if no -3- 4 Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing to Lessor within ten (10) days after the end of said sixty (60) day period, 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. Except as may be otherwise provided, and regardless of when the Original Term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to the period during which the Lessee would have otherwise enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. RENT. 4.1 BASE RENT. Lessee shall pay Base Rent and other rent or charges, as the same may be adjusted from time to time, to Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one full month shall be prorated based upon the actual number of days of the month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon Lessee's execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1). Lessor may use, apply or retain all or any portion of said Security Deposits for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessors uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefore deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor as an addition to the Security Deposit so that the total amount of the Security Deposit shall at all times bear the same proportion to the then current Base Rent as the Initial Security Deposit bears to the Initial Base Rent set forth in Paragraph 1.5. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be -4- 5 considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any monies to be paid by Lessee under this Lease. 6. USE. 6.1 PERMITTED USE. (a) Lessees shall use and occupy the Premises only for the Permitted use set forth in Paragraph 1.8, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to the Premises or neighboring premises or properties. (b) Lessor hereby agrees to not unreasonably withhold or delay its consents to any written request by Lessee, Lessee's assignees or subtenants, and by prospective assignees and subtenants of Lessee, its assignees and subtenants, for a modification of said Permitted Use, so long as the same will not impair the structural integrity of the improvements on the Premises or in the Building or the mechanical or electrical systems therein, does not conflict with uses by other Lessees, is not significantly more burdensome to the Premises or the Building and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within five (5) business days after such request give a written notification of same, which notice shall include an explanation of Lessor's reasonable objections the change in use. 6.2 HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment, or the Premises; (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or by-products thereof. Lessee shall not engage in any activity in or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Requirements (as defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registrations or business plan is required to be filed with, any governmental authority, and (iii) the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Laws require that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but upon notice to Lessor and in compliance with all Applicable Requirements, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of the Permitted use, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to -5- 6 any Reportable Use of any Hazardous Substance by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefor, including but not limited to the installation (and, at Lessor's option, removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises or the Building, other than as previously consented to by Lessor, Lessee shall immediately give Lessor written notice thereof, together with a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action, or proceeding given to, or received from, any governmental authority or private party concerning the presence, spill, release, discharge of, or exposure to, such Hazardous Substance including but not limited to all such documents as may be involved in any Reportable Use involving the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including, without limitation, through the plumbing or sanitary sewer system). (c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all damages, liabilities, judgments, costs, claims, liens, expenses, penalties, loss of permits and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's obligations under this Paragraph 6.2(c) shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultants' and attorneys' fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "APPLICABLE REQUIREMENTS," which term is used in this Lease to mean all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill, or release of any Hazardous Substance), now in effect or which may hereafter come into effect. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including but not limited to permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing with copies of any documents involved) of any threatened or actual claim, notice, -6- 7 citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Requirements. 6.4 INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents, employees, contractors and designated representatives, and the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lenders") shall have the right to enter the Premises at any time in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to employ experts and/or consultants in connection therewith to advise Lessor with respect to Lessee's activities, including but not limited to Lessee's installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease by Lessee or a violation of Applicable Requirements or a contamination, caused or materially contributed to by Lessee, is found to exist or to be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES AND ALTERNATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair (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, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities specifically serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire hose connections if within the Premises, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, windows, doors, plate glass, and skylights, but excluding any items which are the responsibility of Lessor pursuant to Paragraph 7.2 below. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain a contract, with copies to Lessor, in customary form and substance for and with a contractor specializing and experienced in the inspection, maintenance and service of the heating, air conditioning and ventilation system for the Premises. However, Lessor reserves the right, upon notice to Lessee, to procure and maintain the contract for the heating, air conditioning and ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor, upon demand, for the cost thereof. (c) If Lessee fails to perform Lessee's obligations under this Paragraph 7.1, Lessor may 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 -7- 8 Lessee's behalf, and put the Premises in good order, condition and repair, in accordance with Paragraph 13.2 below. 7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler and/or standpipe and hose (if located in the Common Areas) or other automatic fire extinguishing system including fire alarm and/or smoke detection systems and equipment, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common areas and all parts thereof, as well as providing the services for which there is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or replace windows, doors or plate glass of the Premises Lessee expressly waives the benefit of any statute now or hereafter 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 Building, Industrial Center or Common Areas in good order, condition and repair. 7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" is used in this Lease to refer to all air lines, power panels, electrical distribution, security, fire protection systems, communications systems, lighting fixtures, heating, ventilating and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment which can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the Improvements on the Premises which are provided by Lessor under the terms of this Lease other than Utility Installations or Trade Fixtures. "LESSEE-OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alternations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to paragraph 7.4(a). Lessee shall not make nor cause to be made any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the Interior of the Premises (excluding the roof) without Lessor's consent but upon notice to Lessor, so long as they are not visible from the outside of the Premises, do not involve puncturing, relocating or removing the roof or any existing walls, or changing or interfering with the fire sprinkler or fire detection systems and the cumulative cost thereof during the term of this Lease as extended does not exceed $2,500.00. (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities; (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon; and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and -8- 9 workmanlike manner, with good and sufficient materials, and be in compliance with all Applicable Requirements. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may, (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $2,500.00 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation. (c) LIEN PROTECTION. 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 on the Premises, which claims are or may be secured by any mechanic's or materialmen's 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, on, or about 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 any such lien, claim or demand, then Lessee shall, at its sole expense, defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor as surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability of the same, as required by law for the holding of 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. 7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require their removal and to cause Lessee to become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Installations made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee-Owned Alterations and Utility Installations. Unless otherwise instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon the Premises and be surrendered with the Premises by Lessee. (b) REMOVAL. Unless otherwise agreed in writing, Lessor may require that any or all Lessee-Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding that their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Alterations or Utility Installations made without the required consent of Lessor. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. Ordinary wear and tear shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified herein, the Premises, as surrendered, shall include the Alterations and Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Lessee-Owned Alterations and Utility Installations, as well as the -9- 10 removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Requirements and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be moved by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. INSURANCE; INDEMNITY. 8.1 PAYMENT OF PREMIUM INCREASES. (a) As used herein, the term "Insurance Cost Increase" is defined as any increase in the actual cost of the insurance applicable to the Building and required to be carried by Lessor pursuant to Paragraphs 8.2(b), 8.3(a) and 8.3(b), ("REQUIRED INSURANCE"), over and above the Base Premium, as hereinafter defined, calculated on an annual basis. "INSURANCE COST INCREASE" shall include, but not be limited to, requirements of the holder of a mortgage or deed of trust covering the Premises, increased valuation of the Premises, and/or a general premium rate increase. The term "INSURANCE COST INCREASE" shall not, however, include any premium increases resulting from the nature of the occupancy of any other lessee of the Building. If the parties insert a dollar amount in Paragraph 1.9, such amount shall be considered the "BASE PREMIUM." If a dollar amount has not been inserted in Paragraph 1.9 and if the Building has been previously occupied during the twelve (12) month period immediately preceding the Commencement Date, the "BASE PREMIUM" shall be the annual premium applicable to such twelve (12) month period. If the Building was not fully occupied during such twelve (12) month period, the "Base Premium" shall be the lowest annual premium reasonably obtainable for the Required Insurance as of the Commencement Date, assuming the most nominal use possible of the Building. In no event, however, shall Lessee be responsible for any portion of the premium cost attributable to liability insurance coverage in excess of $1,000,000 procured under Paragraph 8.2(b). (b) Lessee shall pay any Insurance Cost Increase to Lessor pursuant to Paragraph 4.2. Premiums for policy periods commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Commencement Date or Expiration Date. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessees, Lessor and any Lender(s) whose names have been provided to Lessee in writing (as additional insureds) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" endorsement and contain the "Amendment of the Pollution Exclusion" endorsement for damage caused by heat, smoke or fumes from a hostel fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be -10- 11 primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) CARRIED BY LESSOR. Lessor shall also maintain liability insurance described in Paragraph 8.2(a) above, in addition to and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to any lenders), insuring against loss or damage to the Premises. Such insurance shall be for full replacement cost, as the same shall exist from time to time, or the amount required by any Lender(s), but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. Lessees-Owned Alterations and Utility Installations, Trade Fixtures and Lessee's personal property shall be insured by Lessee pursuant to Paragraph 8.4. If the coverage is available and commercially appropriate, Lessor's policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender or included in the Base Premium), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Building required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered loss, but not including plate glass insurance. Said policy or polices shall also contain an agreed valuation provisioning in lieu of any co-insurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers of the city nearest to where the Premises are located. (b) RENTAL VALUE. Lessor shall also obtain and keep in force during the term of this Lease a policy or policies in the nature of Lessor, with loss payable to Lessor and any Lender(s), insuring the loss of the full rental and other charges payable by all lessees of the Building to Lessor for one year (including all Real Property Taxes, insurance costs, all Common Area Operating Expenses and any scheduled rental increases). Said insurance may provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any co-insurance clause, and the amount of coverage shall be adjusted annually to reflect the rejected rental income, Real Property Taxes, insurance premium costs and other expenses, if any, otherwise payable, for the next 12-month period. Common Area Operating Expenses shall include any deductible amount in the event of such loss. (c) ADJACENT PREMISES. Lessee shall pay for any increase in the premiums for the property insurance of the Building and for the Common Areas or other buildings in the Industrial Center if said increase is caused by Lessee's act, omissions, use or occupancy of the Premises. -11- 12 (d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring Party, Lessor shall not be required to insure Lessee-Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. 8.4. LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Trade Fixtures and Lessee-Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by Lessor as the Insuring Party under Paragraph 8.3(a). Such Insurance shall be full replacement cost coverage with a deductible not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property and the restoration of Trade Fixtures and Lessee-Owned Alterations and Utility Installations. Upon request from Lessor, Lessee shall provide Lessor with written evidence that such insurance is in force. 8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V or such other rating as may be required by a Lender, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven (7) days after the earlier of the Early Possession Date or the Commencement Date, certified copies of, or certificates evidencing the existence and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or subject to modification except after thirty (30) days' prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss or damage to their property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. Lessor and Lessee agree to have their respective insurance companies issuing property damage insurance waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, loss of permits, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case -12- 13 of claims made against Lessor) litigated and/or reduced to judgment. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other Lessee of Lessor nor from the failure by Lessor to enforce the provisions of any other lease in the Industrial Center. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than fifty percent (50%) of the Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations, the repair cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost of the Premises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction In addition, damage or destruction to the Building, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building, the cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building) of the Building shall, at the option of Lessor, be deemed to be Premises Total Destruction. (c) "INSURED LOSS" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws and without deduction for depreciation. -13- 14 (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PREMISES PARTIAL DAMAGE-INSURED LOSS. If Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect. In the event, however, that there is a shortage of insurance proceeds and such shortage is due to the fact that, by reason of the unique nature of the improvements in the Premises, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefore. If Lessor receives said funds or adequate assurance thereof within said (10) day period, Lessor shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within such ten (10) day period, and if Lessor does not so elect to restore and repair, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 PARTIAL DAMAGE-UNINSURED LOSS. If Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect). Lessor may at Lessor's option, either (i) 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 (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following such commitment from Lessee. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if Premises Total Destruction occurs (including any destruction required by any authorized public authority), -14- 15 this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 9.7. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following 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. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by (a) exercising such option, and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten (10) days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor' expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate as of the date set forth in the first sentence of this Paragraph 9.5. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event of (i) Premises Partial Damage or (ii) Hazardous Substance Condition for which Lessee is not legally responsible, the Base Rent, Common Area Operating Expenses and other charges, if any, payable by Lessee hereunder for the period during which such damage or condition, its repair, remediation or restoration continues, shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not in excess of proceeds from insurance required to be carried under Paragraph 8.3(b). Except for abatement of Base Rent, Common Area Operating Expenses and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair, remediation or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after the receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph 9.6 shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever occurs first. -15- 16 9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000 whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the excess costs of (a) investigation and remediation of such Hazardous Substance Condition to the extent required by Applicable Requirements, over (b) an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following said commitment by Lessee. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time period specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.8 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment made by Lessee to Lessor and so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 WAIVER OF STATUES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises and the Building with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent it is inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as defined in Paragraph 10.2(a), applicable to the Industrial Center, and except as otherwise provided in Paragraph 10.3, any increases in such amounts over the Base Real Property Taxes shall be included in the calculation of Common Area Operating Expenses in accordance with the provisions of Paragraph 4.2. 10.2 REAL PROPERTY TAX DEFINITIONS. (a) As used herein, the term "REAL PROPERTY TAXES" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Industrial Center by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage, or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Industrial Center or any portion thereof, Lessor's right to rent -16- 17 or other income therefrom, and/or Lessor's business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in Applicable Law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Industrial Center or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. (b) As used herein, the term "BASE REAL PROPERTY TAXES" shall be the amount of Real Property Taxes, which are assessed against the Premises, Building or Common Areas in the calendar year during which the Lease is executed. In calculating Real Property Taxes for any calendar year, the Real Property Taxes for any real estate tax year shall be included in the calculation of Real Property Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common. 10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall not include Real Property Taxes specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Industrial Center by other lessees or by Lessor for the exclusive enjoyment of such other lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to Lessor at the time Common Area Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes if assessed solely by reason of Alterations, Trade Fixtures or Utility Installations placed upon the Premises by Lessee or at Lessee's request. 10.4 JOINT ASSESSMENT. If the Building is not separately assessed, Real Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or stored within the Industrial Center. When possible, Lessee shall cause its Lessee-Owned Alterations and Utility Installations, 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 said property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. UTILITIES. Lessee shall pay directly for all utilities and services supplied to the Premises, including but not limited to electricity, telephone, security, gas and cleaning of the Premises, together with any taxes thereon. If any such utilities or services are not separately metered to the Premises or separately billed to the Premises, Lessee shall pay to Lessor a reasonable proportion to be determined by Lessor of all such charges jointly metered or billed with other premises in the Building, in the manner and within the time periods set forth in Paragraph 4.2(d). 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or sublet all or any part of -17- 18 Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buyout or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of full execution and delivery of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to which Lessor may reasonably withhold its consent. "NET WORTH OF LESSEE" for purposes of this Lease shall be the net worth of Lessee (excluding any Guarantors) established under generally accepted accounting principles consistently applied. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1, or a non-curable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a non-curable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days' written notice ("LESSOR'S NOTICE"), increase the monthly Base Rent for the Premises to the greater of the then fair market rental value of the Premises, as reasonably determined by Lessor, or one hundred ten percent (110%) of the Base Rent then in effect. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installments(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value as reasonably determined by Lessor (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition) or one hundred ten percent (110%) of the price previously in effect, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new rental bears to the Base Rent in effect immediately prior to the adjustment specified in Lessor's Notice. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or subletting shall not (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, nor -18- 19 (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent for performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment of subletting by the assignee or sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable under this Lease or the sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or the sublease. (d) In the event of any Default or Breach of Lessee's obligation under this Lease, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of the Lessee's obligations under this Lease, including any sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $1,000 or ten percent (10%) of the monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or sublease, whichever is greater, as reasonable consideration for Lessor's considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) The occurrence of a transaction described in Paragraph 12.2(c) shall give Lessor the right (but not the obligation) to require that the Security Deposit be increased by an amount equal to six (6) times the then monthly Base Rent, and Lessor may make the actual receipt by Lessor of the Security Deposit increase a condition to Lessor's consent to such transaction. (h) Lessor, as a condition to giving its consent to any assignment or subletting, may require that the amount and adjustment schedule of the rent payable under this Lease by adjusted to what is then the market value and/or adjustment schedule for property similar to the Premises as then constituted, as determined by Lessor. -19- 20 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of the foregoing provision or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against such sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior defaults or breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee under a sublease approved by Lessor shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said default. A "DEFAULT" by Lessee is defined as a failure by Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH" by Lessee is defined as the occurrence -20- 21 of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent, Lessee's Share of Common Area Operating Expenses, or any other monetary payment required to be made by Lessee hereunder as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surely bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with Applicable Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that are to be observed, complied with or performed by Lessee, other than those described in Subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or 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 (iv) 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 within thirty (30) days; provided, however, in the event that any provision of this Subparagraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect, and shall not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement of Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially false. -21- 22 (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurances of security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2 REMEDIES. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its own option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee (as defined in Paragraph 13.1), with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, 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 attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District in which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph 13.2. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a -22- 23 notice and grace period required under Subparagraph 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by Subparagraph 13.1(b), (c) or (d). In such case, the applicable grace period under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two (2) such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. Lessor and Lessee agree that the limitations on assignment and subletting in this Lease are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under this Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS" shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor, as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and 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 the terms of any ground lease, mortgage or deed of trust covering the Premises. Accordingly, if any installment of rent or other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal -23- 24 to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three(3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by any Lender(s) whose name and address shall have been furnished to Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the portion of the Common Areas designated for Lessee's parking, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the Premises. No reduction of Base Rent shall occur if the condemnation does not apply to any portion of the Premises. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution of value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation, separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above Lessee's Share of the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. BROKERS' FEES. 15.1 PROCURING CAUSE. The Broker(s) named in Paragraph 1.10 is/are the procuring cause of this Lease. -24- 25 15.2 ADDITIONAL TERMS. Unless Lessor and Broker(s) have otherwise agreed in writing, Lessor agrees that: (a) if Lessee exercises any Option (as defined in Paragraph 39.1) granted under this Lease or any Option subsequently granted, or (b) if Lessee acquires any rights to the Premises or other premises in which Lessor has an interest, or (c) if Lessee remains in possession of the Premises with the consent of Lessor after the expiration of the term of this Lease after having failed to exercise an Option, or (d) if said Brokers are the procuring cause of any other lease or sale entered into between the Parties pertaining to the Premises and/or any adjacent property in which Lessor has an interest, or (e) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then as to any of said transactions, Lessor shall pay said Broker(s) a fee in accordance with the schedule of said Broker(s) in effect at the time of the execution of this Lease. 15.3 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this Paragraph 15. Each Broker shall be an intended third party beneficiary of the provisions of Paragraph 1.10 and of this Paragraph 15 to the extent of its interest in any commission arising from this Lease and may enforce that right directly against Lessor and its successors. 15.4 REPRESENTATIONS AND WARRANTIES. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder other than as named in Paragraph 1.10(a) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Broker(s) is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, and/or attorneys' fees reasonably incurred with respect thereto. 16. TENANCY AND FINANCIAL STATEMENTS. 16.1 TENANCY STATEMENT. Each Party (as "RESPONDING PARTY") shall within ten (10) days after written notice after written notice from the other Party (the "REQUESTING PART") execute, acknowledge and deliver to the Requesting Party a statement in writing in a form similar to the then most current "TENANCY STATEMENT" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 FINANCIAL STATEMENT. If Lessor desires to finance, refinance, or sell the Premises or the Building, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or -25- 26 assignment. Except as provided in Paragraph 15.3, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within ten (10) days following the date on which it was due, shall bear interest from the date due at the prime rate charged by the largest state chartered bank in the state in which the Premises are located plus four percent (4%) per annum, but not exceeding the maximum rate allowed by law, in addition to the potential late charge provided for in Paragraph 13.4. 20. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. Each Broker shall be an intended third party beneficiary of the provisions of this Paragraph 22. 23. NOTICES. 23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission during normal business hours, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 DATE OF NOTICE. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail, the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile -26- 27 transmission or similar means, the same shall be deemed served or delivered upon telephone or facsimile confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday or a Sunday or a legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or any other term, covenant or condition hereof. Lessor's consent to, or approval of, any such act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of any provision hereof. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. NO RIGHT TO HOLDOVER. Subject to the provisions of Paragraph 1.3 above, Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. In the event that Lessee holds over in violation to this Paragraph 26 then the Base Rent payable from and after the time of the expiration or earlier termination of this Lease shall be increased to two hundred percent (200%) of the Base Rent applicable during the month immediately preceding such expiration or earlier termination. Nothing contained herein shall be construed as a consent by Lessor to any holding over by Lessee. 27. 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. 28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of -27- 28 Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default pursuant to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "non-disturbance agreement") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that upon written request from Lessor or a Lender in connection with a sale, financing or refinancing or Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term "PREVAILING PARTY" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. Lessor shall be entitled to attorneys' fees, costs and expenses incurred in preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. Broker(s) shall be intended third party beneficiaries of this Paragraph 31. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the Building, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or Building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred eighty (180) days of the term hereof place on or about the Premises any -28- 29 ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. SIGNS. Lessee shall not place any sign upon the exterior of the Premises or the Building, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business so long as such signs are in a location designated by Lessor and comply with Applicable Requirements and the signage criteria established for the Industrial Center by Lessor. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof of the Building, and the right to install advertising signs on the Building, including the roof, which do not unreasonably interfere with the conduct of Lessee's business; Lessor shall be entitled to all revenues from such advertising signs. 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one of all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. In addition to the deposit described in Paragraph 12.2(e), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the impositions by Lessor at the time of consent of such further or -29- 30 other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. GUARANTOR. 37.1 FORM OF GUARANTY. If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this lease, including but not limited to the obligation to provide the Tenancy Statement and information required in Paragraph 16. 37.2 ADDITIONAL OBLIGATIONS OF GUARANTOR. It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a) evidence of the due execution of the guaranty called for by this Lease, including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signatures of the persons authorized to sign on its behalf, (b) current financial statements of Guarantor as may from time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and the performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. RULES AND REGULATIONS. Lessee agrees that it will abide by, and keep and observe all reasonable rules and regulations ("Rules and Regulations") which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Industrial Center and their invitees. 40. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 41. RESERVATIONS. Lessor reserves the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights of way, utility raceways, and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights of way, utility raceways, dedications, maps and restrictions do not reasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part -30- 31 thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 43. AUTHORITY. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 44. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 45. OFFER. Preparation of this Lease by either Lessor or Lessee or Lessor's agent or Lessee's agent and submission of same to Lessee or Lessor shall not be deemed an offer to lease. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 46. AMENDMENTS. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. The Parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional insurance company or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 47. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such multiple parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEY'S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. -31- 32 The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: Executed at: San Francisco, California San Francisco, California on: on: -------------------------------- --------------------------------- BY LESSOR: BY LESSEE: Rosenberg SOMA Investments IV, LLC, Pets.Com, Inc., A Delaware Limited Liability Co. A California corporation By: /s/ Douglas Rosenberg By: /s/ J.L. Wainwright Name Printed: Douglas Rosenberg Name Printed: J.L. Wainwright Title: Manager Title: CEO Telephone: (415) 835-9808 Telephone: (415) 222-9999 Facsimile: (415) 835-9896 Facsimile: (415) 222-9998 -32- 33 NOTE: These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 345 So. Figueroa St., M-1, Los Angeles, CA 90071. (213) 687-8777. -33- EX-10.29 35 LEASE AGREEMENT W/WHIPPLE PROPERTIES 1001, L.L.C. 1 EXHIBIT 10.29 STANDARD INDUSTRIAL LEASE - MULTI-TENANT, FULL NET THIS LEASE, dated November 5, 1999 , for purposes of reference only, is made and entered into by and between Whipple Properties 1001, LLC, A Delaware Limited Liability Company ("Landlord") and Pets.com Inc., a California Corporation ("Tenant"). WITNESSETH: Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord the Premises described in paragraph 1(c) below for the term and subject to matters of record and to the terms, covenants, agreements and conditions hereinafter set forth, to each and all of which Landlord and Tenant hereby mutually agree. 1. Definitions. Unless the context otherwise specifies or requires, the following terms shall have the meanings herein specified: (a) The term "Industrial Center" shall mean the parcel and other real property described with precision in Exhibit A, as well as any Property interest in the area of the streets bounding the parcel described in Exhibit A, and all other improvements on or appurtenances to said parcel or said streets. (b) The term "Building" shall mean the building(s) in which the Premises are located. (c) The term "Premises" sha1l mean the portion of the Building which is crosshatched on the plan(s) included as part of Exhibit A. (d) The term "Operating Expenses" shall mean all of the following costs, if any, incurred by Landlord with respect to the Industrial Center and allocable to the Building for: (i) the operation, repair, and maintenance, in neat, clean, and good order and condition, of the Industrial Center, including without limitation: (A) all buildings and improvements located thereon, (B) all parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, driveways, landscaped areas, striping, bumpers, irrigation systems, lighting facilities, fences, and gates; (C) trash disposal services; (D) tenant directories; (E) fire detection systems, including sprinkler system maintenance and repair; (F) security services; and (G) any other services to be provided by Landlord described elsewhere in this Lease as an Operating Expense; (ii) any deductible portion of an insured loss concerning any of the items or matters described in this subparagraph (d); (iii) the cost of the premiums for the insurance policies to be maintained by Landlord under this Lease; 2 (iv) the cost of heat, water, sewer, gas, electricity, and any other utilities and services furnished to the Industrial Center, including without limitation the Common Areas (as defined in paragraph 9 below) (collectively, "Utilities"); and (v) such other items as are now or hereafter customarily included in the costs of managing, operating, maintaining, overhauling, and repairing comparable multi-tenant industrial centers in accordance with now or hereafter accepted accounting or management principles or practices, including without limitation reasonable reserves for replacements. Actual Operating Expenses for each year shall be adjusted to equal Landlord's reasonable estimate of Operating Expenses had the total rentable area of the Industrial Center been occupied. Landlord and Tenant acknowledge that certain of the costs of management, operation and maintenance of the Industrial Center may be allocated by Landlord exclusively to a single component of the Industrial Center (e.g. to the, Building, another building located in the Industrial Center or a parking facility) and certain of such costs may be allocated by Landlord among such components. The determination of such costs and their allocation shall not be inconsistent with generally accepted accounting principles applied on a consistent basis. (e) The term "Property Taxes" shall mean any form of real property tax or assessment and any license fee, commercial rental tax, improvement bond or bonds, levy, or other tax (other than inheritance, personal income, or estate taxes), general and special, ordinary and extraordinary, foreseen as well as unforeseen, and of any kind or nature whatsoever, imposed (i) on the Industrial Center or applicable tax assessor's parcel by any authority having the direct or indirect power to tax (including any city, state, or federal government, or any school, agricultural, sanitary, water, fire, street, drainage, or other improvement district thereof) (ii) against any legal or equitable interest of Landlord in the Industrial Center, the Building, or the Premises, (iii) against Landlord's right to rent or other income therefrom, or (iv) against Landlord's business of leasing the Industrial Center, the Building, or the Premises. The term "real property tax(es)" shall also include any tax, fee, levy, assessment, or charge: (i) in substitution of, partially or totally, any tax, fee, levy, assessment, or charge: included above within the definition of "real property tax(es)," (ii) that is imposed, added, or increased as a result of a transfer, either partial or total, of Landlord's interest in the Industrial Center, the Building, or the Premises, or (iii) that is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof. (f) The term "Tenant's percentage share" shall mean the percentage figure specified in the Basic Lease Information. Tenant acknowledges that the Basic Lease Information may set forth different percentage shares of Operating Expenses and Property Taxes or a single percentage share applicable to both. (g) The term "Laws" shall mean any federal, state, local and other laws, codes, orders, ordinances, rules, regulations and statutes. 2. Term. The term of this Lease shall commence on the Commencement Date and, unless sooner terminated as hereinafter provided, shall end on the Expiration Date, as specified in the Basic Lease Information. Unless otherwise agreed by Landlord and Tenant in this Lease, -2- 3 Tenant agrees to accept the Premises in its "as is" condition on the Commencement Date. If Landlord, for any reason whatsoever, cannot deliver the Premises to Tenant on the Commencement Date, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom, but in that event rental shall be waived for the period between the Commencement Date and the time when Landlord delivers the Premises to Tenant. No delay in delivery of the Premises shall operate to extend the term of this Lease. 3. Rental. (a) Tenant shall pay to Landlord throughout the term of this Lease as rental for the Premises the sum specified in the Basic Lease Information as the Base Rent, together with all charges and other amounts required under this Lease as additional rent ("Additional Charges"), including, without limitation, Tenant's percentage share of the total amount of Operating Expenses paid or incurred by Landlord in each year and Tenants percentage share of the total dollar amount of Property Taxes paid by Landlord in each year. (b) Notwithstanding the provisions of subparagraph (a) above, Tenant shall not be responsible for paying any portion of any increase in real property tax that is specified in the tax assessor's records and worksheets as being caused by additional improvements placed upon the Industrial Center by tenants of other premises in the Industrial Center or by Landlord for the exclusive enjoyment of such other tenants. Tenant shall, however, pay to Landlord at the time payments on account of Tenant's Percentage share of Property Taxes are payable under paragraph 4 below the entirety of any increase in real property tax if assessed solely by reason of additional improvements placed upon the Premises by Tenant or at Tenant's request. (c) Rental shall be paid to Landlord on or before the Commencement Date and on or before the first day of each and every successive calendar month thereafter during the term of this Lease. In the event the term of this Lease commences on a day other than the first day of a calendar month or ends on a day other than the last day of a calendar month, the monthly rental for the first and last fractional months of the term hereof shall be appropriately prorated. (d) All sums of money due from Tenant hereunder not specifically characterized as rental shall constitute additional rent, and if any such sum is not paid when due it shall nonetheless be collectible as additional rent with the next installment of rental thereafter falling due, but nothing contained herein shall be deemed to suspend or delay the payment of any sum of money at the time it becomes due and payable hereunder, or to limit any other remedy of Landlord. (e) The term "rent" as used in this Lease shall refer collectively to the Base Rent and to all additional rent, Additional Charges and other sums payable hereunder. Tenant hereby acknowledges that late payment by Tenant to Landlord of rent and other sums due hereunder after the expiration of any applicable grace period will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Landlord by the terms of any trust deed covering the Premises. Accordingly, if any installment of rent or any other sums due from Tenant shall not be received by Landlord -3- 4 when due, Tenant shall pay to Landlord a late charge equal to 5% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant based upon the circumstances existing as of the date of this Lease. 4. Additional Charges for Operating Expenses and Property Taxes. (a) This Leases is intended to be a completely net lease. The Base Rent owing hereunder is to be paid by Tenant absolutely net of all costs and expenses relating to Landlord's ownership and operation of the Building. The provisions of this paragraph 4 for the payment of Tenant's percentage share of Property Taxes and Tenant's Percentage share of Operating Expenses are intended to pass on to Tenant its share of all such costs and expenses. (b) With respect to each calendar year during the term of this Lease, Tenant shall pay to Landlord as Additional Charges, at the times hereinafter set forth, an amount equal to Tenant's percentage share of Operating Expenses and Property Taxes. Prior to or anytime after the commencement of any calendar year Landlord may, but shall not be required to, notify Tenant of Landlord's estimate of the amount of Operating Expenses and Property Taxes for such current calendar year ("Estimated Taxes and Expenses"). Tenant shall pay to Landlord on the first day of each calendar month during such current calendar year one-twelfth (1/12) of the amount of any such Estimated Taxes and Expenses for such current calendar year. If at any time or times Landlord determines that the amount of Tenant's percentage share of Operating Expenses or Property Taxes payable by Tenant for the current year will vary from its estimate by more than 5%, Landlord may, by notice to Tenant, revise Landlord's estimate for such year, and subsequent payments by Tenant for such year shall be based on such revised estimate. Following the close of each calendar years, Landlord shall deliver to Tenant a statement of the actual amount of Tenant's percentage share of Operating Expenses and Property Taxes for the immediately Preceding year, accompanied by a statement made by an accounting or auditing officer designated by Landlord showing the Operating Expenses and Property Taxes for such year. The statement of such accounting or auditing officer shall be final and binding upon Landlord and Tenant. All amounts payable by Tenant as shown on such statement, less any amounts theretofore paid by Tenant on account of Estimated Taxes and Expenses for such calendar year made pursuant to this paragraph 4, shall be paid by or, if Tenant theretofore shall have paid more than such amounts, reimbursed to Tenant within ten (10) days after delivery of such statement to Tenant. (b) If the Expiration Date of this Lease is a day other than the last day of a calendar year, the amount of any Operating Expenses and Property Taxes payable by Tenant for the calendar year in which the Expiration Date occurs shall be prorated on the basis by which the number of days from the commencement of such calendar year to and including the Expiration Date bears to 365 and shall be due and payable when rendered notwithstanding termination of this Lease. Tenant's percentage share of Operating Expenses and Property Taxes allocable to the calendar year in which the Expiration Date occurs shall be deemed to have been incurred evenly over the entire twelve-month period of that calendar year. -4- 5 5. Use. The Premises shall be used and occupied only for the use described in the Basic Lease Information and for no other use or purpose without obtaining the prior written consent of Landlord which may be granted or denied in Landlord's sole discretion. 6. Quiet Enjoyment. Provided Tenant performs its obligations hereunder, Tenant shall lawfully and quietly occupy the Premises during the term of this Lease without hindrance or molestation by Landlord, subject, however, to applicable Laws, matters of record and the provisions of this Lease. 7. Personal Property Taxes. Tenant shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment, and all other personal property of Tenant contained in the Premises or elsewhere. 8. Utilities. Tenant shall pay Landlord, within ten (10) days after receipt of Landlord's statement therefor, the amount by which, in Landlord's reasonable judgment, the Utilities used by Tenant at the Premises exceed normal usage at the Industrial Center for the use described in the Basic Lease Information. 9. Common Areas. (a) The term "Common Areas" shall mean all areas and facilities outside the Premises and within the exterior boundary line of the Industrial Center that are provided and designated by Landlord from time to time for the general non-exclusive use of Landlord, Tenant, and other tenants of the Industrial Center and their respective employees, suppliers, shippers, customers, and invitees, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, and landscaped areas. (b) During the term of this Lease, Tenant and its employees, agents, suppliers, shippers, customers, and invitees shall have the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Landlord under the terms hereof. Under no circumstances shall Tenant's right to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Landlord or Landlord's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur, Landlord shall have the right, without notice, in addition to such other rights and remedies it may have, to remove the property and charge the cost to Tenant, which cost shall be immediately payable upon demand. (c) Landlord, or such other persons as Landlord may appoint, shall have the exclusive control and management of the Common Areas. (d) Landlord shall have the right, in its sole discretion, from time to time: (i) to make changes to the Common Areas, including without limitation changes in the location, size, shape, and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, and walkways, (ii) to close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available, (iii) to designate other land outside the boundaries of the -5- 6 Industrial Center to be a part of the Common Areas, (iv) to add additional buildings and improvements to the Common Areas, (v) to use the Common Areas while engaged in making additional improvements, repairs, or alterations to the Industrial Center, or any portion thereof, and (vi) to do and perform such acts and make such other changes in, to, or with respect to the Common Areas and Industrial Center as Landlord may, in the exercise of sound business judgment, deem to be appropriate. 10. Property Insurance. Landlord shall, at Tenant's sole cost and expense, keep the Premises insured for the benefit of Landlord and Tenant in such amounts and with such coverages as Landlord may reasonably determine to be adequate. 11. Liability Insurance. (a) Tenant agrees to procure and maintain in force during the term hereof, at Tenant's sole cost and expense, Commercial General Liability insurance in an amount not less than two million dollars ($2,000,000) combined single limit for bodily injury and property damage for injuries to or death of persons and property damage occurring in, on or about the Premises. Such policy shall name Landlord, Landlord's managing agent and any other party designated by Landlord as additional insureds, shall insure Landlord's and Landlord's managing agent's contingent liability as respects acts or omissions of Tenant, shall be issued by a company licensed to do business in the State of California and otherwise reasonably acceptable to Landlord, and shall provide that the policy may not be cancelled nor amended without thirty (30) days prior written notice to Landlord. Tenant may carry said insurance under a blanket policy, provided however, said insurance by Tenant shall include an endorsement confirming application to and coverage of Landlord. Said insurance shall be primary insurance to any other insurance that may be available to Landlord. Any other insurance available to Landlord shall be non-contributing with and excess to this insurance. (b) A copy of such policy of insurance shall be delivered to Landlord by Tenant prior to commencement of the term of this Lease and upon each renewal of such insurance. (c) Tenant shall, prior to and throughout the term of this Lease, procure from each of its insurers under all policies of fire, theft, public liability, pertaining in any way to the Premises or the Building or any operation therein, a waiver, as set forth in paragraph 13 of this Lease, of all rights of subrogation which the insurer might otherwise, if at all, have against the Landlord or any officer, agent or employee of Landlord (including Landlord's managing agent). 12. Loss Payable Requirements. All policies of insurance required hereunder shall provide that the proceeds thereof shall be payable to Tenant and Landlord, as their respective interests may appear, and, if Landlord so elects, the policies referenced in paragraph 10 may be payable also to the holder of any of Landlord's mortgages or deeds of trust on the Premises as the interest of such holder may appear, Pursuant to a standard mortgagee clause or a loss payable clause. 13. Waiver of Subrogation. Landlord and Tenant each hereby releases the other from any and all claims, and waives its entire right of recovery against the other, for loss or damage -6- 7 arising out of or incident to the perils insured against under paragraphs 10 and 11 above to the extent such loss or damage is insured against under such policies, whether due to the negligence of Landlord or Tenant or the agents, employees, contractors, or invitees of either of them. 14. Landlord's Right to Perform Tenant's Covenants. Tenant agrees that, if Tenant shall at any time fail to make any payment or perform any other act to be made or performed by it under this Lease, Landlord may, but shall not be obligated to, make such payment or perform such other act to the extent Landlord may deem desirable, with full right of offset, and without waiving or releasing Tenant from any obligation under this Lease. All sums so paid by Landlord and all expenses paid in connection therewith, including without limitation attorneys' fees, together with interest thereon at the Default Interest Rate (defined in paragraph 50) from the date of such payment, shall be paid by Tenant to Landlord on demand. 15. Maintenance and Repair. (a) Landlord's Obligations. Subject to the provisions of subparagraph(b) and paragraphs 23 and 24 below, and except for damage caused by any negligent or intentional act or omission of Tenant or any of Tenant's employees, suppliers, shippers, customers, or invitees, in which event Tenant shall repair the damage, Landlord, at Landlord's expense, subject to reimbursement pursuant to paragraph 4 above, shall keep in good condition and repair the foundations, exterior walls, structural condition of interior bearing walls, and roof of the Premises, as well as the parking lots, walkways, driveways, landscaping, fences, signs, and utility installations of the Common Areas, and shall provide the services for which Operating Expenses are payable pursuant to paragraph 3. Except for obligations specifically undertaken by Landlord in this subparagraph (a), Landlord shall have no obligation, in any manner whatsoever, to repair or maintain the Premises. Landlord shall have no obligation to make repairs under this subparagraph (a) until a reasonable time after receipt of written notice from Tenant of the need for such repairs. In no event shall Landlord be liable for damages or loss of any kind or nature by reason of Landlord's failure to furnish any Common Area services when such failure is caused by accident, breakage, repairs, strikes, lockout, or other labor disturbances or disputes of any character, or by any other cause beyond the reasonable control of Landlord. (b) Tenant's Obligations. Except for those areas that are Landlord's responsibility pursuant to subparagraph (a) above, Tenant shall, at Tenant's sole cost and expense, keep the entire Premises secure, clean and in good order, condition, and repair, and shall make promptly all necessary repairs, interior and exterior, ordinary as well as extraordinary, foreseen as well as unforeseen. When used in this paragraph, the term "repair(s)" shall include alterations, replacements, and renewals. All repairs shall be equal in quality and class to the original work. 16. Surrender of Premises. Upon expiration or any sooner termination of this Lease, Tenant shall surrender to Landlord the entire Premises, together with all Alterations (defined in paragraph 24 below), in the same condition as when received or installed, ordinary wear and tear excepted, and clean and free of debris and free of any liens created or suffered to be created by Tenant. Tenant may, and upon Landlord's request shall, remove any trade fixtures or personal property belonging to Tenant, provided that Tenant shall perform prior to the expiration of the term of this Lease all restoration made necessary by such removal. Landlord may, at Tenant's -7- 8 expense, retain or dispose of in any manner any Trade Fixtures or personal property of Tenant that Tenant does not remove from the Premises upon expiration or termination of the Lease term, in which case title thereto shall vest in Landlord. The term "Trade Fixtures" as used herein shall mean all fixtures, equipment, and personal property owned by Tenant and used in connection with the operation of any business on the Premises, whether or not affixed to the Building. 17. Service Contracts. Tenant shall, at Tenant's sole cost and expense, enter into a regularly scheduled preventive maintenance/service contract with a maintenance contractor for servicing all hot water, heating, and air conditioning systems, elevators (if there be any) and equipment within the Premises. The maintenance contractor and the contract shall be subject to the approval of Landlord. The contract shall include all services suggested by the equipment manufacturers and shall become effective, and a copy thereof shall be delivered to Landlord, within thirty (30) days of the date Tenant takes possession of the Premises. 18. Waste. Tenant shall not do or suffer any waste or damage, disfigurement, or injury to the Premises or permit or suffer any overloading of the floors of the Building. 19. Options. Anything in this Lease or any of its addenda or amendments to the contrary notwithstanding, if during any twelve (12) month-period of the term of this Lease, three (3) or more events of default by Tenant (as defined in paragraph 38 below) have occurred, all of Tenant's rights, if any, to expand or increase the size of the Premises or to extend the term of this Lease, shall cease, expire and be at an end. 20. Waiver of Repair and Deduct. Tenant hereby waives any and all rights it may have to make repairs at Landlord's expense or in lieu thereof to vacate the Premises as provided in California Civil Code Section 1942 or any other law, statute, or ordinance now or hereafter in effect. 21. Compliance With Laws. Tenant shall, at Tenant's sole cost and expense, comply promptly with all Laws and with the recommendations of any insurer under any policies required under this Lease, that may be applicable to the Premises or the use thereof. 22. Hazardous Materials. Except for Hazardous Materials (as defined below) which were upon the Premises through no act or failure of Tenant and were not known to Tenant to be upon the Premises before the date of this Lease, Tenant agrees not to cause or permit the presence, use, generation, release, discharge, storage, disposal, or transportation of any Hazardous Materials on, under, in, above, to, or from the Premises other than presence, use, storage and transportation which is both (i) required for and solely incidental to Tenant's principal use and operation of the Premises, and (ii) in strict compliance with all applicable Laws. Tenant's obligations under the preceding sentence shall not be applicable to Hazardous Materials not generated, released, discharged, stored, disposed of, or transported by Tenant (its employees, agents or contractors), that migrate underground to the Premises from beyond the Premises unless such migration is the result of the negligent or intentional acts or omissions of Tenant, its agents, employees or contractors. For the purposes of this Lease the term "Hazardous Materials" shall refer to any substances, materials, and wastes that are or become regulated as hazardous or toxic substances under any applicable Laws. Tenant shall indemnify, defend, and hold Landlord harmless from and against and reimburse Landlord for any breach of the -8- 9 foregoing obligations and all of the following which may result from such a breach: (a) any loss, cost, expense, claim, or liability arising out of any investigation, reporting, monitoring, clean-up, containment, removal, storage, or restoration work ("Remedial Work") required by any Law, governmental agency, or political subdivision or prudent standards of real estate ownership and management, and (b) any claims of third parties for loss, injury, expense, or damage arising out of the presence, release, or discharge of any Hazardous Materials on, under, in, above, to, or from the Premises during the term of this Lease. Tenant has completed and duly executed, and there is attached to this Lease as Exhibit "B", a copy of a questionnaire pertaining to Tenant's use of Hazardous Materials (the "Hazardous Materials Questionnaire"). Tenant represents and warrants to Landlord that, to the best of Tenant's knowledge, all information set forth in the Hazardous Materials Questionnaire is true and correct as of the date of such Questionnaire. Tenant also agrees with Landlord that neither Tenant, nor Tenant's employees or agents, will cause or permit the use, generation, storage, disposal, transportation or release of any Hazardous Materials on, under, in, above, to, or from the Industrial Center except that which is (i) fully described in the Hazardous Materials Questionnaire, (ii) incidental to Tenant's permitted use and operation of the Premises, and (iii) in compliance with all applicable Laws. Tenant may not use at the Premises any Hazardous Materials other than those specified in the Hazardous Materials Questionnaire, or in quantities different from those specified in the Hazardous Materials Questionnaire, unless Tenant obtains Landlord's prior written consent to such new use and any such new quantity and Tenant submits to Landlord a new duly executed Hazardous Materials Questionnaire that accurately describes the new use and the new quantity. 23. Alterations. Except for non-structural alterations costing less than $5,000 Tenant shall not alter the Premises without the prior written consent of Landlord, which consent may be granted upon conditions. 24. Property of Landlord. All repairs, improvements, changes, alterations, equipment, and machinery (other than trade fixtures) made or installed by Tenant (collectively, "Alterations") shall immediately upon completion or installation thereof be and become the property of Landlord without payment therefor by Landlord. 25. Damage or Destruction. Subject to the other provisions of this paragraph, if the Premises or any portion thereof becomes damaged or wholly or partially untenantable because of fire, earthquake, act of God, the elements or other casualty, Landlord shall repair such damage with and to the extent of the insurance proceeds made available to Landlord for such purpose. However, if in Landlord's opinion such repairs cannot be made within one hundred eighty (180) days, Landlord shall so notify Tenant in writing within ninety (90) days of the date of such damage. In such event, either Tenant or Landlord may terminate this Lease within thirty (30) days after Landlord's notice. Termination shall be effected by written notice delivered to the other party within said thirty (30) day period. If this Lease is not so terminated, it shall remain in full force and effect except that if such damage is not the result of the negligence or willful misconduct of Tenant or Tenant's employees or invitees, an abatement of Base Rent shall be allowed Tenant for such part of the Premises as shall be rendered unusable by Tenant in the conduct of its business during the time such part is so unusable. -9- 10 26. Waiver. Tenant hereby waives California Civil Code Sections 1932, 1933, 1941 and 1942 and the provisions of any other law now or hereafter in effect that would relieve Tenant from any obligation to pay rent under this Lease except to the extent expressly provided in this Lease. 27. Condemnation. (a) If the Premises or any portion thereof are taken under the power of eminent domain (hereinafter 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 50% of the floor area of the Premises is taken by Condemnation, then at Tenant's option, exercisable only in writing and within ten (10) days after Landlord shall have given Tenant written notice of such taking (or, in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession), and provided that Tenant is not in default under this Lease, Tenant may terminate this Lease as of the date the condemning authority takes possession. If Tenant does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion, of the Premises remaining, except that the rent shall be reduced in the proportion that the floor area of the portions of the Premises taken bears to the total floor area of the Premises at the time of the taking. No reduction of rent shall occur if no portion of the area taken contains any portion of the Premises. (b) In the event any portion of the Premises is taken by Condemnation, Landlord shall be entitled to and shall receive the total award made in such Condemnation, which award Tenant hereby assigns to Landlord, except that Tenant shall be entitled to receive such portion of the award as may be specifically allocated in such proceedings to compensation for Tenant's Trade Fixtures and Tenant's relocation expenses. (c) If less than the entire Premises shall be taken by Condemnation, and this Lease is not terminated pursuant to subparagraph (a) above, with the net amount of any award received by landlord in any proceeding for physical damage to the Building after deducting all of Landlord's costs and expenses of collection, including without limitation attorneys' fees, Landlord shall promptly restore that portion of the Building not so taken to a complete architectural unit. 28. Tenant's Work. All work done by Tenant in or about the Premises (hereinafter called the "Work") shall be done in all cases subject to the following conditions, each of which Tenant covenants to observe and perform: (a) No Work involving any structural change and no Work involving any alteration, restoration, or rebuilding costing more than $5,000 shall be undertaken until detailed plans and specifications have first been submitted to and approved in writing by Landlord; (b) No Work involving a cost, as reasonably estimated by Tenant, of more than $5,000 shall be undertaken except under the supervision of an architect or engineer approved in writing by Landlord (unless such requirement is waived by Landlord in writing), which approval shall not be unreasonably withheld; and -10- 11 (c) All Work shall be (i) commenced only after reasonable notice to Landlord and only after all required local and other governmental permits and authorizations have been obtained, (ii) done in a good and workmanlike manner, (iii) performed in compliance with the building and zoning laws and with all other applicable Laws and in accordance with the recommendations of any insurer under any policies required by this Lease, and (iv) completed promptly and free of liens. 29. Mechanic's Liens. Tenant shall not suffer or permit any mechanics' or other liens (or claims thereof) to be filed against the Premises or Tenant's leasehold interest therein or hereunder by reason of work, labor, services, or materials supplied or claimed to have been supplied to Tenant or anyone holding the Premises or any part thereof through or under Tenant. Landlord shall have the right at all reasonable times to post and keep posted on the Premises any notices that Landlord may deem necessary or advisable for the protection of Landlord and the Premises from mechanics' liens. If any such liens (or claims thereof) shall at any time be filed against the Premises, Tenant shall cause the same to be discharged of record within forty-five (45) days after the date of filing. 30. Financial Statements. Upon the request of Landlord, Tenant shall provide to Landlord from time to time, at no expense to Landlord, copies of such financial statements with respect to Tenant as may have been prepared by or for Tenant. 31. Landlord's Entry. Tenant agrees to permit Landlord and any authorized representatives of Landlord to enter the Premises with reasonable frequency during usual business hours, or at any other time in case of emergency, (a) to inspect the Premises and, if Landlord so desires, but without implying any obligation of Landlord to do so, to make any repairs deemed necessary or desirable by Landlord and to perform any work in the Premises deemed necessary by Landlord to comply with any Laws or the recommendations of any insurer, and (b) during the final year of the term of this Lease, for the purpose of leasing the Premises, during which one-year period Landlord may display on the Premises; in such manner as not to interfere unreasonably with Tenant's business, usual "For Sale" or "To Let" signs. 32. Assignment and Subletting. (a) Tenant shall not hypothecate or encumber this Lease or any interest herein without the prior written consent of Landlord, which may be granted or denied in Landlord's absolute discretion. Tenant shall not, without the prior consent of Landlord, which consent shall not be unreasonably withheld by Landlord, transfer or assign this Lease or any interest herein, sublet the Premises or any part thereof, or permit the use of the Premises by any party other than Tenant. This Lease shall not, nor shall any interest herein, be assignable as to the interest of Tenant by operation of law without the consent of Landlord, which consent shall not be unreasonably withheld. Any of the foregoing acts without such consent shall be void and shall, at the option of Landlord, terminate this Lease. In connection with each consent requested by Tenant, Tenant shall submit to Landlord the terms of the proposed transaction, the identity of the parties to the transaction, the proposed documentation for the transaction, and all other information reasonably requested by Landlord concerning the proposed transaction and the parties involved. -11- 12 (b) If the Tenant is a privately held corporation, is an unincorporated association or partnership, the transfer (except pursuant to a public offering), assignment, or hypothecation of any stock or interest in such corporation, association, or partnership in excess of fifty percent (50%) in the aggregate shall be deemed an assignment or transfer within the meaning and provisions of this paragraph. If Tenant is a publicly held corporation, the public offering or trading of stock in Tenant shall not be deemed an assignment or transfer within the meaning of this paragraph. (c) Without limiting the other instances in which it may be reasonable for Landlord to withhold its consent to an assignment or subletting, Landlord and Tenant acknowledge that it shall be reasonable for Landlord to withhold its consent in the following instances: (1) if at the time consent is requested or at any time prior to the granting of consent, Tenant is in default under this Lease or would be in default under this Lease but for the pendency of any grace or cure period specified in this Lease; (2) if the proposed assignee or sublessee is a governmental agency; (3) if, in Landlord's reasonable judgment, the use of the Premises by the proposed assignee or sublessee would involve occupancy in violation of this Lease; or (4) if, in Landlord's reasonable judgment, the financial worth of the proposed assignee or sublessee does not meet the current credit standards applied by Landlord or its investment advisors for a new tenant of the Premises. (d) If at any time during the term of this Lease Tenant desires to assign its interest in this Lease or sublet all or any part of the Premises, Tenant shall give notice to Landlord setting forth the terms of the proposed assignment or subletting ("Tenant's Notice"). Landlord shall have the option, exercisable by notice given to Tenant within thirty (30) days after Tenant's Notice is given ("Landlord's Option Period"), either (1) to consent to the assignment in which event the provisions of subparagraph (g) shall be applicable, or to consent to the subletting in which event the provisions of subparagraph (h) shall be applicable; (2) to become the assignee or sublessee of Tenant (instead of the entity specified in Tenant's Notice) upon the terms set forth in Tenant's Notice; (3) in the event of (A) a proposed assignment, or (B) a proposed subletting of the entire Premises, or a portion of the Premises for all or substantially all of the remainder of the term, to terminate this Lease with respect to, and to retake possession of, the space in question, together with, if only a portion of the Premises is involved, such rights of access to and from such portion as may be reasonably required for its use and enjoyment. If Landlord does not exercise one of such options, Tenant shall be free for a period of one hundred twenty (120) days after Landlord's Option Period, to assign its entire interest in this Lease or to sublet such space to the entity specified in Tenant's Notice upon the terms set forth therein or to any third party upon the same terms set forth in Tenant's Notice, subject to obtaining Landlord's prior consent as hereinabove provided. (e) Notwithstanding the provisions of subparagraphs (a) and (b) above, Tenant may assign this Lease or sublet the Premises or any portion thereof, with prior notice to -12- 13 Landlord but without the necessity of Landlord's consent and without extending any option to Landlord pursuant to subparagraph (d) above, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from the merger or consolidation with Tenant. (f) No sublessee (other than Landlord if it exercises its option pursuant to subparagraph (d) above) shall have a right further to sublet without Landlord's prior consent, which Tenant acknowledges may be withheld in Landlord's absolute discretion, and any assignment by a sublessee of its sublease shall be subject to Landlord's prior consent in the same manner as if Tenant were entering into a new sublease. No sublease, once consented to by Landlord, shall be modified or terminated by Tenant without Landlord's prior consent, which consent shall not be unreasonably withheld. (g) In the case of an assignment to an entity other than Landlord, any sums or other economic consideration received by Tenant as a result of such assignment shall be paid to Landlord after first deducting the unamortized cost of leasehold improvements made to the Premises at Tenant's sole cost, and the cost of any real estate commissions incurred by Tenant in connection with such assignment. (h) In the case of a subletting to an entity other than Landlord, any sums or economic consideration received by Tenant as a result of such subletting shall be paid to Landlord after first deducting (1) the rental due hereunder, prorated to reflect only rental allocable to the sublet portion of the Premises, (2) the cost of leasehold improvements made to the sublet portion of the Premises at Tenant's sole cost, amortized over the term of this Lease except for leasehold improvements made by Tenant for the specific benefit of the sublessee, which shall be amortized over the term of the sublease, and (3) the cost of any real estate commissions incurred by Tenant in connection with such subletting, amortized over the term of the sublease. (i) Regardless of Landlord's consent, no subletting or assignment (except to Landlord pursuant to the provisions of subparagraph (d) above) shall release Tenant of Tenant's obligation or alter the primary liability of Tenant to pay the rent and to perform all other obligations to be performed by Tenant hereunder. The acceptance of rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. In the event of default by any assignee of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee or successor. Landlord may consent to subsequent assignments or subletting of this Lease or amendments or modifications to this Lease with assignees of Tenant, without notifying Tenant, or any successor of Tenant, and without obtaining its or their consent thereto, and such action shall not relieve Tenant of liability under this Lease. (j) In the event Tenant shall assign this Lease or sublet the Premises or request the consent of Landlord to any assignment, subletting, hypothecation or other action requiring Landlord's consent hereunder, then Tenant shall pay Landlord's then reasonable and -13- 14 standard processing fee and Landlord's reasonable attorneys' fees incurred in connection therewith, which shall not exceed $500. 33. Subordination. At Landlord's option, this Lease shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the Premises and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements, and extensions thereof. Notwithstanding such subordination, Tenant's right to a quiet possession of the Premises shall not be disturbed if Tenant is not in default and so long as Tenant shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee, or ground lessor shall elect to have this Lease prior to the lien of its mortgage, deed of trust, or ground lease, and shall give written notice thereof to Tenant, this Lease shall be deemed prior to such mortgage, deed of trust, or ground lease, whether this Lease is dated prior or subsequent to the date of such mortgage, deed of trust, or ground lease or the date of the recording thereof. 34. Attornment. In the event any proceedings are brought for the foreclosure of, or in the event of exercise of the power of sale under, any mortgage or deed of trust now or hereafter on the Premises or any part thereof, Tenant shall, if so requested by the purchaser upon such foreclosure or sale or the grantee under a deed in lieu of foreclosure, attorn to such purchaser or grantee and recognize such purchaser or grantee as the Landlord under this Lease. 35. Indemnification. Tenant agrees to indemnify, defend, and save Landlord harmless from and to reimburse Landlord for any and all claims arising from (a) the conduct or management of, or any work or thing whatsoever done in or about, the Premises during the term of this Lease, (b) any condition existing during the term of this Lease of (i) the Premises, (ii) any street, curb, or sidewalk adjoining the Premises, or (iii) any vaults, passageways, or spaces therein or appurtenant thereto, (b) any breach or default on the part of Tenant in the performance of any covenant or agreement on the part of Tenant to be performed pursuant to the terms of this Lease, (c) any act or negligence of Tenant or any of its agents, contractors, servants, employees, or licensees, (d) any accident, injury, or damage whatsoever caused to any person, firm, or corporation occurring during the term of this Lease in or about the Premises or upon or under the sidewalks or the land adjacent thereto, and (e) any and all costs, counsel fees, expenses, and liabilities incurred in connection with the such claim or action or proceeding brought thereon, except to the extent that any of the above-described claims arise out of any gross negligence or willful misconduct of Landlord. In case any action or proceeding be brought against Landlord by reason of any such claim, Tenant, upon notice from Landlord, covenants to resist or defend such action or proceeding by counsel satisfactory to Landlord. 36. Attorneys' Fees. If any action arising out of this Lease is brought by either party hereto against the other, then and in that event the unsuccessful party to such action shall pay to the prevailing party all costs and expenses, including reasonable attorneys' fees, incurred by such prevailing party, and if the prevailing party shall recover judgment in such action, such costs, expenses and attorneys' fees shall be included in and as part of such judgment. -14- 15 37. No Representations. Landlord has made no representations of any nature whatsoever in connection with the condition of the Premises or any part thereof, and Landlord shall not be liable for any defects therein, except as herein expressly provided. 38. Events of Default. The following events shall be deemed to be events of default by Tenant under this Lease: (a) The failure of Tenant to pay any installments of Base Rent or additional rent when due, or any other payment or reimbursement to Landlord required herein when due, where such failure shall continue for a period of five (5) days after written notice of such failure; (b) (i) The application by Tenant for consent to the appointment of a receiver, trustee, or liquidator of Tenant or of all or a substantial part of Tenant's assets, (ii) Tenant's insolvency or admission in writing of its inability to pay its debts as they come due, (iii) the making by Tenant of any general arrangement or assignment for the benefit of creditors, (iv) Tenant becomes a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days), (v) the appointment of a trustee or receiver to take possession of all or substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease (unless possession is restored to Tenant within thirty (30) days), (vi) the attachment, execution, or other judicial seizure of all or substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease (unless such seizure is discharged within thirty (30) days), or (vii) any transfer of Tenant's assets in fraud of its creditors; (c) Tenant shall have been served with three or more notices of default hereunder, or under any applicable statute, within any twelve-month period, whether or not the defaults in question were cured. 39. Landlord's Remedies. Upon the occurrence of any event of default by Tenant, Landlord may, at its option and without any further notice or demand (in addition to any other rights and remedies under this Lease, at law or in equity) do any of the following: (a) Landlord shall have the right, so long as such default continues, to give notice of termination to Tenant. On the date specified in such notice (which shall not be less than three (3) days after the giving of such notice) this Lease shall terminate; (b) In the event of any such termination of this Lease, Landlord may then or at any time thereafter re-enter the Premises and remove therefrom all persons and property and again repossess and enjoy the Premises, without prejudice to any other remedies that Landlord may have by reason of Tenant's default or of such termination; (c) In the event of any such termination of this Lease, Landlord may recover damages which shall include, without limitation: (1) the amount at the time of award (computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent) of (A) unpaid rent earned at the time of termination, (B) the amount by which the unpaid rent that would have been earned during the period from termination until the award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided, and (C) the amount by which the unpaid rent for the balance of the -15- 16 term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; (2) all legal expenses and other related costs incurred by Landlord following Tenant's default; (3) all costs incurred by Landlord in restoring the Premises to good order and condition, or, to the extent reasonably necessary to accomplish such reletting, in remodeling, renovating, or otherwise preparing the Premises for reletting; and (4) all other costs (including without limitation any brokerage commissions) incurred by Landlord in reletting the Premises; (d) Following the termination of this Lease (or upon Tenant's failure to remove its personal property from the Premises after the expiration of the term of this Lease), Landlord may remove any and all personal property located in the Premises and sell or place such property in a public or private warehouse or elsewhere at the sole cost and expense of Tenant in accordance with applicable Laws. Tenant waives all claims for damages that may be caused by Landlord's removing, storing or selling the property as herein provided; (e) Landlord shall have the right to cause a receiver to be appointed in any action against Tenant to take possession of the Premises and to collect the rents or profits derived therefrom. The appointment of such receiver shall not constitute an election on the part of Landlord to terminate this Lease unless notice of such intention is given to Tenant; or (f) Landlord shall have the remedy described in California Civil Code Section 1951.4 (i.e. Landlord may continue this Lease in effect after Tenant's abandonment and recover rent as it becomes due, because Tenant has the right to sublet or assign, subject only to reasonable limitations). Even though Tenant has breached this Lease and abandoned the Premises, this Lease shall continue in effect for so long as Landlord does not terminate Tenant's right to possession, and Landlord may enforce all its rights and remedies under this Lease, including the right to recover rent in periodic actions as it becomes due under this Lease. In such event, Landlord may re-enter the Premises and remove all persons and property if the Premises have not been vacated, using any available summary proceedings, without such re-entry or removal being deemed a termination or acceptance of surrender of this Lease. Landlord may then elect to relet the Premises for the account of Tenant for a period that may extend beyond the term hereof, and upon such other terms as Landlord may reasonably deem appropriate. Tenant shall reimburse Landlord upon demand for all costs incurred by Landlord in connection with such reletting, including without limitation necessary restoration, renovation, or improvement costs, attorneys' fees, and brokerage commissions. The proceeds of such reletting shall be applied first to any sums then due and payable to Landlord from Tenant, including the reimbursement described above. The balance, if any, shall be applied to the payment of future rent as it becomes due hereunder. 40. Cumulative Remedies. The specified remedies to which Landlord may resort under the terms of this Lease are cumulative and are not intended to be exclusive of any other remedies or means of redress to which Landlord may be entitled, either at law or in equity, in case of any breach or threatened breach by Tenant of any covenant, agreement, or condition of this Lease. 41. No Waivers. The failure of Landlord to insist in any one or more instances upon the strict performance or observance of any of the covenants, agreements, or conditions of this Lease or to exercise any option herein contained shall not be construed as a waiver or a -16- 17 relinquishment of future performance or observance of such covenant, agreement, or condition or exercise of such option. 42. Application of Tenant Deposits. In the event of any default by Tenant under this Lease, Landlord may, at its option, apply on account of such default any monies (and the proceeds of any and all other security) deposited by or for the account of Tenant under any provision of this Lease. Tenant shall not be entitled to interest on any monies so deposited. 43. Holding Over. Tenant covenants that it will vacate the Premises immediately upon the expiration or sooner termination of this Lease. If, with Landlord's consent, Tenant retains possession of the Premises or any part thereof after the expiration or termination hereof, Tenant shall pay Landlord rent at 150% of the monthly rate specified in paragraph 3 for the time Tenant thus remains in possession. The provisions of this paragraph do not exclude Landlord's rights of re-entry or any other right hereunder, including without limitation the right to refuse 150% of the monthly rent and instead to remove Tenant through summary proceedings for holding over beyond the expiration of the term of this Lease. 44. Notices. All notices, demands, and requests that may or are required to be given by either party to the other shall be in writing and shall be deemed given when sent by United States Certified Mail, postage prepaid, and addressed as follows: (a) to Tenant at the address specified in the Basic Lease Information, or at such other place as Tenant may from time to time designate by written notice to Landlord, or (b) to Landlord at the address specified in the Basic Lease Information, or at such other places as Landlord may from time to time designate by written notice to Tenant. 45. Limitation of Landlord's Liability. In the event of a sale or transfer by Landlord of its interest in the Premises or this Lease, such sale or transfer shall operate to release the transferor from all liability for the performance of the obligations of Landlord hereunder, expressed or implied, from and after the date of such transfer, and Tenant agrees thereafter to look solely to the successor in interest of Landlord in and to this Lease for the performance thereafter of Landlord's obligations hereunder. Landlord may transfer to its successor in interest the Security Deposit (and all other forms of security) given by or for Tenant to Landlord and thereupon Landlord shall be discharged from any further liability with respect thereto. 46. Estoppel Certificates. At any time and from time to time upon not less than ten (10) days prior request by Landlord, Tenant agrees to execute, acknowledge, and deliver to Landlord a statement in writing certifying that (a) this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and identifying the modifications), (b) the dates to which Base Rent, additional rent, and other charges have been paid, and (c) whether there is then existing any claim by Tenant of default hereunder by Landlord and, if so, specifying the nature thereof. It is intended that any such statement may be relied upon by any person proposing to acquire Landlord's interest in this Lease or any prospective mortgagee of, or assignee of any mortgage upon, such interest. 47. Brokerage. Tenant represents and warrants that it has dealt with no broker, agent, or other person in connection with this transaction and that no other broker, agent, or other person brought about this transaction, other than the Brokers listed in the Basic Lease -17- 18 Information, and Tenant agrees to indemnify and hold Landlord harmless from and to reimburse Landlord for any and all claims by any other broker, agent, or person claiming a commission or other form of compensation by virtue of having dealt with Tenant with respect to this leasing transaction. The provisions of this paragraph shall survive the termination of this Lease. 48. Security Deposit. Tenant shall, upon execution of this Lease, deposit with Landlord the sum specified in the Basic Lease Information as security for the full and faithful performance of every provision of this Lease to be performed by Tenant (the "Security Deposit"). If Tenant defaults with respect to any provision of this Lease, Landlord may use, apply, or retain all or any part of the Security Deposit for the payment of Base Rent or any other sum in default, for the payment of any other amount that Landlord may spend or become obligated to spend by reason of Tenant's default, or to compensate Landlord for any other loss, cost, or damage that 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. Landlord shall not be required to keep the Security Deposit separate from its general funds and Tenant shall not be entitled to interest on such deposit. 49. Signage. Tenant shall not place or permit on the outside of the Premises any sign, advertisement, illumination, projection, or similar thing (a "Sign"), unless (a) Landlord has given its prior written consent thereto, which shall not be unreasonably withheld, and (b) such Sign complies with applicable law. 50. Miscellaneous. This Lease cannot be changed orally, but only by agreement in writing signed by the party against whom, or against whose successors and assigns, enforcement of the change is sought. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger as to any existing subtenancies and shall, at the option of Landlord, terminate any and all such existing subtenancies or, at Landlord's option, operate as an assignment to it of any and all such subtenancies. The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. If there is more than one tenant, the obligations hereunder imposed upon the tenant shall be joint and several. Time is of the essence of this Lease and each and all of its provisions. This Lease shall be construed and enforced in accordance with the laws of the State in which the Premises are situated. The term "Default Interest Rate" shall mean an annual rate equal to 4% over the annual prime rate of interest announced publicly by Citibank, N.A. in New York, New York from time to time or the maximum interest rate permitted by law, whichever is less. Any amount due from Tenant, if not paid when first due, shall bear interest at the Default Interest Rate from the date due until paid. If any covenant, agreement, or condition of this Lease or the application thereof to any person, firm, corporation, or circumstance is or becomes to any extent invalid or unenforceable, the remainder of this Lease, or the application of such covenant, agreement, or condition to persons, firms, corporations, or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and in lieu of each clause or provision of this Lease that is illegal, invalid, or unenforceable, there shall be added as a part of this Lease a clause or provision as similar in terms to such clause or provision as is possible and as may be legal, valid, and enforceable. If any excavation or other building operation shall be made, or about to be made, upon any adjoining property or streets, upon the request of Landlord, Tenant shall permit the owner or lessee of such adjoining property and their respective representatives to enter the -18- 19 Premises and shore the foundations and walls thereof, and to do any other act or thing reasonably necessary, in Landlord's opinion, for the safety or preservation of the Building and Premises. Landlord's acceptance of a partial rent payment shall not constitute a waiver of any rights of Tenant and Landlord, including, without limitation, any right Landlord may have to recover possession of the Premises, in unlawful detainer, or otherwise. The parties agree that the covenants and agreements herein contained shall bind and inure to the benefit of Landlord and its successors and assigns, and shall bind and inure to the benefit of Tenant and its successors and assigns, subject to the provisions of paragraph 32, and provided that any consent required to any assignment hereof shall be had and obtained as specified in this Lease. Exhibits A-C and Addendum A , consisting of 7 pages are attached hereto and become part of this Lease. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first above written. TENANT LANDLORD Pets.com Inc., a California Whipple Properties 1001, Corporation a Delaware Limited Liability Company 435 Brannan Street, Suite 100 One Front Street, Suite 1100 San Francisco, CA 94107 San Francisco, CA 94111 By: /s/ Julie Wainwright By: /s/ Keith Fink ----------------------------- -------------------------------------- Julie Wainwright Keith Fink Its CEO Its V.P. ------------------------- --------------------------------- By: By: ----------------------------- -------------------------------------- Its Its -------------------------- ---------------------------------- -19- EX-10.30 36 LEASE AGREEMENT WITH PRECEDENT INDUSTRIAL GROUP 1 LEASE AGREEMENT THIS LEASE is executed this 7th day of December, 1999, by and between PRECEDENT INDUSTRIAL GROUP, LLC, an Indiana limited liability company ("Landlord"), and pets.com, inc., a California corporation ("Tenant"). WITNESSETH: ARTICLE 1 - LEASE OF PREMISES Section 1.01. Basic Lease Provisions and Definitions. A. Leased Premises (shown outlined on Exhibit A attached hereto) Building No. 1 (the "Building"); located in Precedent South Business Center (the "Park") in Greenwood, Indiana; B. Rentable Area: 292,500 square feet which includes 7,400 square feet of office space; Landlord shall use commercially reasonable standards, consistently applied, in determining the Rentable Area and the rentable area of the Building. Landlord's determination of Rentable Area shall conclusively be deemed correct for all purposes hereunder. C. Tenant's Proportionate Share: 65%; D. Minimum Annual Rent: [*] E. Monthly Rental Installments: [*] F. Lease Term: Five (5) years; G. Target Commencement Date: January 1, 2000; H. Security Deposit: None; I. Guarantor(s): None; J. Broker(s): Summit Realty Group representing Landlord and Trammell Crow Company representing Tenant; K. Permitted Use: General warehouse, related office and other related purposes; L. Address for notices: Landlord: Precedent Industrial Group, LLC Suite 120 9365 Counselors Row Indianapolis, IN 46240 Attn: Randy Aikman * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 2 With a copy to: Greenwalt Development 215 West New Road Suite 200 Greenfield, IN 46140 Attn: Terry McCardwell Tenant: pets.com, inc. 435 Brannan Street San Francisco, California 94107 Attn: Mark Lemma With a copy to: Hopkins & Carley P. O. Box 1469 San Jose, California 95109-1469 Attn: Julie Frambach, Esq. Address for rental and other payments: Precedent Industrial Group, LLC Suite 120 9365 Counselors Row Indianapolis, IN 46240 Section 1.02. Leased Premises. Landlord hereby leases to Tenant and Tenant leases from Landlord, under the terms and conditions herein, the Leased Premises. ARTICLE 2 - TERM AND POSSESSION Section 2.01. Term. The term of this Lease ("Lease Term") shall be for the period of time set forth in the Basic Lease Provisions and shall commence on the Commencement Date, as defined in Section 2.02, below. Upon delivery of possession of the Leased Premises to Tenant, Tenant shall execute a letter of understanding acknowledging (i) the Commencement Date of this Lease, and (ii) that Tenant has accepted the Leased Premises. If Tenant takes possession of and occupies the Leased Premises, Tenant shall be deemed to have accepted the Leased Premises and that the condition of the Leased Premises and the Building was at the time satisfactory and in conformity with the provisions of this Lease in all respects. Section 2.02. Construction of Tenant Improvements and Commencement Date. Tenant has personally inspected the Leased Premises and accepts the same "AS IS" without representation or warranty by Landlord of any kind and with the understanding that Landlord shall have no responsibility with respect thereto except to construct in a good and workmanlike manner the improvements designated as Landlord's obligations in the attached Exhibit B, which shall be in accordance with and at the expense of the party indicated on Exhibit B. Based upon the scope of the work to be completed by Landlord (the "Landlord's Work") which is described on Exhibit B, the Landlord anticipates that the Landlord's Work will be completed by the Target Commencement Date identified in the Basic Lease Provisions [Section 1.01(G)], -2- 3 subject to force majeure, as described in Section 16.04. Notwithstanding anything to the contrary contained herein, the Landlord represents and warrants that, as of the Commencement Date: (i) the Building and the Leased Premises will have been completed in material compliance with all building codes applicable thereto, (ii) the mechanical, plumbing and electrical systems included in the Building and the Leased Premises are in good operating condition, and (iii) the roof of the Building and the Leased Premises is in place and weather tight. The "Commencement Date" shall be the earlier of (i) the date on which the Leased Premises are first used and occupied by Tenant's personnel for carrying on the normal functions of its business, or (ii) the date ten (10) days after Landlord gives written notice to Tenant that the Landlord's Work has been substantially completed. The Commencement Date shall in no event be postponed by reason of any delay caused by Tenant (for example, and without limitation, Tenant's failure to timely approve or furnish plans or specifications, make selections or decisions necessary for substantial completion of the Landlord's Work, or complete any work required or permitted to be completed by Tenant in or upon the Leased Premises). In this regard, the Landlord shall complete those portions of Landlord's Work as will be necessary to reasonably accommodate acceptance of delivery of the equipment and materials for the racking system/fixtures which the Tenant intends to install in the Leased Premises by December 15, 1999. Thereafter, the Landlord agrees that it will complete those portions of Landlord's Work as will be necessary to reasonably accommodate the commencement of work by Tenant and its independent contractors to fabricate, construct and/or install such racking systems/fixtures in the Leased Premises by December 27, 1999. The Tenant acknowledges and agrees that Landlord shall have no liability or responsibility for the custody or protection of such equipment and materials or such racking systems/fixtures, either before or after the fabrication, construction and/or installation thereof and that Tenant and its independent contractors shall have such equipment and materials delivered and placed within the Leased Premises in such locations, and conduct its fabrication, construction and/or installation activities in such a manner so as to not unreasonably interfere with the performance and completion of the Landlord's Work. Section 2.03. Surrender of the Premises. Upon the expiration or earlier termination of this Lease, Tenant shall immediately surrender the Leased Premises to Landlord in broom-clean condition and in good order, condition and repair. Tenant shall also remove its personal property, trade fixtures and any alterations made by Tenant to the Leased Premises (which the Landlord has designated are to be removed under Section 7.03), in writing, to the Tenant, and the Tenant shall promptly repair any damage caused by such removal, and restore the Leased Premises to the condition existing upon the Commencement Date, reasonable wear and tear excepted . If Tenant fails to do so, Landlord may restore the Leased Premises to such condition at Tenant's expense, Landlord may cause all of said property to be removed at Tenant's expense, and Tenant hereby agrees to pay all the costs and expenses thereby reasonably incurred, including, without limitation, costs of removal and storage of Tenant's property. All Tenant property which is not removed within twenty (20) days following Landlord's written demand therefor shall be conclusively deemed to have been abandoned by Tenant, and Landlord shall be entitled to dispose of such property at Tenant's cost without thereby incurring any liability to Tenant. The provisions of this section shall survive the expiration or other termination of this Lease. Section 2.04. Holding Over. If Tenant retains possession of the Leased Premises after the expiration or earlier termination of this Lease, Tenant shall become a tenant from month to month at one hundred fifty percent (150%) of the Monthly Rental Installment in effect at the end of the Lease Term, and otherwise upon the terms, covenants and conditions herein specified, so far as applicable. Acceptance by Landlord of rent in such event shall not result in a renewal of this Lease, and Tenant shall vacate and surrender the Leased Premises to Landlord upon Tenant being given thirty (30) days prior written notice from Landlord to vacate whether or not said notice is given on the rent paying date. This Section 2.04 shall in no way constitute a consent by Landlord to any holding over by Tenant upon the expiration or earlier -3- 4 termination of this Lease, nor limit Landlord's remedies in such event. ARTICLE 3 - RENT Section 3.01. Base Rent. Tenant shall pay to Landlord the Minimum Annual Rent in the Monthly Rental Installments, in advance, without deduction or offset, beginning on the Commencement Date and on or before the first day of each and every calendar month thereafter during the Lease Term. The Monthly Rental Installment for partial calendar months shall be prorated. Monthly Rent during the applicable lease year shall be an amount equal to one twelfth (1/12) of the Minimum Annual Rent during such lease year. Tenant also agrees to pay Landlord any excise, sales or privilege tax, if any, imposed by any governmental authority on account of this Lease or the rent paid hereunder as part of Operating Expenses under Section 3.02. Section 3.02. Additional Rent. In addition to the Minimum Annual Rent Tenant shall pay to Landlord for each calendar year during the Lease Term, as "Additional Rent," Tenant's Proportionate Share of all costs and expenses incurred by Landlord during the Lease Term for Real Estate Taxes and Operating Expenses for the Building and common areas (collectively "Common Area Charges"). For purposes of this Lease, the term "Operating Expenses" shall mean all of Landlord's expenses for operation, repair, replacement and maintenance to keep the Building and common areas in good order, condition and repair (including all additional direct costs and expenses of operation and maintenance of the Building which Landlord reasonably determines it would have paid or incurred during such year if the Building had been fully occupied), including, but not limited to, management or administrative fees at market rates (not to exceed four percent (4%) of gross rentals from the Building); utilities; stormwater discharge fees; license, permit, inspection and other fees; fees and assessments imposed by and/or payable to the owner's association or otherwise under the Declaration of Covenants, Conditions, Restrictions and Easements for Precedent South Business Center, as the same may be amended from time to time (the "Covenants"); security services; insurance premiums and deductibles; maintenance, repair and replacement of the driveways, parking areas (including snow removal), exterior lighting, landscaped areas, walkways, curbs, drainage strips, sewer lines, exterior walls, foundation, structural frame, roof and gutters. The costs incurred by Landlord in connection with any capital improvement (including, without limitation, replacements to existing improvements which are, in Landlord's reasonable discretion, no longer susceptible to repair by the Tenant under Section 7.01) shall be amortized over the useful life of such improvement (in accordance with generally accepted accounting principals, consistently applied), and only the amortized portion shall be included in Operating Expenses. "Real Estate Taxes" shall include any form of real estate tax or assessment or service or other payments in lieu thereof, and any license fee, commercial rental tax, improvement bond or other similar charge or tax (other than income, inheritance or estate taxes) imposed upon the Building or common areas (or against Landlord's business of leasing the Building) by any authority having the power to so charge or tax, together with costs and expenses of contesting the validity or amount of Real Estate Taxes which, at Landlord's option, may be calculated as if such contesting work had been performed on a contingent fee basis, whether charged by Landlord's counsel or representative; provided, however, that said fees are reasonably comparable to the fees charged for similar services by others not affiliated with Landlord. In no event shall any such fee exceed the actual amount of the tax savings). Additionally, Tenant shall pay, prior to delinquency, all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all personal property of Tenant contained in the Leased Premises. The Landlord has advised Tenant that the Building is located within an economic revitalization area and, as such, has been afforded tax abatement. In this regard, the assessed value of the property upon -4- 5 which the Building is located, will increase and/or has increased as a result of the construction of the Building. The impact of that increase in assessed value will, as a result of the tax abatement and subject to the terms thereof, phase in the increase in the Real Estate Taxes resulting from that increase in assessed value over a ten (10) year period. Maintaining the tax abatement that is available for the Building may require that the Landlord report on the condition and utilization of the Building to state and/or local taxing authorities. In this regard, the Landlord may solicit information on the Tenant's utilization of the Leased Premises in order to permit the Landlord to comply with any applicable state or local reporting requirements. Tenant agrees that it will cooperate with any reasonable request for such information. The Landlord has advised Tenant that the benefits of the tax abatement are "front-loaded" so as to provide the greatest benefit of the tax abatement in the early years of the abatement period. In this regard, the parties acknowledge that the original Lease Term does not cover the entire abatement period. As a result the Landlord and Tenant have agreed that the Landlord will include, in Real Estate Taxes, an amount which would be paid or incurred for such Real Estate Taxes as if the benefits of the tax abatement were allocated equally over the entire ten (10) year abatement period (the "Averaged Tax Amount"). As a result, the Landlord will, during the first several years of the abatement period, collect an amount in excess of the amount it is actually obligated to pay for such Real Estate Taxes (the "Tax Abatement Reserve"). The Landlord shall hold the Tax Abatement Reserve during the original Lease Term, but will not be obligated to segregate, escrow or otherwise impound any funds in the Tax Abatement Reserve. If the Tenant exercises its option to renew this Lease for either one or both of the Option Periods (as provided in Section 16.11), the Tenant will continue to pay the Averaged Tax Amount over the entire ten (10) year abatement period and the Landlord will utilize funds from the Tax Abatement Reserve to cover the shortfall in payments from Tenant on account of such Real Estate Taxes (during that ten year abatement period) to pay the actual Real Estate Taxes then due. If the Tenant fails to exercise its option to renew under Section 16.11, below, the Landlord shall be entitled to apply the Tax Abatement Reserve in any manner that it sees fit to facilitate re-letting the Leased Premises to a third party or otherwise. In no event shall the Tenant have any rights or claims as to any funds in the Tax Abatement Reserve, by way of recoupment or otherwise, except to have those funds applied to pay Real Estate Taxes due if Tenant re-lets the Leased Premises in the manner set forth above. Notwithstanding the foregoing, the parties hereto acknowledge and agree that the Averaged Tax Amount may need to be recalculated from time to time on account of, inter. alia., (i) delays in the initial assessment of the Building, (ii) increases in applicable tax rate(s), and (iii) reassessments of the Building by the local assessor's office. Section 3.03. Payment of Additional Rent. Landlord shall estimate the total amount of Common Area Charges, and thereby the Additional Rent to be paid by Tenant during each calendar year of the Lease Term, pro-rated for any partial years. The Landlord currently estimates that the Common Area Charges during the first year of the Lease Term will be [*] per square foot of Rentable Area in the Building. Commencing on the Commencement Date, Tenant shall pay to Landlord each month, at the same time the Monthly Rental Installment is due, an amount equal to one-twelfth (1/12) of the estimated Additional Rent for such year. Within a reasonable time after the end of each calendar year, Landlord shall submit to Tenant a statement of the actual amount of such Additional Rent (the "Landlord's Year End Statement") and within thirty (30) days after receipt of such statement, Tenant shall pay any deficiency between the actual amount owed and the estimates paid during such calendar year. In the event of overpayment, Landlord shall credit the amount of such overpayment toward the next installments of Minimum Rent. * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. -5- 6 Section 3.04. Tenant Verification. Tenant shall have the right to inspect, upon reasonable notice, at reasonable times and in a reasonable manner, during the ninety (90) day period following the delivery of Landlord's Year End Statement, such of Landlord's books of account and records as pertain to and contain information concerning the Common Area Charges for such year in order to verify the amounts thereof (herein referred to as a "Tenant Audit"). The Tenant acknowledges and agrees that the calculation of the amounts due on the Year End Statement require a certain threshold level of financial competence and, consequently, if Tenant elects to engage a third party to conduct a Tenant Audit, that third party shall be an independent certified public accountant. If the Tenant Audit is conducted by such an independent certified public accountant, and the fee arrangement between Tenant and such independent certified public accountant is a contingency or similar fee arrangement pursuant to which the Tenant's independent certified public accountant is paid a fee as a percentage of the amount of any reduction that it obtains in the calculation of the amount due from Tenant on account of such Common Area Charges (herein a "Contingency Fee"), then the Tenant shall be obligated to pay a fee to the Landlord in an amount equivalent to the greater of either (i) the amount of all reasonable costs and expenses paid or incurred by Landlord in connection with any such Tenant Audit, including, without limitation, an amount calculated by Landlord to reimburse Landlord, on an hourly basis, for the costs associated with utilizing its own internal accountants and/or property management personnel to facilitate the completion of such a Tenant Audit (the "Landlord's Overhead Fee"), or (ii) the amount of the Contingency Fee, in either case, to reimburse Landlord for the time and expense associated with responding and furnishing information for such Tenant Audit. If such independent certified public accountant is not to be compensated by Tenant with a Contingency Fee, the Tenant shall, nonetheless, be obligated to pay to Landlord the Landlord's Overhead Fee in connection with any such Tenant Audit. The amounts due from Tenant to Landlord on account of the Landlord's Overhead Fee or on account of any such Contingency Fee shall not be due if the results of any such Tenant Audit or any Final Determination, as specified below, result in a credit due to the Tenant in an amount equal to five percent (5%) of the aggregate amount of such Common Area Charges, or more, for the year in question. If Tenant or any such independent certified public accountant fails to specifically identify any errors or omissions in the Year End Statement within such ninety (90) day period, the amounts due to Landlord or to be credited to Tenant, as reflected on the Year End Statement, shall be conclusively due in the manner set forth in such Year End Statement. Upon completion of any such Tenant Audit, the Tenant shall furnish a complete copy thereof to Landlord. Upon receipt of any such Tenant Audit, if the Landlord agrees with the results of such Tenant Audit, the Landlord shall revise its Year End Statement accordingly. Alternatively, if the Landlord disagrees with the results of the Tenant Audit, the Landlord shall submit its Year End Statement and supporting information, together with a copy of the Tenant Audit to an independent certified public accountant (the "Accountant") to make a final and conclusive determination as to the actual amount due from Tenant on account of such Common Area Charges hereunder (herein a "Final Determination"). If and to the extent that the actual amount of Common Area Charges due from the Tenant, as determined by such Accountant, is five percent (5%) less then the amounts indicated to be due from Tenant on the Landlord's Year End Statement, the Landlord shall pay for the costs and expenses associated with obtaining the Final Determination. In all other cases, the Tenant shall be responsible for the cost of obtaining the Final Determination, which amounts shall constitute Additional Rent hereunder and which amounts shall be immediately due and payable. Section 3.05. Late Charges. Tenant acknowledges that Landlord shall incur certain additional unanticipated administrative and legal costs and expenses if Tenant fails to timely deliver to Landlord any payment required hereunder. Therefore, in addition to the other remedies available to Landlord hereunder, if any payment required to be paid by Tenant to Landlord hereunder shall not have been paid within five -6- 7 (5) business days following the due date therefore, the Tenant will be obligated to pay to Landlord, in addition to the amount due, a late fee in an amount equal to five percent (5%) of the amount overdue. ARTICLE 4 - SECURITY DEPOSIT INTENTIONALLY OMITTED ARTICLE 5 - USE Section 5.01. Use of Leased Premises. The Leased Premises are to be used by Tenant solely for the Permitted Use and for no other purposes without the prior written consent of Landlord. Section 5.02. Covenants of Tenant Regarding Use. Tenant shall (i) use and maintain the Leased Premises and conduct its business thereon in a safe, careful, reputable and lawful manner, (ii) comply with all laws, rules, regulations, orders, ordinances, directions and requirements of any governmental authority or agency, now in force or which may hereafter be in force, including without limitation those which shall impose upon Landlord or Tenant any duty with respect to or triggered by a change in the use or occupation of, or any improvement or alteration to, the Leased Premises, and (iii) comply with and obey all reasonable directions of the Landlord, including any rules and regulations that may be adopted by Landlord from time to time. Tenant shall not do or permit anything to be done in or about the Leased Premises or common areas which constitutes a nuisance or which interferes with the rights of other tenants or injures or annoys them. Landlord shall not be responsible to Tenant for the nonperformance by any other tenant or occupant of the Building of its lease or of any rules and regulations. Tenant shall not overload the floors of the Leased Premises. All damage to the floor structure or foundation of the Building due to improper positioning or storage of items or materials shall be repaired by Landlord at the sole expense of Tenant, who shall reimburse Landlord immediately therefor upon demand. Tenant shall not use the Leased Premises, or allow the Leased Premises to be used, for any purpose or in any manner which would invalidate any policy of insurance now or hereafter carried on the Building or increase the rate of premiums payable on any such insurance policy unless Tenant reimburses Landlord as Additional Rent for any increase in premiums charged. Section 5.03. Landlord's Rights Regarding Use. In addition to the rights specified elsewhere in this Lease, Landlord shall have the following rights regarding the use of the Leased Premises or the common areas, each of which may be exercised without notice or liability to Tenant, (a) Landlord may install such signs, advertisements, notices or tenant identification information as it shall deem necessary or proper; (b) Landlord shall have the right at any time to control, change or otherwise alter the common areas as it shall deem necessary or proper; and (c) Landlord or Landlord's agent shall be permitted to inspect or examine the Leased Premises at any reasonable time upon giving at least 24 hours advance verbal notice to any Tenant designated representative (except in an emergency when no notice shall be required), and Landlord shall have the right to make any repairs to the Leased Premises which are necessary for its preservation; provided, however, that any repairs made by Landlord shall be at Tenant's expense, except as provided in Section 7.02 hereof. Landlord shall incur no liability to Tenant for such entry, nor shall such entry constitute an eviction of Tenant or a termination of this Lease, or entitle Tenant to any abatement of rent therefor. ARTICLE 6 - UTILITIES AND UTILITY SERVICES Tenant shall obtain in its own name and pay directly to the appropriate supplier the cost of all utilities and utility services serving the Leased Premises. Notwithstanding the foregoing, if any such utilities or utility services are jointly metered with other property, Landlord shall make a reasonable -7- 8 determination of Tenant's proportionate share of the cost of such utilities and utility services (at rates that would have been payable if such utilities and utility services had been directly billed by the utilities or utility service providers to Tenant) and Tenant shall pay such share to Landlord within thirty (30) days after receipt of Landlord's written statement. To the extent that any such utility or other building service fails or is otherwise interrupted, the Landlord agrees to exercise commercially reasonable efforts, in cooperation with the applicable service provider, to expeditiously restore any such utility or other building service. Landlord shall not, however, be liable in damages or otherwise for any failure or interruption of any utility or other building service and no such failure or interruption shall entitle Tenant to terminate this Lease or withhold or abate any sums due hereunder. In the event that any such utilities or utility services are available from more than one (1) utility service provider, Landlord shall be entitled to choose the utility service provider. ARTICLE 7 - MAINTENANCE AND REPAIRS Section 7.01. Tenant's Responsibility. During the Lease Term, Tenant shall, at its own cost and expense, maintain the Leased Premises in good condition, regularly servicing and promptly making all repairs thereto, including but not limited to the electrical systems, heating and air conditioning systems, plate glass, floors, windows and doors, sprinkler and plumbing systems, and shall obtain a preventive maintenance contract on the heating, ventilating and air-conditioning systems, and provide Landlord with a copy thereof. In connection with the foregoing, the Landlord agrees to make available to the Tenant copies of all warranties which relate to the Leased Premises and/or Landlord's Work and shall assist the Tenant to the extent reasonably necessary in any effort by the Tenant to enforce any rights under any such warranty. The preventive maintenance contract shall meet or exceed Landlord's standard maintenance criteria (which criteria are more specifically delineated in Exhibit C), and shall provide for the inspection and maintenance of the heating, ventilating and air conditioning system on not less than a semi-annual basis. Section 7.02. Landlord's Responsibility. During the Lease Term, Landlord shall maintain in good condition and repair, and replace as necessary, the roof, exterior walls, foundation and structural frame of the Building and the parking and landscaped areas, the costs of which shall be included in Operating Expenses; provided, however, that to the extent any of the foregoing items require repair because of the negligence, misuse, or default of Tenant, its employees, agents, customers or invitees, Landlord shall make such repairs solely at Tenant's expense. Section 7.03. Alterations. Tenant shall not permit alterations in or to the Leased Premises unless and until the plans have been approved by Landlord in writing. Landlord agrees to not unreasonably withhold any such approval to the extent that the alterations do not affect the structural and/or mechanical systems in the Building. In connection with any such approval, Landlord shall advise Tenant as to whether or not the Landlord will require the Tenant to remove the alterations and restore the Leased Premises upon termination of this Lease. In this regard, the Landlord acknowledges that the Tenant will have no obligation to remove any of the improvements included in the Landlord's Work which is identified on Exhibit B. To the extent that the Landlord fails to advise Tenant that it will require the removal of any alterations, such alterations shall become a part of the realty and the property of Landlord upon expiration or earlier termination of this Lease, and shall not be removed by Tenant. Tenant shall ensure that all alterations shall be made in accordance with all applicable laws, regulations and building codes, in a good and workmanlike manner and of quality equal to or better than the original construction of the Building. No person shall be entitled to any lien derived through or under Tenant for any labor or material furnished to the Leased Premises, and nothing in this Lease shall be construed to constitute a consent by Landlord to the creation of any lien. If any lien is filed against the Leased Premises for work claimed to have been done for or material claimed to have been furnished to Tenant, Tenant shall cause such lien to be -8- 9 discharged of record within thirty (30) days after filing. Tenant shall indemnify Landlord from all costs, losses, expenses and attorneys' fees in connection with any construction or alteration and any related lien. ARTICLE 8 - CASUALTY Section 8.01. Casualty. In the event of total or partial destruction of the Building or the Leased Premises by fire or other casualty, Landlord agrees to promptly restore and repair same; provided, however, Landlord's obligation hereunder shall be limited to the reconstruction of such of improvements as were originally required to be made by Landlord, if any. Notwithstanding the foregoing, if the Leased Premises are (i) so destroyed that they cannot be repaired or rebuilt within one hundred eighty (180) days from the casualty date; or (ii) destroyed by a casualty which is not covered by the insurance required hereunder or, if covered, such insurance proceeds are not released by any mortgagee entitled thereto or are insufficient to rebuild the Building and the Leased Premises; then, in case of a clause (i) casualty, either Landlord or Tenant may, or, in the case of a clause (ii) casualty, then Landlord may, upon thirty (30) days written notice to the other party, terminate this Lease with respect to matters thereafter accruing. Section 8.02. Landlord's Insurance. During the Lease Term, Landlord shall maintain all risk coverage insurance on the Building, rental interruption insurance covering the rents due under this Lease and under any and all other leases affecting the Building (for a period of no more than twelve (12) months), and the cost of all such insurance shall be included as an Operating Expense under Section 3.02. Such insurance shall not protect Tenant's property on the Leased Premises; and, notwithstanding the provisions of Section 9.01, Landlord shall not be liable for any damage to Tenant's property, regardless of cause, including the negligence of Landlord and its employees, agents and invitees. Tenant hereby expressly waives any right of recovery against Landlord for damage to any property of Tenant located in or about the Leased Premises, however caused, including the negligence of Landlord and its employees, agents and invitees. Section 8.03. Waiver. Notwithstanding the provisions of Section 9.01 below, Landlord hereby expressly waives any rights of recovery against Tenant for damage to the Leased Premises or the Building which is insured against under Landlord's all risk coverage insurance. All insurance policies maintained by Landlord or Tenant as provided in this Lease shall contain an agreement by the insurer waiving the insurer's right of subrogation against the other party to this Lease. Notwithstanding anything contained herein to the contrary, Landlord and Tenant hereby release each other and each other's employees, agents, customers and invitees from any and all liability for any loss of or damage or injury to person or property occurring in, on, or about or to the Leased Premises, Building or related property by reason of fire or other casualty customarily insured against under a standard fire and extended coverage insurance policy, regardless of cause, including the negligence of Landlord or Tenant and their respective employees, agents, customers and invitees, and agree that such insurance carried by either of them shall contain a clause whereby the insurer waives its right of subrogation to recover against the other party. Because the provisions of this Section are intended to preclude the assignment of any claim mentioned herein by way of subrogation or otherwise to an insurer or any other person, each party to this Lease shall give to each insurance company, which has issued to it one or more policies of fire and extended coverage insurance, notice of the provisions of this Section and have such insurance policies properly endorsed, if necessary, to prevent the invalidation of such insurance by reason of the provision of this Section. -9- 10 ARTICLE 9 - LIABILITY INSURANCE Section 9.01. Tenant's Responsibility. Landlord shall not be liable to Tenant or to any other person for (i) damage to property or injury or death to persons due to the condition of the Leased Premises, the Building or the common areas, or (ii) the occurrence of any accident in or about the Leased Premises or the common areas, or (iii) any act or neglect of Tenant or any other tenant or occupant of the Building or of any other person, unless such damage, injury or death is the result of Landlord's negligence; and Tenant hereby releases Landlord from any and all liability for the same. Tenant shall be liable for, and shall indemnify and defend Landlord from, any and all liability for (i) any act or neglect of Tenant and any person coming on the Leased Premises or common areas by the license of Tenant, express or implied, (ii) any damage to the Leased Premises, and (iii) any loss of or damage or injury to any person (including death resulting therefrom) or property occurring in, on or about the Leased Premises, regardless of cause, except for any loss or damage covered by Landlord's all risk coverage insurance as provided in Section 8.02 and except for that caused by Landlord's negligence. This provision shall survive the expiration or earlier termination of this Lease. Section 9.02. Tenant's Insurance. Tenant shall carry general public liability and property damage insurance, issued by one or more insurance companies acceptable to Landlord, with the following minimum coverages: A. Worker's Compensation: minimum statutory amount. B. Commercial General Liability Insurance, including blanket, contractual liability, broad form property damage, personal injury, completed operations, products liability, and fire damage: Not less than $3,000,000 Combined Single Limit for both bodily injury and property damage. C. All Risk Coverage, Vandalism and Malicious Mischief, and Sprinkler Leakage insurance, if applicable, for the full cost of replacement of Tenant's property. D. Business interruption insurance. The insurance policies shall protect Tenant and Landlord as their interests may appear, naming Landlord and Landlord's managing agent and mortgagee as additional insureds, and shall provide that they may not be canceled on less than thirty (30) days prior written notice to Landlord. Tenant shall furnish Landlord with Certificates of Insurance evidencing all required coverages on or before the Commencement Date. If Tenant fails to carry such insurance and furnish Landlord with such Certificates of Insurance after a request to do so, Landlord may obtain such insurance and collect the cost thereof from Tenant. ARTICLE 10 - EMINENT DOMAIN If all or any substantial part of the Building or common areas shall be acquired by the exercise of eminent domain, Landlord may terminate this Lease by giving written notice to Tenant on or before the date that actual possession thereof is so taken. If all or any part of the Leased Premises shall be acquired by the exercise of eminent domain so that the Leased Premises shall become unusable by Tenant for the Permitted Use, Tenant may terminate this Lease as of the date that actual possession thereof is so taken by giving written notice to Landlord. All damages awarded shall belong to Landlord; provided, however, that Tenant may claim dislocation damages if such amount is not subtracted from Landlord's award. ARTICLE 11 - ASSIGNMENT AND SUBLEASE -10- 11 Tenant shall not assign this Lease or sublet the Leased Premises in whole or in part without Landlord's prior written consent, which consent shall not be unreasonably withheld. In the event of any assignment or subletting, Tenant shall remain primarily liable hereunder, and any extension, expansion, rights of first offer, rights of first refusal or other options granted to Tenant under this Lease shall be rendered void and of no further force or effect. The acceptance of rent from any other person shall not be deemed to be a waiver of any of the provisions of this Lease or to be a consent to the assignment of this Lease or the subletting of the Leased Premises. Without in any way limiting Landlord's right to refuse to consent to any assignment or subletting of this Lease, Landlord reserves the right to refuse to give such consent if, in Landlord's opinion: (i) the Leased Premises are or may be in any way adversely affected; (ii) the business reputation of the proposed assignee or subtenant is unacceptable; or (iii) the financial worth of the proposed assignee or subtenant is insufficient to meet the obligations hereunder. Landlord further expressly reserves the right to refuse to give its consent to any subletting if the proposed rent is to be less than the then current rent for similar premises in the Park or the proposed assignee or subtenant is already a tenant in the Building or the Park. Notwithstanding the foregoing, the restrictions described in the immediately preceding sentence shall not apply to any subletting by the Tenant for a period of two (2) years or less so long as the rental rate charged by the Tenant to any such subtenant is no less than seventy-five percent (75%) of the then current market rent for similar premises in the Park. Tenant agrees to reimburse Landlord for reasonable accounting and attorneys' fees incurred in conjunction with the processing and documentation of any such requested assignment, subletting or any other hypothecation of this Lease or Tenant's interest in and to the Leased Premises. Notwithstanding anything to the contrary contained herein, the Tenant may, upon thirty (30) days advance written notice to Landlord, assign this Lease or sublet the Leased Premises to a Permitted Transferee or to a Conditional Permitted Transferee (as such terms are herein defined) without the Landlord's prior written consent. Any such notice (herein a "Transfer Notice") shall identify the nature of the transfer as either an assignment or a subletting and shall identify the Permitted Transferee or Conditional Permitted Transferee. The Transfer Notice shall include a copy of the documentation purporting to effect the assignment or subletting and an insurance certificate from the proposed subtenant or assignee's insurance carrier confirming that the Permitted Transferee or Conditional Permitted Transferee has procured the insurance otherwise required of the Tenant under this Lease. In the case of a Conditional Permitted Transferee, the Transfer Notice shall also include such financial statements as may be reasonably necessary to confirm that such transferee is, in fact, a Conditional Permitted Transferee. As used herein, the term "Permitted Transferee" shall mean and refer to any subsidiary, affiliate, division or corporation controlling, controlled by or under common control with the Tenant. In the case of any assignment or subletting to any Permitted Transferee, the Tenant originally identified herein shall remain primarily liable for the performance and observance of all of the terms, covenants and conditions of this Lease. Alternatively, the term "Conditional Permitted Transferee" shall mean and refer to a successor corporation that (a) is related to Lessee by merger, consolidation, non-bankruptcy reorganization or governmental action, or a purchaser of all or substantially all of the Tenant's assets and (b) has a net worth, as demonstrated by financial statements prepared in accordance with generally accepted accounting principals, equal to or greater than the greater of either (i) the net worth of the Tenant originally identified herein, or (ii) the net worth of the then current Tenant (if this Lease has theretofore been assigned or the Leased Premises theretofore sublet), determined in each case, in accordance with generally accepted accounting principles, consistently applied, as of the date immediately preceding the date of the proposed assignment or subletting. In the case of any assignment or subletting to any Conditional Permitted Transferee, the Tenant originally identified herein (to the extent still existing as a legal entity) shall remain primarily liable for the performance and observance of all of the terms, covenants and conditions of this -11- 12 Lease. For purposes of this Lease, the sale of the Tenant's capital stock through any public exchange or issuance of Tenant's capital stock for purposes of documenting equity investment in the Tenant shall not be deemed an assignment, subletting or other transfer of the Lease or the Leased Premises. ARTICLE 12 - TRANSFERS BY LANDLORD Section 12.01. Sale of the Building. Landlord shall have the right to sell the Building at any time during the Lease Term, subject only to the rights of Tenant hereunder; and such sale shall operate to release Landlord from liability hereunder after the date of such conveyance. Section 12.02. Subordination and Estoppel Certificate. Landlord shall have the right to subordinate this Lease to any mortgage presently existing or hereafter placed upon the Building by so declaring in such mortgage. Within ten (10) business days following receipt of a written request from Landlord, Tenant shall execute and deliver to Landlord, without cost, any instrument which Landlord deems necessary or desirable to confirm the subordination of this Lease and an estoppel certificate in such form as Landlord may reasonably request certifying (i) that this Lease is in full force and effect and unmodified or stating the nature of any modification, (ii) the date to which rent has been paid, (iii) that there are not, to Tenant's knowledge, any uncured defaults or specifying such defaults if any are claimed, and (iv) any other matters or state of facts reasonably required respecting the Lease. Such estoppel may be relied upon by Landlord and by any purchaser or mortgagee of the Building. Notwithstanding the foregoing, if the mortgagee shall take title to the Leased Premises through foreclosure or deed in lieu of foreclosure, Tenant shall be allowed to continue in possession of the Leased Premises as provided for in this Lease so long as Tenant shall not be in default. ARTICLE 13 - DEFAULT AND REMEDY Section 13.01. Default. The occurrence of any of the following shall be a "Default": (a) Tenant fails to pay any Monthly Rental Installment or Additional Rent within five (5) days after the same is due, or Tenant fails to pay any other amounts due Landlord from Tenant within ten (10) days after written notice that the same is due. Notwithstanding the foregoing, the Landlord agrees that it will provide the Tenant with written notice that the Landlord has not received any payment due hereunder (a "Payment Default Notice") and the Tenant shall have five (5) days following its receipt of any such Payment Default Notice in which to cure such Default; provided, however, the Landlord shall only not be obligated to furnish such a Payment Default Notice two (2) times in any given calendar year of the Lease Term. (b) Tenant fails to perform or observe any other term, condition, covenant or obligation required under this Lease for a period of thirty (30) days after notice thereof from Landlord; provided, however, that if the nature of Tenant's default is such that more than thirty days are reasonably required to cure, then such default shall be deemed to have been cured if Tenant commences such performance within said thirty-day period and thereafter diligently completes the required action within a reasonable time. (c) Tenant shall assign or sublet all or a portion of the Leased Premises in contravention of the provisions of Article 11 of this Lease. (d) All or substantially all of Tenant's assets in the Leased Premises or Tenant's interest in this Lease are attached or levied under execution (and Tenant does not discharge the same within sixty (60) -12- 13 days thereafter); a petition in bankruptcy, insolvency or for reorganization or arrangement is filed by or against Tenant (and Tenant fails to secure a stay or discharge thereof within sixty (60) days thereafter); Tenant is insolvent and unable to pay its debts as they become due; Tenant makes a general assignment for the benefit of creditors; Tenant takes the benefit of any insolvency action or law; the appointment of a receiver or trustee in bankruptcy for Tenant or its assets if such receivership has not been vacated or set aside within thirty (30) days thereafter; or, dissolution or other termination of Tenant's existence as a legally formed and validly existing entity. Section 13.02. Remedies. Upon the occurrence of any Default, Landlord shall have the following rights and remedies, in addition to those allowed by law or in equity, any one or more of which may be exercised without further notice to Tenant: (a) Landlord may apply the Security Deposit or re-enter the Leased Premises and cure any default of Tenant, and Tenant shall reimburse Landlord as additional rent for any costs and expenses which Landlord thereby incurs; and Landlord shall not be liable to Tenant for any loss or damage which Tenant may sustain by reason of Landlord's action. (b) Landlord may terminate this Lease or, without terminating this Lease, terminate Tenant's right to possession of the Leased Premises as of the date of such Default, and thereafter (i) neither Tenant nor any person claiming under or through Tenant shall be entitled to possession of the Leased Premises, and Tenant shall immediately surrender the Leased Premises to Landlord; and (ii) Landlord may re-enter the Leased Premises and dispossess Tenant and any other occupants of the Leased Premises by any lawful means and may remove their effects, without prejudice to any other remedy which Landlord may have. Upon the termination of this Lease, Landlord may declare the present value (discounted at the Prime Rate) of all rent which would have been due under this Lease for the balance of the Lease Term to be immediately due and payable, whereupon Tenant shall be obligated to pay the same to Landlord, together with all loss or damage which Landlord may sustain by reason of Tenant's default ("Default Damages"), which shall include without limitation expenses of preparing the Leased Premises for re-letting, demolition, repairs, tenant finish improvements, brokers' commissions and attorneys' fees, it being expressly understood and agreed that the liabilities and remedies specified in this subsection (b) shall survive the termination of this Lease. (c) Landlord may, without terminating this Lease, re-enter the Leased Premises and re-let all or any part thereof for a term different from that which would otherwise have constituted the balance of the Lease Term and for rent and on terms and conditions different from those contained herein, whereupon Tenant shall be immediately obligated to pay to Landlord as liquidated damages the present value (discounted at the Prime Rate) of the difference between the rent provided for herein and that provided for in any lease covering a subsequent re-letting of the Leased Premises, for the period which would otherwise have constituted the balance of the Lease Term, together with all of Landlord's Default Damages. (d) Landlord may sue for injunctive relief or to recover damages for any loss resulting from the Default. Section 13.03. Landlord's Default and Tenant's Remedies. Landlord shall be in default if it fails to perform any term, condition, covenant or obligation required under this Lease for a period of thirty (30) days after written notice thereof from Tenant to Landlord; provided, however, that if the term, condition, covenant or obligation to be performed by Landlord is such that it cannot reasonably be performed within thirty (30) days, such default shall be deemed to have been cured if Landlord commences such performance within said thirty-day period and thereafter diligently undertakes to complete the same. Upon the -13- 14 occurrence of any such default, Tenant may sue for injunctive relief or to recover damages for any loss directly resulting from the breach, but Tenant shall not be entitled to terminate this Lease or withhold, offset or abate any sums due hereunder. Section 13.04. Limitation of Landlord's Liability. If Landlord shall fail to perform any term, condition, covenant or obligation required to be performed by it under this Lease and if Tenant shall, as a consequence thereof, recover a money judgment against Landlord, Tenant agrees that it shall look solely to Landlord's right, title and interest in and to the Building for the collection of such judgment; and Tenant further agrees that no other assets of Landlord shall be subject to levy, execution or other process for the satisfaction of Tenant's judgment. Section 13.05. Nonwaiver of Defaults. Neither party's failure or delay in exercising any of its rights or remedies or other provisions of this Lease shall constitute a waiver thereof or affect its right thereafter to exercise or enforce such right or remedy or other provision. No waiver of any default shall be deemed to be a waiver of any other default. Landlord's receipt of less than the full rent due shall not be construed to be other than a payment on account of rent then due, nor shall any statement on Tenant's check or any letter accompanying Tenant's check be deemed an accord and satisfaction. No act or omission by Landlord or its employees or agents during the Lease Term shall be deemed an acceptance of a surrender of the Leased Premises, and no agreement to accept such a surrender shall be valid unless in writing and signed by Landlord. Section 13.06. Attorneys' Fees. If either party defaults in the performance or observance of any of the terms, conditions, covenants or obligations contained in this Lease and the non-defaulting party obtains a judgment against the defaulting party, then the defaulting party agrees to reimburse the non-defaulting party for reasonable attorneys' fees incurred in connection therewith. ARTICLE 14 - LANDLORD'S RIGHT TO RELOCATE TENANT INTENTIONALLY OMITTED ARTICLE 15 - TENANT?S RESPONSIBILITY REGARDING ENVIRONMENTAL LAWS AND HAZARDOUS SUBSTANCES Section 15.01. Definitions. a. "Environmental Laws" - All present or future federal, state and municipal laws, ordinances, rules and regulations applicable to the environmental and ecological condition of the Leased Premises, the rules and regulations of the Federal Environmental Protection Agency or any other federal, state or municipal agency or governmental board or entity having jurisdiction over the Leased Premises. b. "Hazardous Substances" - Those substances included within the definitions of "hazardous substances," "hazardous materials," "toxic substances" "solid waste" or "infectious waste" under Environmental Laws. Section 15.02. Compliance. Tenant, at its sole cost and expense, shall promptly comply with the Environmental Laws including any notice from any source issued pursuant to the Environmental Laws or issued by any insurance company which shall impose any duty upon Tenant with respect to the use, occupancy, maintenance or alteration of the Leased Premises whether such notice shall be served upon Landlord or Tenant. -14- 15 Section 15.03. Restrictions on Tenant. Tenant shall operate its business and maintain the Leased Premises in compliance with all Environmental Laws. Tenant shall not cause or permit the use, generation, release, manufacture, refining, production, processing, storage or disposal of any Hazardous Substances on, under or about the Leased Premises, or the transportation to or from the Leased Premises of any Hazardous Substances, except as necessary and appropriate for its Permitted Use in which case the use, storage or disposal of such Hazardous Substances shall be performed in compliance with the Environmental Laws and the highest standards prevailing in the industry. Section 15.04. Notices, Affidavits, Etc. Tenant shall immediately notify Landlord of (i) any violation by Tenant, its employees, agents, representatives, customers, invitees or contractors of the Environmental Laws on, under or about the Leased Premises, or (ii) the presence or suspected presence of any Hazardous Substances on, under or about the Leased Premises and shall immediately deliver to Landlord any notice received by Tenant relating to (i) and (ii) above from any source. Tenant shall execute affidavits, representations and the like within five (5) days of Landlord's request therefor concerning Tenant's best knowledge and belief regarding the presence of any Hazardous Substances on, under or about the Leased Premises. Section 15.05. Landlord's Rights. Landlord and its agents shall have the right, but not the duty, upon advance notice (except in the case of emergency when no notice shall be required) to inspect the Leased Premises and conduct tests thereon to determine whether or the extent to which there has been a violation of Environmental Laws by Tenant or whether there are Hazardous Substances on, under or about the Leased Premises. In exercising its rights herein, Landlord shall use reasonable efforts to minimize interference with Tenant's business but such entry shall not constitute an eviction of Tenant, in whole or in part, and Landlord shall not be liable for any interference, loss, or damage to Tenant's property or business caused thereby. Section 15.06. Indemnification. Tenant shall indemnify Landlord and Landlord's managing agent from any and all claims, losses, liabilities, costs, expenses and damages, including attorneys' fees, costs of testing and remediation costs, incurred by Landlord in connection with any breach by Tenant of its obligations under this Article 15. Likewise, the Landlord agrees to indemnify Tenant from any and all claims, losses, liabilities, costs, expenses and damages, including attorneys' fees, costs of testing and remediation costs, incurred by Tenant as a result of any material violation, by Landlord, of any applicable Environmental Laws. In this regard, the Landlord shall have no obligation to indemnify the Tenant or hold the Tenant harmless from and against the acts of any other tenant of the Building or any other third party. The covenants and obligations under this Article 15 shall survive the expiration or earlier termination of this Lease. Section 15.07. Landlord's Representation. Notwithstanding anything contained in this Article 15 to the contrary, Tenant shall not have any liability to Landlord under this Article 15 resulting from any conditions existing, or events occurring, or any Hazardous Substances existing or generated, at, in, on, under or in connection with the Leased Premises prior to the Commencement Date of this Lease, except to the extent Tenant exacerbates the same, and then only to the extent of the damage resulting from Tenant's actions. ARTICLE 16 - MISCELLANEOUS -15- 16 Section 16.01. Benefit of Landlord and Tenant. This Lease shall inure to the benefit of and be binding upon Landlord and Tenant and their respective successors and assigns. Section 16.02. Governing Law. This Lease shall be governed in accordance with the laws of the State of Indiana. Section 16.03. Guaranty. In consideration of Landlord's leasing the Leased Premises to Tenant, Tenant shall provide Landlord with a Guaranty of Lease executed by the guarantor(s) described in the Basic Lease Provisions, if any. Section 16.04. Force Majeure. Landlord and Tenant (except with respect to the payment of any monetary obligation) shall be excused for the period of any delay in the performance of any obligation hereunder when such delay is occasioned by causes beyond its control, including but not limited to work stoppages, boycotts, slowdowns or strikes; shortages of materials, equipment, labor or energy; unusual weather conditions; or acts or omissions of governmental or political bodies. Section 16.05. Examination of Lease. Submission of this instrument for examination or signature to Tenant does not constitute a reservation of or option for Lease, and it is not effective as a Lease or otherwise until execution by and delivery to both Landlord and Tenant. Section 16.06. Indemnification for Leasing Commissions. The parties hereby represent and warrant that the only real estate brokers involved in the negotiation and execution of this Lease are the Brokers. Each party shall indemnify the other from any and all liability for the breach of this representation and warranty on its part and shall pay any compensation to any other broker or person who may be entitled thereto. Section 16.07. Notices. Any notice required or permitted to be given under this Lease or by law shall be deemed to have been given if it is written and delivered in person or by overnight courier or mailed by certified mail, postage prepaid, to the party who is to receive such notice at the address specified in Article 1. If delivered in person, notice shall be deemed given as of the delivery date. If sent by overnight courier, notice shall be deemed given as of the first business day after sending. If mailed, the notice shall be deemed to have been given on the date which is three business days after mailing. Either party may change its address by giving written notice thereof to the other party. Section 16.08. Partial Invalidity; Complete Agreement. If any provision of this Lease shall be held to be invalid, void or unenforceable, the remaining provisions shall remain in full force and effect. This Lease represents the entire agreement between Landlord and Tenant covering everything agreed upon or understood in this transaction. There are no oral promises, conditions, representations, understandings, interpretations or terms of any kind as conditions or inducements to the execution hereof or in effect between the parties. No change or addition shall be made to this Lease except by a written agreement executed by Landlord and Tenant. Section 16.09. Financial Statements. During the Lease Term and any extensions thereof, Tenant shall provide to Landlord on an annual basis, within ninety (90) days following the end of Tenant's fiscal year, a copy of Tenant's most recent audited financial statements prepared as of the end of Tenant's fiscal year. Such audited financial statements shall be certified by Tenant and by Tenant's independent certified public accountant who shall attest to the truth and accuracy of the information set forth in such statements in accordance with applicable FASB standards. All financial statements provided by Tenant to Landlord hereunder shall be prepared in conformity with generally accepted accounting principles, consistently applied. -16- 17 Section 16.10. Representations and Warranties. The undersigned represent and warrant that (i) such party is duly organized, validly existing and in good standing (if applicable) in accordance with the laws of the state under which it was organized; and (ii) the individual executing and delivering this Lease has been properly authorized to do so, and such execution and delivery shall bind such party. Section 16.11. Option to Extend Term of Lease. So long as there is no existing, material, uncured default on the part of the Tenant hereunder, Tenant shall have the option to renew the Term of this Lease for two (2) additional terms of three (3) years each ("Option Period" or "Option Periods"). Such renewal(s) shall be upon the same terms and conditions contained in the Lease for the original Term except for this provision giving the renewal option and subject to an adjustment of the rent as provided in Article III hereof. Such option(s) shall be exercised by the Tenant's giving written notice to Landlord of its intention to renew the Term of this Lease no later than nine (9) months prior to the expiration of the original Term or the Option Period then in effect, whichever is applicable. Tenant's failure to exercise any option to renew shall extinguish its right and option for any subsequent renewal option. To the extent that the Tenant has elected to exercise any right of first refusal under Section 16.12, below, the Tenant shall have no right to renew the term of this Lease as to the original Leased Premises without also renewing the Term of this Lease as to any Refusal Space leased by the Tenant pursuant to Section 16.12, below. In the event Tenant elects to exercise its option(s) to extend the term of the Lease, the Minimum Annual Rent for the first such Option Period shall be an amount equal to Eight Hundred Ninety Four Thousand Three Hundred Forty Eight Dollars ($894,348.00), payable in Monthly Rental Installments of Seventy Four Thousand Five Hundred Twenty Nine Dollars ($74,529.00) and the Minimum Annual Rent for the second such Option Period shall be an amount equal to Nine Hundred Seventy Four Thousand Eight Hundred Forty Four Dollars ($974,844.00), payable in Monthly Rental Installments of Eighty One Thousand Two Hundred Thirty Seven Dollars ($81,237.00). Additional Rent shall continue to be due and payable during any such Option Period in the manner provided under Section 3.02 and 3.03, above. Section 16.12. Right of First Refusal. So long as there is no existing, material, uncured default on the part of the Tenant hereunder, and subject to the rights of any tenant currently, or at the time, leasing the Refusal Space (as hereinafter defined) during the original Lease Term, including any Option Period, Landlord agrees that prior to leasing all or any part of the space in the Building which is identified on the attached Exhibit D (the "Refusal Space"), it will first offer to lease all of the Refusal Space to Tenant for the balance of the Term of this Lease, or Option Period then in effect, at the current market rate for space of similar size and quality in the Building as reasonably determined by Landlord, but not less than the rate then being charged for each square foot of the existing Leased Premises. Notwithstanding the foregoing, the Tenant shall have no right to exercise any such right of first refusal unless, at the time thereof, there remains a minimum of three (3) years in the Term of this Lease [taking into account the original Lease Term and any Option Period(s), but only to the extent that the Tenant has actually exercised its right to extend the Term of this Lease for such Option Period(s)]. In the event Landlord intends to lease all or any part of the Refusal Space, Landlord will give Tenant written notice of such intent, specifying such market rate; and Tenant shall have five (5) days after receipt of such notice to notify Landlord, in writing, of its agreement to lease the Refusal Space. Such leasing shall be on the same terms and conditions as in this Lease for the Leased Premises, except for the adjustment of rent provided above as it relates to the Refusal Space and except for the granting of any monetary allowances or concessions. To the extent that the Tenant exercises any such right of first refusal during the original Lease Term, the Minimum Annual Rent and Monthly Rental Installments for the Refusal Space during the first Option Period shall be an amount equal the Minimum Annual Rent and Monthly Rental Installments during the original Lease Term plus twelve percent (12%)(to match the rent escalation set forth in Section 16.11). Likewise, the Minimum Annual Rent and Monthly -17- 18 Rental Installments for the Refusal Space during the second Option Period shall be an amount equal the Minimum Annual Rent and Monthly Rental Installments during the first Option Period plus nine percent (9%)(to match the rent escalation set forth in Section 16.11). Section 16.13. Job Recruiting Allowance. The Landlord agrees to reimburse Tenant, in an amount up to One Hundred Fifty Thousand Dollars ($150,000.00) (the "Recruiting Allowance"), for costs and expenses actually paid to third parties in connection with the recruiting employees for its operations at the Leased Premises. An initial portion of the Recruiting Allowance, in an amount equal to Sixty Six Thousand Five Hundred Forty Three Dollars and Seventy Five Cents ($66,543.75) will be paid to the Tenant as a credit against the first installment of the Minimum Monthly Rent due hereunder (the "First Installment") to fund costs actually paid or incurred in connection with recruiting employees for its operations at the Leased Premises (herein referred to as "Recruiting Costs"). The remainder of the Recruiting Allowance, in the amount of Eighty Three Thousand Four Hundred Fifty Six Dollars and Twenty Five Cents (the "Second Installment") shall be due if the Tenant, acting in good faith and with commercially reasonable diligence, fails to achieve either the First Recruiting Milestone or Second Recruiting Milestone (as each such term is defined herein) within the time periods established below for the satisfaction of each such milestone. As used herein, the term "First Recruiting Milestone" shall mean and refer to the hiring of a number of employees equal to Seventy-five percent (75%) or more of the Tenant's Required Workforce (as defined herein). As used herein, the term "Second Recruiting Milestone" shall mean and refer to the hiring of a number of employees equal to One Hundred percent (100%) of the Tenant's Required Workforce. The "Required Workforce" for purposes of this Lease shall be a number of employees equal to 236 employees. Consequently, the First Recruiting Milestone shall be deemed to have been achieved at the point in time when the Tenant has hired 167 employees and the Second Recruiting Milestone shall be deemed to have been achieved at the point in time when the Tenant has hired 236 employees. The time (within which the Tenant's performance in achieving the milestones described herein is to be measured) depends on the timing of certain "job fairs" which economic development agencies of the City of Greenwood and/or Johnson County, Indiana are or will be hosting together with Tenant to facilitate the Tenant's recruiting efforts (the "Job Fair" or "Job Fairs"). The Tenant will schedule the first such Job Fair for some time in January of 2000 (the "First Job Fair"). Following the First Job Fair, if the Tenant has not hired a sufficient number of employees to fill its Required Workforce, the Tenant will, within three (3) to five (5) weeks following the First Job Fair, exercise commercially reasonable efforts to schedule a second Job Fair (the "Second Job Fair"). If the Tenant fails to meet the First Recruiting Milestone within five (5) business days following the date of the First Job Fair, the Tenant shall be entitled to receive the Second Installment of the Recruiting Allowance. If the Tenant does meet the First Recruiting Milestone within such five (5) day period, the Tenant will not be entitled to receive the Second Installment of the Recruiting Allowance unless and until it hosts a Second Job Fair. If the Tenant fails to meet the Second Recruiting Milestone within five (5) business days following the date of the Second Job Fair, the Tenant shall be entitled to receive the Second Installment of the Recruiting Allowance. Alternatively, if the Tenant does meet the Second Recruiting Milestone within such five (5) day period, the Tenant will, nonetheless, be entitled to receive one half ( 1/2) of the Second Installment of the Recruiting Allowance as an incentive to promote the Tenant's use of the Job Fairs to recruit its employees (the "Incentive Amount"). Within sixty (60) days following the Landlord's disbursement of either the First Installment or the Second Installment, the Tenant shall furnish to Landlord reasonable evidence that it has paid or incurred Recruiting Costs equal to or greater than the amount of such First Installment or Second Installment, as applicable, including, without limitation, copies of receipts, paid invoices, cancelled checks or other -18- 19 reasonable evidence of the Tenant's payment of costs and/or expenses directly related to recruitment of employees for Tenant's operations at the Leased Premises. No such documentation will be required with respect to the Tenant's use of the Incentive Amount. On or prior to the expiration of that sixty (60) day period, the Tenant agrees to reimburse Landlord for the amount, if any, of the Recruiting Allowance actually paid to Tenant (other than the Incentive Amount) which is not used by Tenant to pay bona-fide Recruiting Costs hereunder. In addition to the foregoing, the Landlord agrees to exercise commercially reasonable efforts to assist the Tenant in obtaining job training incentive payments or credits in an amount of up to One Hundred Fifty Thousand Dollars ($150,000.00) from the State of Indiana. IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and year first above written. LANDLORD: PRECEDENT INDUSTRIAL GROUP, LLC By Precedent Group, LLC, Mgr. By The Precedent Companies, Inc. By: /s/ J. Randall Ackina ----------------------------------------- Printed: J. Randall Ackina ------------------------------------ Title: President -------------------------------------- TENANT: PETS.COM, INC. By: /s/ Chris Deyo ----------------------------------------- Printed: Chris Deyo ------------------------------------ Title: President -------------------------------------- -19- EX-21.1 37 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 SUBSIDIARIES OF PETS.COM, INC.
NAME JURISDICTION OF INCORPORATION - ---- ----------------------------- Pets.com Distribution Services Corporation Delaware
EX-23.1 38 CONSENT OF INDEPENDENT AUDITORS 1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated December 6, 1999, in the Registration Statement (Form S-1) and related Prospectus of Pets.com, Inc. for the registration of shares of its common stock. /s/ Ernst & Young LLP San Francisco, California December 6, 1999 EX-27.1 39 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1999 FEB-17-1999 SEP-30-1999 36,231 150 0 0 1,872 40,728 7,568 (319) 48,399 5,815 0 0 14 5 42,565 48,399 619 619 1,842 1,842 0 0 0 (19,355) 0 (19,355) 0 0 0 (19,355) (10.84) (10.84)
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