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As filed with the Securities and Exchange Commission on April 15, 2004

Registration Number 333-113257



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


PRE-EFFECTIVE AMENDMENT NO. 2
TO
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933


Alibris, Inc.
(Exact name of Registrant as specified in its charter)


Delaware
(State or other jurisdiction of
incorporation or organization)
  5960
(Primary Standard Industrial
Classification Code Number)
  94-3300447
(I.R.S. Employer
Identification Number)

Alibris, Inc.
1250 45th Street, Suite 100
Emeryville, California 94608
(510) 594-4500
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)


Martin J. Manley
President and Chief Executive Officer
Alibris, Inc.
1250 45th Street, Suite 100
Emeryville, California 94608
(510) 594-4500
(Name, address, including zip code, and telephone number, including area code, of agent for service)


Copies to:
Samuel B. Angus, Esq.
Robert A. Freedman, Esq.
William L. Hughes, Esq.
Kathleen Kehoe Greeson, Esq.
Michael J. Hopp, Esq.
FENWICK & WEST LLP
275 Battery Street, 15th Floor
San Francisco, California 94111
(415) 875-2300
  Larry W. Sonsini, Esq.
Matthew W. Sonsini, Esq.
Clay B. Simpson, Esq.
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
(650) 493-9300

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.o

        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.o

        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.o

        If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.o


        The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.




SUBJECT TO COMPLETION, DATED APRIL 15, 2004

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission
is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.


ALIBRIS, INC. LOGO

 

Alibris, Inc.
          Shares
of Common Stock


This is our initial offering of our shares to the public, and no public market currently exists for our shares. We expect that the public offering price will be between $        and $            per share.

THE OFFERING

 

PER SHARE

 

 

TOTAL

 

 


   
Public Offering Price   $       $         
Underwriting Discount   $       $         
Proceeds to Alibris   $       $         

We have granted the underwriters the right to purchase up to  additional shares from us within 30 days after the date of this prospectus to cover any over-allotments. The underwriters expect to deliver shares of common stock to purchasers on   , 2004.

Proposed NASDAQ National Market Symbol: ALBR
OpenIPO®: The method of distribution being used by the underwriters in this offering differs somewhat from that traditionally employed in firm commitment underwritten public offerings. In particular, the public offering price and allocation of shares will be determined primarily by an auction process conducted by the underwriters and other securities dealers participating in this offering. A more detailed description of this process, known as an OpenIPO, is included in "Plan of Distribution" beginning on page 84.

 

 

 

 

 

 

 

 

      This offering involves a high degree of risk. You should purchase shares only if you can afford a complete loss of your investment. See "Risk Factors" beginning on page 8.


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.

WR HAMBRECHT + CO LOGO    

Pacific Growth Equities, LLC

         The date of this prospectus is                          , 2004


GRAPHIC


GRAPHIC



TABLE OF CONTENTS

Prospectus Summary   3
The Offering   5
Summary Financial Data   6
Risk Factors   8
Special Note Regarding Forward-Looking Statements   21
Other Notes Regarding Information Contained in this Prospectus   21
Use of Proceeds   22
Dividend Policy   22
Capitalization   23
Dilution   24
Selected Financial Data   26
Management's Discussion and Analysis of Financial Condition and Results of Operations   28
Business   46
Management   57
Certain Relationships and Related Transactions   71
Principal Stockholders   74
Description of Capital Stock   77
Shares Eligible for Future Sale   81
Plan of Distribution   84
Legal Matters   91
Experts   91
Change in Independent Accountants   91
Where You Can Find More Information   92
Index to Financial Statements   F-1


PROSPECTUS SUMMARY

        You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully.


Alibris, Inc.

        Alibris operates an online marketplace for used and hard-to-find books. We connect an international network of over 5,000 independent professional booksellers with retail and business customers from around the world. Our booksellers value the broad distribution, specialized inventory management and logistics that help them to increase their sales. Our customers value the ability to quickly select from over 40 million used and hard-to-find books.

        We generate revenue by selling books through multiple sales channels. Our website, www.alibris.com, provides consumers with one of the largest selections of books on the Internet. Librarians rely on our dedicated library website to meet their special collections and replacement needs. Online and traditional book retailers and wholesalers, including Amazon.com, Barnes&Noble.com and Borders, use us to supply used or hard-to-find books to their customers.

        Alibris has developed a proprietary data architecture that enables us to obtain specific and timely information about our market. This allows us to acquire and resell large quantities of low-cost books from retailers, publishers, non-profit organizations and liquidators. We also use this knowledge to create inventory management and pricing services to further assist our sellers in improving their business results.

        Additionally, our logistics services enable our distribution system to aggregate supply from thousands of sellers and distribute products through multiple sales channels. This allows us to satisfy the differing logistics needs of our many suppliers and business customers.

        Our goal is to be the preferred partner to independent booksellers, the supplier of choice to retailers, and a trusted vendor to consumers and libraries around the world. We believe that our selection, customer base, market intelligence and logistics provide us with opportunities to grow our business, increase revenue and achieve profitability by continuing to implement the following strategies:

    Increase and diversify our product offerings—by expanding our bookseller network, selectively building our inventory of used, new and hard-to-find books, and continuing to grow our movie and music offerings, sales of which have not been significant to date.

    Grow revenue through expanding marketing and sales activities—by increasing seller participation in our business customer programs and investing in targeted online marketing and sales campaigns that include keyword purchases and direct e-mail marketing.

    Leverage our market intelligence and logistics assets—by identifying and purchasing large quantities of books that we believe can be sold quickly and profitably and providing additional services to our sellers.

    Expand geographic reach—by attracting additional international booksellers, retail customers and business customers through direct marketing efforts and creating local websites for overseas customers.

        Any investment in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties related to our business and an investment in our common stock set forth in "Risk Factors," beginning on page 8 of this prospectus.

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        Alibris was incorporated in California in May 1998. In June 1998, we opened our distribution center in Sparks, Nevada. In November 1998, we began providing an online marketplace for used and hard-to-find books. During our history of operations, we have incurred significant losses and had negative cash flow from operations in each year from our inception through 2003. As of March 31, 2004, we had an accumulated deficit of $79.0 million. We intend to reincorporate in Delaware prior to completion of this offering.

        Our principal executive offices are located at 1250 45th Street, Suite 100, Emeryville, California 94608 and our telephone number is (510) 594-4500. Our website address is www.alibris.com. Information contained on our website should not be considered a part of, nor incorporated into, this prospectus.

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The Offering

 
   
Common stock offered                shares

Common stock to be outstanding after the offering

 

             shares

Use of proceeds

 

To grow our product supply, expand marketing and sales, invest in our technology and operations infrastructure, and for working capital and general corporate purposes. See "Use of Proceeds."

Proposed NASDAQ National Market symbol

 

ALBR

        Except for the financial statements, related financial statement schedule, and notes thereto beginning on page F-1 and as otherwise noted, all information in this prospectus (1) gives effect to the conversion of all outstanding shares of preferred stock into 4,012,287 shares of common stock upon the closing of the offering, (2) assumes the completion of our reincorporation from California to Delaware prior to the closing of the offering and (3) assumes no exercise of the underwriters' over-allotment option. The number of shares of common stock to be outstanding after this offering is based on 5,566,006 shares outstanding as of March 31, 2004 and gives effect to a one-for-six reverse stock split to be effected prior to the completion of this offering in connection with our reincorporation in Delaware. This number does not include the following:

    214,198 shares of common stock subject to outstanding options as of March 31, 2004 at a weighted average exercise price of $1.6359 per share;

    185,849 shares of common stock issuable upon exercise of outstanding warrants as of March 31, 2004 at a weighted average exercise price of $28.41 per share;

    1,875,927 shares of common stock reserved for future grant or issuance under our 1998 stock option plan, 2000 equity incentive plan, 2004 equity incentive plan and 2004 employee stock purchase plan;

    any shares of common stock automatically reserved for issuance under our 2004 employee stock purchase plan, as more fully described in "Management—Employee Benefit Plans and Option Grants;" and

    up to             shares issuable upon exercise of the underwriters' over-allotment option at an assumed initial public offering price of $             per share.

        This offering will be made through the OpenIPO process, in which the allocation of shares and the public offering price are primarily based on an auction in which prospective purchasers are required to bid for the shares. This process is described under "Plan of Distribution."

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Summary Financial Data

        The following table sets forth summary, pro forma and other financial information of Alibris. This summary should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes contained elsewhere in this prospectus.

 
  Year Ended December 31,
  Three Months Ended
March 31,

 
 
  2001
  2002
  2003
  2003
  2004
 
 
  (in thousands, except per share data)

 
Statements of Operations Data:                                
Total revenue   $ 20,969   $ 31,044   $ 45,456   $ 10,350   $ 13,830  
Cost of product revenue     15,103     23,338     36,782     8,563     11,144  
Gross profit     5,866     7,706     8,674     1,787     2,686  
Operating loss     (14,106 )   (7,148 )   (4,729 )   (1,444 )   (910 )
Net loss     (13,727 )   (7,234 )   (4,838 )   (1,468 )   (901 )
Accretions on redeemable preferred stock     (5,670 )   (5,944 )   (5,968 )   (1,492 )   (1,528 )
Deemed dividend on Series F preferred stock                     (2,539 )
Net loss applicable to common stockholders   $ (19,397 ) $ (13,178 ) $ (10,806 ) $ (2,960 ) $ (4,968 )

Net loss per share—basic and diluted(1)

 

$

(18.53

)

$

(11.61

)

$

(9.21

)

$

(2.55

)

$

(3.59

)
Weighted average shares outstanding—basic and diluted(1)     1,047     1,135     1,173     1,163     1,383  

Pro forma net loss per share (unaudited)(2)

 

 

 

 

 

 

 

$

(1.06

)

 

 

 

$

(0.18

)

Shares used in computing pro forma net loss per share (unaudited)(2)

 

 

 

 

 

 

 

 

4,573

 

 

 

 

 

5,089

 
 
  As of March 31, 2004
 
  Actual
  Pro Forma(3)
  Pro Forma
As Adjusted(4)

 
  (in thousands)

Consolidated Balance Sheet Data:                  
Cash and cash equivalents   $ 3,807   $ 3,807   $           
Working capital     3,263     3,263               
Total assets     11,155     11,155      
Total indebtedness     191     191      
Convertible redeemable preferred stock     88,023          
Total stockholders' equity (deficit)   $ (81,069 ) $ 6,954   $           

(1)
See note 2 of notes to financial statements.

(2)
The pro forma net loss per share is computed using the weighted average number of shares of common stock outstanding, including the pro forma effects of the automatic conversion of our Series A, B, C, D, E and F preferred stock into shares of our common stock effective upon the closing of this offering as if such conversion occurred at the beginning of the period, or at the date of issuance, if later, and a decrease in net loss attributed to common stockholders for the accretions on redeemable preferred stock and deemed dividend. The net loss applicable to

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    common stockholders and the shares used in calculating the pro forma net loss per share is as follows:

 
  Year Ended
December 31, 2003

  Three Months Ended
March 31, 2004

 
 
  (in thousands, except
per share data)

 
  Net loss applicable to common stockholders   $ (10,806 ) $ (4,968 )
  Accretions on redeemable preferred stock     5,968     1,528  
  Deemed dividend on Series F preferred stock         2,539  
   
 
 
      Pro forma net loss applicable to common stockholders   $ (4,838 ) $ (901 )
   
 
 
  Weighted average common shares outstanding     1,173     1,383  
   
 
 
  Plus weighted average preferred shares outstanding:              
  Series A (conversion rate of 1 to 4)     694     694  
  Series B (conversion rate of 1 to 1.13)     786     786  
  Series C (conversion rate of 1 to 1.14)     264     264  
  Series D (conversion rate of 1 to 1.16)     880     880  
  Series E (conversion rate of 1 to 1)     776     776  
  Series F (conversion rate of 1 to 1)         306  
   
 
 
Total weighted average preferred shares outstanding (as converted)     3,400     3,706  
   
 
 
Total weighted average shares outstanding used in computing pro forma net loss per share     4,573     5,089  
   
 
 
Pro forma net loss per share   $ (1.06 ) $ (0.18 )
   
 
 
(3)
The pro forma balance sheet data gives effect to the conversion of all outstanding shares of preferred stock into shares of common stock effective upon the closing of this offering. The pro forma balance sheet data does not give effect to the offering proceeds.

(4)
The pro forma as adjusted information above gives effect to our receipt of the estimated net proceeds from the sale of                         shares of common stock in this offering by us at the assumed public offering price of $             per share after deducting $             million in estimated underwriting discounts and commissions and $             million in estimated offering expenses.

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RISK FACTORS

        Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in shares of our common stock. The risks and uncertainties described below are not the only risks we face. These risks are the ones we consider to be significant to your decision whether to invest in our common stock at this time. We might be wrong. There may be risks that you in particular view differently than we do, and there are other risks and uncertainties that are not presently known to us or that we currently deem immaterial, but that may in fact impair our business operations. If any of the following risks actually materialize, our business, financial condition and results of operations would suffer. In this case, the trading price of our common stock would likely decline and you might lose all or part of your investment in our common stock.


Risks Related to Our Business and Industry

We have a history of significant losses and have not yet achieved profitability. If we continue to sustain losses, the trading price of our common stock could decline and our business might fail.

        We have incurred net losses each year since the formation of our business in May 1998, and have not yet achieved profitability. We had a net loss of $4.8 million and negative cash flow for the year ended December 31, 2003, and a net loss of $0.9 million and negative cash flow for the three months ended March 31, 2004. As of March 31, 2004, we had an accumulated deficit of $79.0 million. We expect to increase our cost of revenue or expenses significantly to:

    grow our supply of books;

    expand our marketing and sales activities;

    promote our services to booksellers;

    invest in our technology and operations infrastructure;

    access international markets; and

    expand our product categories.

        We may not generate sufficient revenue to offset these expenditures and our losses might be greater than the losses we would incur if we developed our business more slowly. As a result, we may incur significant operating losses and may be unable to achieve or maintain profitability. If we continue to sustain losses, the trading price of our common stock could decline and our business might fail.

Our quarterly and annual revenue and operating results have and are expected to fluctuate in future periods and may fail to meet expectations, which may reduce the trading price of our common stock.

        Forecasting our future revenue and operating results with precision is a difficult task. If our operating results fail to meet expectations, the trading price of our common stock would decline. Our results of operations have fluctuated significantly in the past and we anticipate that these results will fluctuate significantly in the future as a result of a variety of factors, including price pressures in the market for used and hard-to-find books, the relative sales mix across segments and supply sources, the timing of expansion or infrastructure-related operating costs and capital expenditures and other risks discussed in this Risk Factors section. As a result, it is likely that in some future quarters or years our results of operations will fall below the expectations of securities analysts or investors, which would cause the trading price of our common stock to decline. We believe that period-to-period comparisons are not necessarily indicative of our future performance.

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Competition from other online and traditional booksellers, including some of our largest business customers, and from new book formats or distribution methods could make it difficult for us to operate successfully.

        We currently derive substantially all of our revenue from the sale of books on our website and the websites of our business customers, and our business depends on increasing revenue from the sale of books. The selling environment in this market is highly competitive, particularly on the Internet. We must continue to attract and retain retail and business customers, and successfully encourage our retail customers to make repeat purchases, to compete in this environment. If we fail to attract and retain customers our revenue will decline. Some of our largest business customers, such as Amazon.com and Barnes&Noble.com, maintain on their websites a market for used and hard-to-find books not supplied by Alibris. If any of our other business customers internally develop their own offerings of used and hard-to-find books, they could directly compete with us as well.

        We principally compete with a variety of Internet and specialty retailers that offer products similar to or the same as our books. Many of our traditional and online competitors have longer operating histories, larger customer or user bases, greater brand recognition and significantly greater resources and bargaining power. In addition, large, well-established or well-financed entities may become, or join with other, online competitors in the future. Our competitors may be able to offer lower prices, fulfill orders more efficiently and achieve greater market acceptance than we can.

        In addition, new or currently unconventional book formats and means of distribution could lower demand and margins in the market for used and hard-to-find books and undermine any competitive advantages we may have. If new formats, such as e-books, become popular among consumers, second-hand books might lose their appeal, reducing our sales activity. Consumers could also prefer an electronically formatted or delivered title over a new or used one. If a broad selection of titles becomes available for electronic distribution and consumers adopt these new means of obtaining books, any of our current strategic advantages could become less valuable and others would be able to more effectively compete with us.

        If we are unable to maintain or increase our market share or compete effectively, our revenue will decline. Please refer to "Business—Competition" for more detailed information about our competitors.

Our operating results depend on the systems and network infrastructure that we, our vendors and our business customers operate. Accordingly, capacity constraints or system failures could lower our revenue and increase our expenses.

        Our revenue depends on sales to customers who shop on our websites and sales we make through our business customers. Any system interruptions that result in the unavailability of our websites or those of our business customers or reduce the performance of our or their transaction systems would cause us to lose sales for the period the website is unavailable, reduce the attractiveness of our website to retail customers, harm our reputation with business customers and cause us to lose customers, particularly our business customers for which we believe, in general, reliability is one of their highest concerns. This would cause our revenue to decline. For example, in March 2004, we experienced a system interruption which lasted approximately 36 hours and which we believe caused us to lose revenue and retail customers.

        We use a combination of vendor-provided and internally developed systems to operate our business. These systems have experienced, and we expect them to experience in the future, periodic interruptions and delays, and we have lost critical data, due to hardware and software failures, human error and other unanticipated problems. Some of these systems are highly dependent on the continued service of one or a few individuals that have particular knowledge of how they operate. System delays and interruptions and data loss can also result from fire, flood, power loss, telecommunications failure, earthquakes, acts of war or terrorism, acts of God, computer viruses, physical or electronic break-ins,

9



and similar events. We have also experienced and expect to continue to experience temporary capacity constraints due to unexpected, sharply increased activity, which can cause system disruptions, slower response times, degradation in levels of customer service, impaired quality and delays in reporting accurate financial information. Any of these problems could cause our revenue to decline. Our insurance coverage might not adequately compensate us for any loss we may suffer in this regard. We cannot assure you that we will be able in a timely manner to effectively upgrade and expand these systems or to integrate smoothly any newly developed or purchased modules with our existing systems.

        In addition, the vendors we use for customer and seller communications, website monitoring and marketing periodically have experienced and will continue to experience system interruptions, which could disrupt our business. Similarly, if our business customers experience system interruptions, our revenues could decline.

Approximately 40% of our total revenue is associated with a few business customers with which we generally have short-term arrangements. If these business customers terminate or decide not to renew their agreements with us, or the terms in our future agreements with them are less favorable to us, our revenue could decline and the trading price of our common stock would fall.

        We depend on a few business customers for a significant portion of our revenue. In 2003, revenue from our relationships with Amazon.com and its related entities, Barnes&Noble.com, Books-A-Million, Borders Group Inc., eBay and Half.com by eBay, Indigo/Chapters and Ingram Book Group, accounted for approximately 40% of our total revenue. Barnes&Noble.com and Amazon.com and its related entities accounted for approximately 18% and approximately 14% of total revenue, respectively. Our agreements with these business customers are generally one year or less in duration and some may be terminated without penalty at the customers' convenience with little or no advance notice. We cannot assure you that any of our current major business customers will remain customers in future periods or that our relationships will continue on terms that are favorable to us. Our revenue could decline if we are unable to maintain these relationships or our business customers fundamentally change their approach to us or to the market in which we operate.

        It would be difficult to replace any of these major customers, particularly Barnes&Noble.com and Amazon.com and its related entities. If we lose any revenue from these customers, we cannot assure you that we will be able to replace it. In addition, if we were to lose any of our major business customers, any publicity related to the loss of these customers could make it more difficult to attract other business customers.

        In addition, we gather pricing information from Amazon.com under its standard web services agreement. If we were unable to gather this price information, due to termination of our business customer relationship or otherwise, we might have difficulty obtaining the same or substantially similar pricing information in the future, which could harm our business. Obtaining information from an alternate source, even if possible, could be costly or subject to unfavorable terms and conditions.

If we lose key personnel or are unable to hire additional qualified personnel, or if our management team is unable to perform effectively, we will not be able to implement our business strategy or operate our business effectively.

        Our success depends upon the continued services of our executive officers and other key personnel, many of whom would be difficult to replace. The loss of any of these individuals would adversely affect our ability to implement our business strategy and to effectively operate our business. Except for Martin Manley, our Chief Executive Officer, none of our officers or key employees is bound by an employment agreement. None of our officers or key employees is covered by a "key person" life insurance policy to which we are a beneficiary.

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        Our success also depends upon our ability to continue to attract, retain and motivate skilled employees. Competition for employees with certain skills in our industry is intense, especially in the San Francisco Bay area. We believe that there are only a limited number of persons with the requisite skills to serve in a few key positions, and it can be difficult to hire, retain and motivate these persons. Additionally, a number of key personnel have developed business relationships and accumulated experience and knowledge of our business that would make their replacement difficult.

        We have in the past experienced, and we expect to continue to experience, difficulty in hiring skilled employees with appropriate qualifications. Competitors, business customers and others have in the past attempted, and may in the future attempt, to recruit our employees. We believe that we will be required from time to time to increase salaries, benefits and recruiting expenses because of the challenges of hiring and retaining employees.

        Finally, our success depends on the ability of our management to perform effectively, both individually and as a group. As our management team expands and responsibilities change, we will have to successfully integrate new members and existing members will have to accept change. If our management is unable to operate effectively in their respective roles or as a team, we will not be able to implement our business strategy or operate our business effectively.

The value of our inventory may decline due to price erosion and other factors, causing us to record charges against earnings or lose the value of our investment.

        Our inventory of owned books could lose value over time as a result of obsolescence and price erosion resulting from an excess supply of books for sale or changes in consumer tastes and book preferences. For example, since our inception, we have written down approximately $2.5 million of our obsolete and slow-moving inventory. We offer a broad selection of books, including books that might take several years to sell or may never sell. Our success in selling books that we purchase or accept for consignment depends on our ability to accurately predict these trends and avoid stocking the wrong amount of any particular title. Demand for books, however, can change quickly and significantly, and it is difficult to accurately forecast the timing and magnitude of these changes. We cannot predict with any certainty whether an item will sell for more than we pay for it. Unexpected reductions in demand or increases in supply of particular titles can cause the value of those titles in our inventory to fall below our cost, which could cause us to lose all or a material portion of our investment in these titles and/or result in our recording charges for obsolete inventory.

If we fail to remedy certain "material" weaknesses in our internal controls cited by our independent auditors, our business may suffer.

        We have received a letter from our independent auditors advising that they consider us to have "reportable conditions that are also considered to be material weaknesses," in our internal financial systems and controls that could, if not remedied, affect our ability to record, process and report financial data. The letter from our independent auditors noted four specific material weaknesses:

    Our existing system of recording accrued liabilities does not provide a trial balance by vendor and does not tie to our general ledger, so an accurate balance of accrued liabilities on a monthly basis is not available for monitoring payment requirements. Our auditors recommended strengthening controls over accrued accounts payable by generating a trial balance of accrued liabilities by vendor reconciled to our general ledger on an monthly basis. We have modified our systems to implement this recommendation and currently generate and analyze the recommended trial balance and reconcile it to our general ledger balance on a monthly basis.

    The same accounts payable personnel who are responsible for originating and processing disbursements under $10,000 for payment have custody of a computerized signature plate for check signing, which could give rise to the possibility of undetected errors or misappropriation of cash. Our

11


      auditors recommended that check signing authority and custody of unused checks be assigned to personnel other than the above-noted accounts payable personnel. We have implemented this recommendation.

    Customer payments received and credits issued are not always applied to a specific invoice, which distorts the aging of accounts receivable and reduces its usefulness for analyzing and monitoring customer accounts, and has caused accounts receivable for libraries not to be reconciled on a timely basis. Although cash received from customers is deposited daily and applied to customer balances, some of our large business customers do not provide us with timely reports of specific payment and returned item details. As recommended by our auditors, we continue to work with our business customers to obtain more timely payment details, but we cannot rely on their systems and processes to consistently meet our requirements. Additionally, credit memos for our library customers must be manually prepared due to limitations in our current accounting system. Automated credit memos for our library customers will be a requirement of the new general ledger system that we intend to implement in 2005.

    Our accounts receivable aging reports are prepared manually using spreadsheet software, which lowers the efficiency of our accounting department in generating an accurate accounts receivable aging report and hinders the collection of accounts receivable. Our auditors recommended that we adopt an automated accounting system that could generate accounts receivable aging reports directly and tie them to the general ledger. We will require automated aging reports from our new general ledger system that we intend to implement in 2005.

        The third and fourth concerns noted above will likely be noted again in the 2004 audit. Our audit committee and executive officer group have reviewed and discussed the auditor's letter and our responses to the letter.

        Although we have implemented some of the above recommendations and intend to upgrade our financial systems in 2005 as noted above, we cannot be certain that these measures will ensure that we maintain adequate controls over our financial processes and reporting in the future. Any failure to implement these new operational and financial systems, procedures and controls, or difficulties encountered in the process of upgrading these systems, could harm our operating results or cause us to fail to meet our reporting obligations, either of which could have a negative impact on our business.

Because we experience seasonal fluctuations in our net sales, our quarterly results will fluctuate and our annual performance will be affected by seasonal fluctuations.

        We experience seasonality in our business. Our revenue follows a seasonal pattern that we believe is typical of the overall book industry. We have generally had weaker demand in the quarter ending in June when compared to the quarters ending in March, September and December. We expect this pattern to continue. Accordingly, unfavorable economic conditions or lower than normal levels of demand in any of the other quarters could harm our operating results for the entire year. Historically, we have seen these patterns, but we cannot assure you that the results of any particular quarter will follow this pattern. If our revenue during any other quarter were to fall below the expectations of investors or securities analysts, our stock price could decline, perhaps significantly.

Our business results depend in part on our ability to generate customer demand on our websites. If we fail, our sales and profit margins could decrease.

        Our success depends, in part, upon our ability to offer a wide range of books that reflect the tastes and preferences of our retail customers and the customers of our business customers. If we do not attract a sufficient number of booksellers or maintain a sufficiently broad selection of marketable books, we might be unable to satisfy the changing tastes of our retail customers or those of our business customers. In addition, we could drive away repeat customers if we establish relationships with

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booksellers that sell books of poor quality or have unreliable fulfillment capabilities. In addition, to acquire customers, we implement e-mail marketing programs and buy words from Internet search engine companies to ensure that links to our website are displayed. Although these techniques are currently cost-effective, increasing costs could effectively prohibit us from employing them in the future and could cause our revenue to decline.

If we fail to maintain our supply relationships, our revenue will decline.

        We currently derive a substantial majority of our revenue from sales associated with our network of independent professional booksellers. In general, our relationships with these booksellers are terminable at will by either party immediately upon notice. We rely upon booksellers to provide an attractive selection of books to our retail and business customers without our having to incur related inventory or book procurement-related expenses. We believe that we attract these booksellers by providing them with a marketplace on our retail websites and a more efficient means of access to our business customers. However, if we fail to meet the expectations of these booksellers, they may decide not to continue to list items for sale with us. If for any reason booksellers decide not to list with us and we cannot replace them with booksellers having comparable offerings, or if we fail to recruit booksellers on a timely basis, we may lose revenue.

        To date, we have purchased or consigned books for our inventory held in our distribution center from a relatively small number of suppliers, including retailers, wholesalers, nonprofit organizations, and liquidators who send us their returned, remaindered, overstock, donated, or damaged inventory. In addition, we have a number of arrangements in place that give us rights to acquire those types of books on consignment. While none of these purchase or consignment relationships accounted for 10% or more of our inventory purchases or our revenue in 2003, we depend on these relationships to generate revenue. These suppliers might choose to no longer do business with us if we fail to meet their expectations. In addition, these suppliers might develop in-house solutions to market or otherwise liquidate these books, which could make it more difficult for us to maintain our overall supply of books. If we cannot successfully maintain existing book-supply arrangements, or develop and maintain new ones on favorable terms, our revenues would decline and we might fail.

If our efforts to expand into new business areas are unsuccessful, our inability to generate sufficient revenue to offset the cost of expansion could harm our operating results and lower our cash and cash equivalents.

        We expect to expand our operations by making additional investments in our international business or in developing a more efficient marketplace for used and hard-to find movie and music titles. We cannot assure you that our experience and abilities in the market for used and out-of-print books will be applicable to or indicative of our prospects in any new business or market we enter. As we expand our operations internationally or into new product categories, we would also incur additional expenses and require significant development, operations, marketing and editorial resources, which would strain our management, financial and operational resources. Additionally, these new operations could be more costly to maintain than our current operations. The lack of market acceptance of such efforts or our inability to generate satisfactory revenue from such expanded services or products to offset their cost could harm our operating results and lower our cash and cash equivalents.

If we fail to effectively manage our growth, our business may suffer.

        Our plans to expand our business will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. Our current and planned personnel, systems and procedures may not be adequate to support and effectively manage our expanded operations. Accordingly, we will have to hire, train, retain, motivate and manage required personnel, and implement new operational and financial systems and procedures. Any failure to implement these

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new operational and financial systems and procedures could negatively effect our ability to generate revenue. Difficulties encountered in the process of upgrading these systems could increase our costs and expenses and lower our revenue.

Acquisitions may harm our business by being more difficult than expected to integrate or by diverting management's attention.

        Although we are not currently a party to any contracts or letters of intent with respect to any acquisitions, in the future we may seek to acquire or invest in businesses or additional products or technologies that we feel could complement or expand our business. If we identify an appropriate acquisition opportunity, we might be unable to negotiate the terms of that acquisition successfully, finance it, or integrate it into our existing business and operations. Further, the negotiation of potential acquisitions, as well as the integration of an acquired business, would divert management time and other resources. We may have to use a substantial portion of our available cash, including proceeds of this offering, to consummate an acquisition and integrate any acquired business. On the other hand, if we consummate acquisitions through an exchange of our securities, our stockholders could suffer significant dilution. In addition, we cannot assure you that any particular acquisition, even if successfully completed, will ultimately benefit our business.

Problems with the operation of our distribution center or other operations could lower our revenue and increase our expenses.

        A substantial portion of our revenue flows through our distribution center. Problems with our distribution center could disrupt the flow of order processing, damage our reputation and cause our revenue to decline. In many cases, the services provided by our distribution center are highly complex from a logistical standpoint and seemingly minor breakdowns within our operations could have major implications for our ability to successfully provide these services. Our ability to provide these services may be adversely affected by a number of factors, including inadequate staffing, capacity limitations and dependence on a limited number of shipping companies. In addition, our agreement with our contract labor service provider is on a month-to-month basis. We have a limited ability to re-route orders to third parties for shipping or otherwise counteract any problems that may develop with our distribution center. If for any reason we cannot receive and process inbound inventory in an efficient manner, or cannot ship completed orders cost-effectively and in the manner requested, our retail and business customers might choose not to use our services or buy books through our website, as the case may be, any of which could damage our reputation, increase our costs and cause our revenue and gross margin to decline.

If additional financing becomes necessary, failure to obtain such financing could limit our operations and might cause our business to fail.

        We cannot be certain that our cash reserves and any cash flow from operations will be sufficient to finance our anticipated growth. We may need to raise additional funds if:

    our losses continue;

    our estimates of revenue or our working capital and/or capital expenditure requirements change or prove inaccurate;

    we are required to respond to unforeseen technological or marketing hurdles; or

    we choose to take advantage of current and unanticipated opportunities.

If adequate funds are not available to satisfy either short- or long-term capital requirements, we might be required to limit our operations significantly and our business might fail. We cannot assure you that these funds will be available when required in amounts or on terms we find acceptable, if at all.

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Additional financings could disadvantage our existing stockholders and purchasers in this offering.

        Should our capital resources become insufficient to meet our future capital requirements and expenses, or for other reasons, we may decide to sell additional equity or debt securities. We cannot assure you that we will be able to obtain additional financing on commercially reasonable terms, if at all. If additional funds are raised through the issuance of equity securities or convertible debt securities, the percentage ownership of our then-current stockholders would be reduced and the value of their investments might decline. In addition, any new securities issued might have rights, preferences or privileges senior to those securities held by our existing stockholders. If we raise additional funds through the issuance of debt, we might become subject to restrictive covenants or high rates of interest, and our assets could become encumbered, which would limit our ability to borrow in the future.

Retail sales outside of the United States and Canada account for approximately 11% of our total revenue, so our business is exposed to risks of international operations to a greater extent than are companies with more domestic sales.

        Revenue from outside of the United States and Canada increased as a percentage of total revenue from 9.0% to 11.2% from 2002 to 2003, and we anticipate that such sales will continue to represent a significant percentage of our total revenue in future periods. We expect the amount of revenue and percentage of total revenue represented by these international sales will fluctuate in the future because of the special risks associated with our international operations, such as:

    the need to develop supplier relationships for foreign titles;

    unexpected changes in international regulatory requirements and tariffs;

    difficulties in staffing and managing foreign operations;

    greater difficulty in collecting overseas accounts receivable;

    potential adverse tax consequences of foreign sales or operations;

    costs associated with our current practice of shipping books from overseas sellers to overseas customers living in the same country through our distribution center in Nevada;

    price controls or other restrictions on foreign currency;

    complexities in adopting our inventory and other back office systems to other languages and\or character sets; and

    difficulties in obtaining export and import licenses.

        In addition, governments in foreign jurisdictions may regulate e-commerce or other online services in such areas as content, privacy, network security, copyright, encryption, taxation, or distribution. In particular, one or more foreign countries may seek to impose sales or other tax (including value added tax) collection obligations on out-of-jurisdiction companies that engage in e-commerce. For example, the European Union has issued directives that have affected many e-commerce companies, including some of our competitors. Although, to date, this legislation has not applied to a large number of our sales transactions, new interpretations or directives may affect these sales transactions. A successful assertion by one or more foreign countries or jurisdictions that we should collect sales or other taxes on the sale of merchandise or services could result in substantial tax liabilities for past sales, decrease our ability to compete and otherwise harm our business.

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Fluctuations in the exchange rates of foreign currency, particularly in Europe, may reduce our revenue or increase our costs and expenses.

        We are exposed to adverse movements in foreign currency exchange rates because we translate foreign currencies into U.S. Dollars for reporting purposes. Our primary exposures have resulted from sales in Europe of books from domestic sellers where these sales are not U.S. Dollar-denominated. We face a similar risk when we sell books from foreign sellers and incur a foreign currency payable obligation for which we have been paid in U.S. Dollars. If our international revenue and operations grow, adverse currency fluctuations could reduce our revenue or increase our costs and expenses.

The security risks of e-commerce may discourage retail customers from purchasing goods from us.

        For the Internet to continue to grow as a transaction medium, we and other market participants must be able to store and transmit confidential information securely over public networks. We and our business customers rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to provide secure transmission of confidential information, such as retail customer credit card numbers. We and our business customers have also individually established secure repositories in which to keep confidential information. Third parties may have the technology or know-how to breach these security measures. Any breach, or any release of confidential customer information for any other reason, could damage our reputation or customer confidence in our technology and cause our retail customers to choose not to make purchases on our websites or the websites of our business customers in the future. In addition, any security breach of our secure repositories of confidential information, or any release of confidential customer information for any other reason, could expose us to risks of loss, litigation and liability and could seriously disrupt our operations and harm our business results.

A significant number of returns could harm our results of operations by lowering our revenue and increasing our costs.

        We back all purchases made through our website with a money-back guarantee. Our ability to handle a large volume of returns is unproven. In addition, any policies intended to reduce the number of product returns may result in customer dissatisfaction and less repeat business. If we have a significant volume of returns, our operating results could be harmed.

Our business may be harmed by the fraudulent, infringing or unlawful activities of third parties on our websites or our business customers' websites.

        Any negative publicity generated from fraudulent or deceptive conduct by third parties could damage our reputation, harm our business and diminish the value of our brand. We have received in the past, and anticipate that we will receive in the future, communications from retail customers who were charged for books that they did not purchase because of fraudulent activity of third parties. We also periodically receive complaints from our retail customers who believe that they have been deceived as to the quality of the goods purchased on our or our business customers' websites. We expect to continue to receive requests for reimbursement from retail customers or threats of legal action against us if no reimbursement is made in these situations.

        We have received in the past, and we anticipate that we will receive in the future, communications alleging that certain items listed or sold through our or our business customers' websites have infringed third-party copyrights, trademarks, trade names or other intellectual property rights. For example, authors or publishers that have restricted distribution of specific books have sued us in the past and could sue us in the future for contributing to a violation of their rights if those items are sold through our website by our booksellers. These and future claims could limit our operations and increase our

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costs of doing business, whether or not the claim is adjudicated. In addition, litigation could result in interpretations of the law that require us to limit our operations or otherwise increase our costs.

        In addition, we might be unable to prevent third parties from listing unlawful goods or content, and we might be subject to allegations of civil or criminal liability for the unlawful activities of third parties on our or our business customers' websites. In the future, we might have to limit our operations in costly ways to protect us from these potential liabilities, including discontinuing certain offerings. Any costs incurred as a result of liability or asserted liability relating to the sale of unlawful goods or content, the unlawful sale of goods, the fraudulent receipt of goods or the fraudulent collection of payments could harm our business. Any misrepresentation by our sellers as to the type, quantity, legal ownership, nature, or quality of their inventory could harm our reputation and cause our revenue to decline.

Existing or future government regulation could harm our business.

        We are subject to general business regulations and laws, as well as regulations and laws specifically governing the Internet and e-commerce. Many of these laws are in the early stages of development; existing and future laws and regulations could impede the growth of the Internet or other online services. These regulations and laws are likely to address a variety of issues, including:

    taxation and pricing;

    user privacy and expression;

    data protection;

    consumer protection; and

    intellectual property.

        It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel, and personal privacy apply to the Internet and e-commerce. Furthermore, the growth and development of the Internet and e-commerce may prompt the passage of more stringent consumer protection laws that may impose additional burdens on those companies conducting business online. Unfavorable resolution of these issues may harm our business. Jurisdictions may also regulate the sales between our booksellers and our retail customers on our website. This could, in turn, diminish the demand for our products and services, lower our revenue and increase our cost of doing business.

Laws or regulations relating to privacy and data protection may adversely affect the growth of our business or our marketing efforts.

        We are subject to increasing regulation relating to privacy, data security and the use of personally identifiable information, including that of our customers and employees. For example, several states have, or have proposed, legislation limiting the uses of personal user information gathered online or requiring online services to establish privacy policies. Federal laws and regulations currently govern the collection and use of personal identifying information in a number of areas. These include restrictions on information obtained from children under the age of 13. A new federal law also regulates the sending of commercial electronic mail messages. Some state as well as proposed federal legislation requires that companies notify customers and other affected individuals of computer security breaches involving their personal data. Moreover, proposed legislation in this country and existing laws in foreign countries require companies to establish procedures to notify users of privacy and security policies, obtain consent from users for collection and use of personal information, and/or provide users with the ability to access, correct and delete personal information collected and stored by us. These existing and potential data protection regulations could be costly to comply with or could harm our marketing efforts, including by restricting our ability to collect demographic and personal information from users

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or to use or disclose such information in certain ways. If we were to violate these regulations, or if it were alleged that we had, we could face penalties and injunctions and our business could be harmed. In addition, our agreements with business customers and other third parties may limit our ability to obtain and use related consumer information.

We may be subject to tax liability for past sales and this liability may decrease our future sales.

        We do not currently collect sales, value-added or other taxes on shipments into foreign countries or into states other than California, Michigan and Nevada. However, one or more other states have in the past, and may in the future, seek to impose sales tax collection obligations on us as an out-of-state company engaged in e-commerce. In addition, any new operations in states outside California, Michigan, Nevada or Washington could subject shipments into such states to state sales taxes under current or future laws. A successful assertion by one or more states or any foreign country that we should collect sales or other taxes on product sales would likely result in substantial tax liabilities, decrease our ability to compete with traditional retailers, and otherwise harm our business.

        Currently, decisions of the United States Supreme Court restrict states and local governments from imposing sales and use tax collection obligations on sales made over the Internet. However, a number of states, as well as the United States Congress, have been considering various initiatives that could limit or supersede the Supreme Court's position regarding sales and use taxes on Internet sales. If any of these initiatives successfully address the Supreme Court's concerns and result in a reversal of its current position, we could be required to collect sales and use taxes in states other than California, Michigan, Nevada and Washington. The imposition by state and local governments of various taxes on Internet commerce could create administrative burdens for us and could decrease our future sales.

We may have to litigate to protect our intellectual property rights, or to defend claims that we have infringed the rights of others, which could subject us to significant liability and be time consuming and expensive.

        Our success depends significantly upon our copyrights, trademarks, service marks, trade secrets, technology and other intellectual property rights. We may not be able to adequately protect our intellectual property from third parties. If this occurs, we may have to litigate to protect our intellectual property rights. These difficulties could disrupt our ongoing business, increase our expenses and distract our management's attention from the operation of our business.

        Legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in Internet-related companies are uncertain and still evolving, and the future viability or value of any of our intellectual property rights is uncertain. We have not applied for the registration of all of our copyrights, trademarks and service marks, and effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our content, services and products are made available online. If we were prevented from using our copyrights, trademarks or service marks, we would need to rebuild our website, as well as our brand identity with our retail and business customers and booksellers. This would increase our operating expenses substantially.

        Companies frequently resort to litigation regarding intellectual property rights. If a successful claim were made against us and we could not timely and cost-effectively develop non-infringing intellectual property or license the infringed or similar intellectual property, we might be unable to continue operating our business as planned. We have received in the past, and we may in the future receive, notices of claims of infringement or misappropriation of other parties' proprietary rights. We analyze such claims on a case-by-case basis and respond as we deem appropriate. Any infringement claims could subject us to costly litigation, divert management's attention, require the change of our trademarks and the alteration of content, and require us to redesign our websites or services or require us to pay damages or enter into royalty or licensing agreements. These royalty or licensing agreements,

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if required, might not be available on acceptable terms or at all. In addition, like many online and traditional businesses, we rely on information (including price and other information) gathered from the websites of others. Third parties have in the past taken, and may in the future take, action to prevent us from conducting such information gathering. If we were forced to pay for the right to gather such information, if such information becomes unavailable to us, or if we have technical issues integrating new sources of such information, our business could be harmed.


Risks Relating to This Offering

We expect to experience volatility in our stock price.

        Our common stock has never been sold in a public market and an active trading market for our stock may not develop or be sustained. The price of our common stock that will prevail in the market after this offering may be higher or lower than the price you pay. Stock markets have experienced significant price and trading volume fluctuations, and the market prices of technology and e-commerce companies generally have been extremely volatile and have experienced sharp share price and trading volume changes in the first days and weeks after such companies' securities were first released for public trading. Investors may not be able to resell their shares at or above the initial public offering price. Class action litigation resulting from volatility of the trading price of our common stock would likely result in substantial costs and a diversion of management's attention and resources.

Our management has broad discretion as to the use of the net proceeds from this offering.

        Our management has broad discretion as to the use of the net proceeds that we will receive from this offering. We cannot assure you that management will apply these funds effectively, nor can we assure you that the net proceeds from this offering will be invested in a manner yielding a favorable return.

Investors will experience immediate and substantial dilution in the book value of their investment.

        The anticipated initial public offering price of our common stock will be substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase our common stock in this offering, you will incur an immediate dilution of approximately $            in pro forma net tangible book value per share from the price you paid. The exercise of outstanding options and warrants will result in further dilution.

Securities analysts may not initiate coverage of our common stock and this may have a negative impact on our common stock's market price.

        There are only two underwriters of this offering, and there is no guarantee that securities analysts will cover our common stock after the completion of this offering. If securities analysts do not cover our common stock after the completion of this offering, the lack of research coverage may adversely affect our common stock's market price. As a result, you may be unable to sell your shares of common stock at or above the initial public offering price.

We do not intend to pay dividends on our common stock, and you may lose the entire amount of your investment.

        We have never declared or paid any cash dividends on our common stock and do not intend to pay dividends on our common stock for the foreseeable future. We intend to invest our future earnings, if any, to fund our growth. Therefore, you will not receive any funds without selling your shares. We cannot assure that you will receive a positive return on your investment when you sell your shares or that you will not lose the entire amount of your investment.

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There may be sales of substantial amounts of our common stock after this offering, which could cause our stock price to fall.

        Our current stockholders hold a substantial number of shares, which they will be able to sell in the public market in the near future. After this offering,             shares of common stock will be outstanding, excluding exercises of options or warrants after                        , 2004. All of the shares sold in this offering will be freely tradable, except for shares purchased by holders subject to lock-up agreements or our investor rights agreement or by any of our existing "affiliates," as that term is defined in Rule 144 under the Securities Act, which generally includes officers, directors and significant stockholders. The remaining shares of common stock outstanding after this offering may be restricted as a result of securities laws, our investor rights agreement or lock-up agreements with WR Hambrecht + Co that restrict the holders' ability to transfer their stock for 180 days after the date of this prospectus. Of these shares, 4,844,069 will be available for sale in the public market 180 days after the date of this prospectus; and 721,937 will be available for sale in the public market at various times thereafter. WR Hambrecht + Co may, however, waive the 180-day lock-up period at any time for any stockholder. Sales of a substantial number of shares of our common stock within a short period of time after this offering 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. See "Shares Eligible for Future Sale" beginning on page 81.

We have adopted anti-takeover defenses that could delay or prevent an acquisition of our company, even an acquisition that would be beneficial to our stockholders.

        After this offering, our board of directors will have the authority to issue up to 5 million shares of preferred stock. Issuance of the preferred stock would make it more difficult for a third party to acquire a majority of our outstanding voting stock, even if doing so would be beneficial to our stockholders. Without any further vote or action on the part of the stockholders, the board of directors will have the authority to determine the price, rights, preferences, privileges and restrictions of the preferred stock. This preferred stock, if issued, might have conversion rights and other preferences that work to the disadvantage of the holders of common stock.

        Our certificate of incorporation, bylaws and equity compensation plans include provisions that may deter an unsolicited offer to purchase Alibris. These provisions, coupled with the provisions of the Delaware General Corporation Law, may delay or impede a merger, tender offer or proxy contest involving Alibris. Furthermore, our board of directors is divided into three classes, only one of which will be elected each year. These factors may further delay or prevent a change of control of Alibris and may be detrimental to our stockholders. See "Description of Capital Stock—Anti-Takeover Provisions" beginning on page 79.

Continued concentration of ownership among our directors, executive officers and affiliates after this offering might lead to conflicts with other stockholders over corporate transactions or other corporate matters.

        Following the completion of this offering, our directors, executive officers and holders of 5% or more of our outstanding common stock will beneficially own an aggregate of approximately            % of our outstanding common stock, including warrants and stock options exercisable within 60 days after            , 2004. As a result, these stockholders will exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of control could disadvantage other stockholders with interests different from those of our officers, directors and affiliates. For example, our officers, directors and affiliates could delay or prevent someone from acquiring or merging with us even if the transaction would benefit other stockholders.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions and of the successful completion of this offering and our reincorporation. Any statements that are not statements of historical fact are forward-looking statements. These statements include, but are not limited to, statements concerning:

    the anticipated benefits and risks associated with our business strategy;

    our future operating results and the future value of our common stock;

    the anticipated size of or trends in the markets in which we compete and the anticipated amount and character of competition in those markets;

    our ability to attract customers in a cost-efficient manner;

    potential government regulation;

    our future capital requirements and our ability to satisfy our capital needs;

    the anticipated use of the proceeds realized from this offering;

    the potential for additional issuances of our securities;

    the possibility of future acquisitions of businesses or assets; and

    possible expansion into new product categories and international markets.

        When used in this prospectus, the words "anticipate," "believe," "estimate," "expect," "intend," "plan," and similar expressions identify certain of these forward-looking statements.

        These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this prospectus. You should carefully consider the statements set forth in "Risk Factors" and other sections of this prospectus. Alibris does not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this prospectus.


OTHER NOTES REGARDING INFORMATION CONTAINED IN THIS PROSPECTUS

        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 operations and prospects may have changed since that date.

        "Alibris" is a registered trademark of Alibris, Inc. Other service marks, trademarks and trade names referred to in this prospectus are property of their respective owners. OpenIPO is a registered service mark of WR Hambrecht + Co, LLC.

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USE OF PROCEEDS

        The net proceeds to us from the sale of the shares of common stock offered in this offering are estimated to be $             million, after deducting the estimated underwriting discount and estimated offering expenses payable by us. If the underwriters' over-allotment option is exercised in full, we estimate that net proceeds will be $             million. We presently intend to use approximately 15% of the net proceeds from this offering to grow our product supply, approximately 15% to expand marketing and sales and approximately 20% to invest in technology and operations infrastructure. In addition, we may use a portion of the net proceeds of this offering to acquire complementary technologies or businesses, although we are not currently a party to any contracts or letters of intent with respect to any acquisitions. The balance of the net proceeds of this offering will be used for working capital and general corporate purposes. Pending such uses, we will invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities. We cannot predict whether the proceeds will yield a favorable return.


DIVIDEND POLICY

        We have never declared or paid cash dividends on our capital stock and do not anticipate declaring or paying cash dividends in the foreseeable future. Our credit facility with Silicon Valley Bank prohibits the payment of cash dividends without prior approval of the lender. Payments of future dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion.

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CAPITALIZATION

        The following table sets forth our capitalization as of March 31, 2004:

    on an actual basis;

    on a pro forma basis after giving effect to the conversion of all outstanding shares of preferred stock into common stock upon the closing of this offer; and

    on a pro forma as adjusted basis to reflect the receipt of the estimated net proceeds from the sale of             shares of common stock in this offering at an assumed initial public offering price of $            per share, after deducting the estimated underwriting discount and estimated offering expenses.

 
  As of March 31, 2004
 
  Actual
  Pro Forma
  Pro Forma
As Adjusted

 
  (in thousands, except share data)

Cash and cash equivalents.   $ 3,807   $ 3,807   $  
   
 
 
Total indebtedness     191     191      
Convertible redeemable preferred stock; $0.00001 par value. Authorized 5,000,000 shares (actual, pro forma and pro forma as adjusted); issued and outstanding 3,247,503 shares (liquidation value of $66,299) (actual), none (pro forma and pro forma as adjusted)     88,023          

Stockholders' equity (deficit):

 

 

 

 

 

 

 

 

 
  Common stock; $.00001 par value.
Authorized 100,000,000 shares (actual, pro forma and pro forma as adjusted); issued and outstanding 1,553,719 shares (actual), 5,566,006 shares (pro forma) and            (pro forma as adjusted)
             
Additional paid-in capital         88,023      
Deferred stock compensation     (1,535 )   (1,535 )    
Notes receivable from stockholders     (578 )   (578 )    
Accumulated deficit     (78,956 )   (78,956 )    
   
 
 
    Total stockholders' equity (deficit)     (81,069 )   6,954      
   
 
 
  Total capitalization   $ 7,145   $ 7,145   $  
   
 
 

        The information in the table above excludes:

    214,198 shares of common stock subject to outstanding options as of March 31, 2004 at a weighted average exercise price of $1.6359 per share, under our 1998 stock option plan and 2000 equity incentive plan;

    185,849 shares of common stock issuable upon exercise of outstanding warrants as of March 31, 2004 at a weighted average exercise price of $28.41 per share;

    1,875,927 shares of common stock reserved for future grant or issuance under our 1998 stock option plan, 2000 equity incentive plan, 2004 equity incentive plan and 2004 employee stock purchase plan;

    any shares of common stock automatically reserved for issuance under our 2004 employee stock purchase plan, as more fully described in "Management—Employee Benefit Plans and Option Grants;" and

    up to        shares issuable upon exercise of the underwriters' over-allotment option at an assumed initial public offering price of $        per share.

        You should read this capitalization table together with the sections of this prospectus entitled "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.

23



DILUTION

        Our pro forma net tangible book value as of March 31, 2004 was $4.0 million, or $0.71 per share of common stock. Pro forma net tangible book value per share represents total tangible assets less total liabilities, divided by the total number of shares of common stock outstanding as of March 31, 2004 after giving effect to the conversion of all outstanding shares of preferred stock into 4,012,287 shares of our common stock upon the closing of this offering.

        After giving effect to the issuance and sale of            shares of common stock offered by us at an assumed initial public offering price of $            per share and after deducting the estimated underwriting discount and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2004 would have been $            , 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. The following table illustrates this dilution on a per share basis:

Assumed initial public offering price per share         $  
  Pro forma net tangible book value per share as of March 31, 2004   $        
  Increase per share attributable to new investors            
   
     
Pro forma as adjusted net tangible book value per share after this offering            
         
Dilution per share to new investors in this offering         $  
         

        If the underwriters exercise their over-allotment option in full, there will be an increase in pro forma as adjusted net tangible book value of $            per share to existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of $            to new investors.

        The following table summarizes on a pro forma as adjusted basis, as of March 31, 2004, after giving effect to the conversion of all outstanding shares of preferred stock into 4,012,287 shares of our common stock upon the closing of this offering, and the offering at an assumed initial public offering price of $            per share and after deducting the estimated underwriting discount and estimated offering expenses payable by us, the difference between the existing stockholders and the purchasers of shares of common stock in this offering with respect to the number of shares of common stock purchased from us, the total consideration paid and the average price paid per share:

 
  Shares Purchased
  Total Consideration
   
 
  Average Price
Per Share

 
  Number
  Percent
  Amount
  Percent
Existing stockholders            % $               % $       
New investors                        
   
 
 
 
 
Total            % $               %    
   
 
 
 
     

        In the preceding tables, the shares of common stock outstanding exclude:

    214,198 shares of common stock subject to outstanding options as of March 31, 2004 at a weighted average exercise price of $1.6359 per share, under our 1998 stock option plan and 2000 equity incentive plan;

    185,849 shares of common stock issuable upon exercise of outstanding warrants as of March 31, 2004 at a weighted average exercise price of $28.41 per share;

24


    1,875,927 shares of common stock reserved for future grant or issuance under our 1998 stock option plan, 2000 equity incentive plan, 2004 equity incentive plan and 2004 employee stock purchase plan;

    any shares of common stock automatically reserved for issuance under our 2004 employee stock purchase plan, as more fully described in "Management—Employee Benefit Plans and Option Grants;" and

    up to            shares issuable upon exercise of the underwriters' over-allotment option at an assumed initial public offering price of $             per share.

        If the underwriters exercise their over-allotment option in full, our existing stockholders would own            % and our new investors would own            % of the total number of shares of our common stock outstanding after this offering.

        The assumed public offering price represents the middle of the proposed offering range on            , 2004.

        Assuming the exercise in full of all options and warrants outstanding as of March 31, 2004, the average price per share paid by our existing stockholders would decrease $            per share to $            per share. See Note 2 of the notes to our financial statements.

25



SELECTED FINANCIAL DATA

        The table below shows selected financial data for our last five fiscal years and the three months ended March 31, 2003 and 2004. The statements of operations data for each of the three fiscal years in the period ended December 31, 2003 and the balance sheet data at December 31, 2002 and December 31, 2003 are derived from our audited financial statements included elsewhere in this prospectus. The statements of operation data for the fiscal years ended December 31, 1999 and 2000 and the balance sheet data at December 31, 1999, 2000 and 2001 are derived from our audited financial statements not included in this prospectus.

        The statements of operations data for the three month periods ended March 31, 2003 and March 31, 2004 and the balance sheet data at March 31, 2004 are derived from our unaudited financial statements included elsewhere in this prospectus. Such unaudited interim financial statements have been prepared on the same basis as the audited financial statements and reflect all adjustments necessary for a fair presentation of the financial information, in accordance with generally accepted accounting principles.

        The following selected financial data should be read in conjunction with our "Management's Discussion and Analysis of Financial Condition and Results of Operations" and financial statements and related notes included elsewhere in this prospectus.

 
  Year Ended December 31,
  Three Months Ended March 31,
 
 
  1999
  2000
  2001
  2002
  2003
  2003
  2004
 
 
  (in thousands, except per share data)

 
Statements of Operations Data:                                            
Revenue:                                            
  Product revenue   $ 4,906   $ 14,974   $ 21,752   $ 31,222   $ 45,456   $ 10,350   $ 13,830  
  Stock-based sales discounts         (820 )   (783 )   (178 )            
   
 
 
 
 
 
 
 
    Total revenue     4,906     14,154     20,969     31,044     45,456     10,350     13,830  

Cost of product revenue

 

 

4,027

 

 

11,257

 

 

15,103

 

 

23,338

 

 

36,782

 

 

8,563

 

 

11,144

 
   
 
 
 
 
 
 
 

Gross profit

 

 

879

 

 

2,897

 

 

5,866

 

 

7,706

 

 

8,674

 

 

1,787

 

 

2,686

 
   
 
 
 
 
 
 
 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Marketing and sales(1)     4,713     15,125     3,835     3,925     3,668     908     1,047  
  Operations(1)     4,411     10,784     10,231     8,765     6,692     1,739     1,661  
  General and administrative(1)     2,659     4,357     4,063     2,059     1,924     509     534  
  Stock-based compensation     1,291     1,960     582     66     1,080     66     344  
  Amortization of goodwill and other intangible assets     197     1,142     1,096     39     39     9     10  
  Impairment of goodwill         628     165                  
   
 
 
 
 
 
 
 
    Total operating expenses     13,271     33,996     19,972     14,854     13,403     3,231     3,596  
   
 
 
 
 
 
 
 

Operating loss

 

 

(12,392

)

 

(31,099

)

 

(14,106

)

 

(7,148

)

 

(4,729

)

 

(1,444

)

 

(910

)

Interest income

 

 

382

 

 

1,119

 

 

324

 

 

107

 

 

50

 

 

15

 

 

11

 
Interest expense     (69 )   (60 )   (53 )   (31 )   (58 )   (8 )   (15 )
Other income (expenses), net     (212 )   11     108     (143 )   (101 )   (31 )   13  
   
 
 
 
 
 
 
 
      Loss before provision of income taxes     (12,291 )   (30,029 )   (13,727 )   (7,215 )   (4,838 )   (1,468 )   (901 )

Provision for income taxes

 

 

5

 

 


 

 


 

 

19

 

 


 

 


 

 


 
   
 
 
 
 
 
 
 

Net loss

 

 

(12,296

)

 

(30,029

)

 

(13,727

)

 

(7,234

)

 

(4,838

)

 

(1,468

)

 

(901

)
Accretions on redeemable preferred stock     (1,209 )   (4,518 )   (5,670 )   (5,944 )   (5,968 )   (1,492 )   (1,528 )
Deemed dividend on Series F preferred stock                             (2,539 )
   
 
 
 
 
 
 
 

Net loss applicable to common stockholders

 

$

(13,505

)

$

(34,547

)

$

(19,397

)

$

(13,178

)

$

(10,806

)

$

(2,960

)

$

(4,968

)
   
 
 
 
 
 
 
 

Net loss per share—basic and diluted(2)

 

$

(22.54

)

$

(32.02

)

$

(18.53

)

$

(11.61

)

$

(9.21

)

$

(2.55

)

$

(3.59

)
   
 
 
 
 
 
 
 

Weighted average shares outstanding—basic and diluted(2)

 

 

599

 

 

1,079

 

 

1,047

 

 

1,135

 

 

1,173

 

 

1,163

 

 

1,383

 
   
 
 
 
 
 
 
 
Pro forma net loss per share(3)                           $ (1.06 )       $ (0.18 )
                           
       
 
Shares used in computing pro forma net loss per share(3)                             4,573           5,089  
                           
       
 

26


 
  As of December 31,
  As of
March 31,

 
  1999
  2000
  2001
  2002
  2003
  2004
  2004
 
   
   
   
   
   
  Actual

  Pro Forma(4)

 
 
(in thousands)

                                           
Balance Sheet Data:                                          
Cash and cash equivalents   $ 11,741   $ 10,839   $ 6,486   $ 1,915   $ 472   $ 3,807   $ 3,807
Working capital     11,013     13,126     7,695     2,028     (1,038 )   3,263     3,263
Total assets     20,127     23,766     16,158     9,924     7,298     11,155     11,155
Total indebtedness     165     833     352     964     705     191     191
Convertible redeemable preferred stock     25,006     58,988     69,901     75,845     81,813     88,023    
Total stockholders' equity (deficit)   $ (7,454 ) $ (38,634 ) $ (56,617 ) $ (69,465 ) $ (79,202 ) $ (81,069 ) $ 6,954

(1)
Amounts exclude stock-based compensation as follows:

 
  Year Ended December 31,
  Three Months Ended March 31,

 

 

1999


 

2000


 

2001


 

2002


 

2003


 

2003


 

2004

 
  (in thousands)

 
Marketing and sales

 

$

40

 

$

128

 

$

50

 

$

(102

)

$

219

 

 

(8

)

$

68
  Operations     152     605     126     33     240     36     47
  General and administrative     1,099     1,227     406     135     621     38     229
   
 
 
 
 
 
 
    $ 1,291   $ 1,960   $ 582   $ 66   $ 1,080   $ 66   $ 344
   
 
 
 
 
 
 
(2)
See Note 2 of Notes to Financial Statements for discussion regarding computation and presentation.

(3)
The pro forma net loss per share is computed using the weighted average number of shares of common stock outstanding, including the pro forma effects of the automatic conversion of our Series A, B, C, D, E and F preferred stock into shares of our common stock effective upon the closing of this offering as if such conversion occurred at the beginning of the period, or at the date of issuance, if later, and a decrease in net loss attributed to common stockholders for the accretions on redeemable preferred stock and deemed dividend. The net loss applicable to common stockholders and the shares used in calculating the pro forma net loss per share is as follows:

 
  Year Ended
December 31, 2003

  Three Months
Ended
March 31, 2004

 
 
  (in thousands, except
per share data)

 
Net loss applicable to common stockholders   $ (10,806 ) $ (4,968 )
Accretions on redeemable preferred stock     5,968     1,528  
Deemed dividend on Series F preferred stock         2,539  
   
 
 
  Pro forma net loss applicable to common stockholders   $ (4,838 ) $ (901 )
   
 
 

Weighted average common shares outstanding

 

 

1,173

 

 

1,383

 
   
 
 
Plus weighted average preferred shares outstanding:              
  Series A (conversion rate of 1 to 4)     694     694  
  Series B (conversion rate of 1 to 1.13)     786     786  
  Series C (conversion rate of 1 to 1.14)     264     264  
  Series D (conversion rate of 1 to 1.16)     880     880  
  Series E (conversion rate of 1 to 1)     776     776  
  Series F (conversion rate of 1 to 1)         306  
   
 
 
    Total weighted average preferred shares outstanding (as converted)     3,400     3,706  
   
 
 
    Total weighted average shares outstanding used in computing pro forma net loss per share     4,573     5,089  
   
 
 
        Pro forma net loss per share   $ (1.06 ) $ (0.18 )
   
 
 
(4)
Gives effect to the conversion of all outstanding shares of preferred stock into shares of common stock effective upon the closing of this offering.

27



MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and the related notes thereto. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions, as set forth under "Special Note Regarding Forward-Looking Statements." Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth in the following discussion and under "Risk Factors," "Business" and elsewhere in this prospectus.

Overview

        Alibris operates an online marketplace for used and hard-to-find books. We use the Internet and our specialized technology and logistics capabilities to aggregate this highly fragmented market, bringing buyers and sellers together. Our broad selection of over 40 million books, some of which are different copies, editions or collectible copies of the same title, is supplied primarily by our international network of over 5,000 sellers that meet our participation criteria, which we refer to as independent professional booksellers. We provide these independent booksellers with specialized inventory management, logistics and distribution services. Additionally, we use our knowledge of the used and hard-to-find book market to selectively purchase or consign low-cost book inventory.

        We incorporated in California in May 1998 and shortly thereafter acquired the business of Interloc, Inc., an online listing and e-mail service for booksellers. In June 1998, we opened our distribution center in Sparks, Nevada. In November 1998, we began providing an online marketplace for used and hard-to-find books and began to rapidly expand our operations to facilitate expected business growth. We exited the lines of business we acquired from Interloc, Inc. by the end of 1999. In August 2000, we began to streamline our operations, reflecting changing conditions in the capital markets and business climate at that time. Primarily through headcount reductions and the elimination of associated expenses, we reduced our operating expenses from a peak of $34.0 million in 2000 to $14.9 million in 2002 and $13.4 million in 2003. In 2004, we plan to expand our operations modestly. In February 2004, we raised gross proceeds of $4.8 million from the sale of our Series F preferred stock to finance this expansion.

        Our revenue has increased each year since we incorporated. We believe that our revenue growth has been driven in large part by:

    growth in the market for online book sales;

    our ability to drive traffic to our consumer website;

    the launch and growth of new business customer relationships;

    price reductions enabled by our decision to require our booksellers located in the United States and Canada to ship directly to end customers located in those countries, and the decisions of our business customers to do the same; and

    our ability to use our knowledge of pricing and demand in the market for used and hard-to-find books to price books at or near current market levels.

        Our revenue is composed of two segments, our retail segment and our business segment. Retail revenue is generated from book sales to consumers and library customers directly from our consumer website, www.alibris.com, and our library website, www.alibris.com/library. Business revenue is generated from book sales through our online business customers, such as Amazon.com and Barnes&Noble.com, and from the on-site kiosks and special order desks of traditional retailers, such as Borders. In 2003, retail revenue and business revenue constituted 59.5% and 40.5%, respectively, of our total revenue.

28



Business revenue as a percentage of total revenue is affected in part by the success of our business customers' marketing and merchandising efforts for used and hard-to-find books, which are largely beyond our control, and the extent to which we add new business customers. As a result, the prediction of our future revenue mix is difficult. Although our retail revenue as a percentage of total revenue declined from 2001 to 2002 and from 2002 to 2003, we cannot predict whether or not this trend will continue.

        During 2003, Barnes&Noble.com accounted for 17.5% of our total revenue and Amazon.com and its related entities accounted for 14.1% of our total revenue. No other single customer accounted for more than 10% of our total revenue. To date, our revenue has been derived primarily from sales in the United States and Canada; revenue from sales outside of the United States and Canada represented 11.2% of our total revenue in 2003.

        Our supply of books comes from three sources:

    books supplied by independent professional booksellers;

    books that we purchase or which are consigned to us and are held in our distribution center; and

    new books that we purchase from book wholesalers, primarily the Ingram Book Group.

Books supplied by our independent booksellers are sold both on our websites and to our business customers, and either ship directly to customers or ship through our distribution center. The majority of our revenue is derived from sales of books shipped directly to end customers from our network of booksellers. Purchased used books, consigned books and new books procured from wholesalers are also sold on our websites and, in most cases, through our business customers.

        Cost of revenue consists primarily of the costs to acquire books, shipping expenses and packaging materials. Our cost of revenue can be higher on sales that we process through our distribution center than on sales of books that are shipped directly by our booksellers to end customers due to the added cost of inbound shipping and packaging materials. Cost of revenue also depends on the magnitude of reserves taken for obsolete and slow-moving inventory from period to period.

        In general, we generate higher gross margins on sales in our retail segment than sales in our business segment, because we generally sell books at a discount to our business customers. Our gross margins are generally lower on sales of books supplied by our network of booksellers than on sales of our own inventory because, in general, we purchase these books from bookseller at a higher price than we would normally pay to acquire them for our own inventory. We also use our market intelligence and pricing technology to price books at current market levels which, although beneficial to our revenue growth, typically results in lower average unit sales prices and lower gross margins.

        Our gross margins have declined over time due to our decisions to require booksellers located in the United States and Canada to ship directly to end customers located in those countries, to increase sales through our business customers, and to use our market intelligence to price books at current market levels. We believe that the demand stimulated by these decisions, and the resulting increases in revenue and gross profit, have significantly improved our business and future prospects. Although our gross margin generally declined from 2002 to 2003, within the last four quarters our gross margin has been relatively stable. Although we expect our gross margin to remain stable for the foreseeable future, we cannot assure you that this will be the case.

        Operating expenses consist of marketing and sales, operations, general and administrative, stock-based compensation, amortization of goodwill and other intangible assets, and impairment of goodwill. Marketing and sales expense consists of the wages, benefits and other expenses for employees engaged in our consumer and business customer marketing and sales programs, retail marketing expenses (fees paid to third parties to drive traffic to our websites) and credit card fees. Operations expense consists

29



of fulfillment expenses and the wages, benefits and other expenses for employees engaged in technology, customer service, supplier services and distribution. Fulfillment expenses generally increase with any increase in the sales volume through our distribution center, and include the costs of our third-party logistics personnel and the lease expenses at our distribution center. General and administrative expense consists of wages and benefits for executive, accounting and administrative personnel, bad debt expenses, legal and other general corporate expenses. Stock-based compensation represents the aggregate differences, at the dates of grant, between the respective exercise prices of options to purchase common stock and the estimated fair market values of the underlying stock. Stock-based compensation is amortized on an accelerated amortization method over the vesting period of the related options, which is generally four years. Amortization of goodwill and intangible assets represents the non-cash charges for the expensing, over the anticipated useful life, of intangible assets and goodwill.

        We have experienced substantial net losses since our inception due to the significant costs incurred to develop our business. As of March 31, 2004, we had an accumulated deficit of $79.0 million. We expect to continue to incur operating losses for the foreseeable future as we incur expenses to build our infrastructure and increase spending on marketing and sales activities in an effort to grow our revenue.

Critical Accounting Policies

        Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenue and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies are set forth below.

    Revenue recognition.

        To date, we have derived our revenue from sales of books to consumers, libraries and businesses. In general, we determine that collectibility on our accounts is probable and recognize as revenue the full amount charged to the end customer, which consists of the selling price of the book plus any applicable shipping charge, on the date an item is shipped from our distribution center to an end customer, or when we are notified that an item has been shipped directly to an end customer. For our retail customers, including some of our library customers, we require payment by credit card. Business customers and most library customers pay us on standard commercial terms.

        We record revenue on a gross basis in the amount that is billed to the customer because, in general, we are the primary obligor in any sale, we have the ability to set the sales price, we bear the risk of physical loss, we are responsible for any returns, and we bear the credit risk for the amount billed to the customer.

        Revenue is recorded net of estimated returns, coupons redeemed by customers, and other discounts. Our management makes estimates of potential future product returns related to current period revenue. We analyze historical returns, current economic trends and changes in customer demand and acceptance of our products when evaluating the adequacy of our estimated returns and other allowances, such as reserves for doubtful accounts, in any accounting period. As of December 31, 2003, our reserve for returns was $0.2 million and our reserve for doubtful accounts was $0.3 million.

30



        Allowance for obsolete inventory.    We determine our reserves for obsolete and slow-moving inventory through a three-pronged analysis, and establish a reserve based on the analysis that results in the highest discount to the value of our inventory. To complete this analysis, we:

    measure the difference between the cost of inventory and its estimated market value based upon assumptions about future demand and current market conditions;

    estimate a charge for each title based on the number of excess books of that title in our inventory multiplied by the cost of that title; and

    perform an aging analysis of our inventory, which discounts the value of our inventory based on the length of time it has remained available for sale.

        Each prong of this analysis is automated, performed quarterly and run using our proprietary pricing and demand technology. Accordingly, management relies on the accuracy of the information that serves as the foundation for this technology when determining its allowance for obsolete inventory.

    Valuation of long-lived and intangibles assets and goodwill.

        We acquired Bibliocity, Inc., an online listing service for booksellers, in August 1999. We accounted for this business combination using the purchase method of accounting and recorded the market value of our common stock issued in connection with this acquisition and the related amount of direct transaction costs as the cost of acquiring this entity. These costs were allocated among the individual assets acquired and liabilities assumed, including goodwill and various identifiable intangible assets, based on their respective fair values. We allocated $5.0 million to goodwill, which equaled the amount by which we determined the purchase price exceeded the fair value of the net assets at the time of the acquisition. Amortization of goodwill and intangibles assets associated with business acquisitions were $1.1 million, $39,000 and $39,000 during the years ended December 31, 2001, 2002 and 2003, respectively. In September 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets", which became effective for us on January 1, 2002. Under SFAS No. 142, we ceased amortizing $2.9 million of goodwill as of January 1, 2002. Instead of amortizing of goodwill, we performed a transitional impairment test of our goodwill on January 1, 2002, and annual impairment testing thereafter. Upon completing our initial review, we determined that the carrying value of our recorded goodwill as of January 1, 2002, had not been impaired. Accordingly, no transitional impairment charge was recorded as a result of the adoption of SFAS No. 142.

        During the three months ended September 30, 2003, we completed our annual impairment testing. Using the steps mentioned above to determine the estimated fair value of goodwill, we determined that goodwill had not been impaired as of the valuation date. In performing our testing, we were required to make estimates regarding future operating trends and other variables used in the analysis. The value of our goodwill balance was verified by an independent valuation analyst.

31


Results of Operations

        The following table sets forth our results of operations expressed as a percentage of total revenue for the year ended 2001, 2002 and 2003 and the three months ended March 31, 2003 and 2004.

 
  Year Ended December 31,
  Three Months Ended March 31
 
 
  2001
  2002
  2003
  2003
  2004
 
 
  (as a percentage of total revenue)

 
Statements of Operations Data:                      
Revenue:                      
  Product revenue   103.7 % 100.6 % 100.0 % 100.0 % 100.0 %
  Stock-based sales discounts   (3.7 ) (0.6 )      
   
 
 
 
 
 
    Total revenue   100.0   100.0   100.0   100.0   100.0  

Cost of product revenue

 

72.0

 

75.2

 

80.9

 

82.7

 

80.6

 
   
 
 
 
 
 

Gross profit

 

28.0

 

24.8

 

19.1

 

17.3

 

19.4

 
   
 
 
 
 
 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 
  Marketing and sales(1)   18.3   12.6   8.1   8.8   7.5  
  Operations(1)   48.8   28.2   14.7   16.8   12.0  
  General and administrative(1)   19.4   6.6   4.2   4.9   3.9  
  Stock-based compensation   2.8   0.2   2.4   0.6   2.5  
  Amortization of goodwill and other intangible assets   5.2   0.1   0.1   0.1   0.1  
  Impairment of goodwill   0.8          
   
 
 
 
 
 
    Total operating expenses   95.3   47.7   29.5   31.2   26.0  
   
 
 
 
 
 

Operating loss

 

(67.3

)

(22.9

)

(10.4

)

(13.9

)

(6.6

)

Interest income

 

1.5

 

0.3

 

0.1

 

0.1

 

0.1

 
Interest expense   (0.3 ) (0.1 ) (0.1 ) (0.1 ) (0.1 )
Other expense, net   0.5   (0.5 ) (0.2 ) (0.3 ) 0.1  
   
 
 
 
 
 

Loss before income taxes

 

(65.6

)

(23.2

)

(10.6

)

(14.2

)

(6.5

)

Provision for income taxes

 


 

0.1

 


 


 


 
   
 
 
 
 
 

Net loss

 

(65.6

)

(23.3

)

(10.6

)

(14.2

)

(6.5

)

Accretions on redeemable preferred stock

 

(27.0

)

(19.1

)

(13.1

)

(14.4

)

(11.0

)

Deemed dividend on Series F preferred stock

 


 


 


 


 

(18.4

)
   
 
 
 
 
 

Net loss applicable to common stockholders

 

(92.6

)%

(42.4

)%

(23.7

)%

(28.6

)%

(35.9

)%
   
 
 
 
 
 

                     
(1)    Amounts exclude equity-based compensation as follows:                  
     
Marketing and sales

 

0.3

%

(0.3

)%

0.5

%

(0.1

)%

0.5

%
      Operations   0.6   0.1   0.5   0.3   0.3  
      General and administrative   1.9   0.4   1.4   0.4   1.7  
   
 
 
 
 
 
    2.8 % 0.2 % 2.4 % 0.6 % 2.5 %
   
 
 
 
 
 

32


        Our results of operations reflect the operations of a company with very limited liquidity and capital resources. Accordingly, you may find it difficult to evaluate our prospects following completion of this offering. Please read the section of the prospectus entitled "Risk Factors" beginning on page 8. The following discussion concerning results of operations should be read in conjunction with "Selected Financial Data," the financial statements and accompanying notes and the other financial data included elsewhere in this prospectus. Our fiscal year ends on December 31.

Comparison of the Three Months Ended March 31, 2003 and 2004

    Revenue

 
  Three Months Ended
March 31, 2003

  Three Months Ended
March 31, 2004

  % Change
2003 to
2004

 
 
  (in millions, except percentages)

 
Retail revenue   $ 6.3   $ 7.8   24.1 %
  Percentage of total revenue     60.7 %   56.4 %    
Business revenue   $ 4.1   $ 6.0   48.3  
  Percentage of total revenue     39.3 %   43.6 %    
   
 
     
    Total revenue   $ 10.4   $ 13.8   33.6 %
   
 
     

        The growth of $1.5 million in retail revenue was attributable to a 27.7% increase in the number of units sold, which was offset in part by a 2.8% decrease in retail average unit sales price. We believe the increase in retail revenue was primarily due to an increased focus on marketing initiatives and website improvements that enhanced customer acquisition and retention.

        The growth of $1.9 million in business revenue was attributable to a 67.6% increase in the number of units sold, which was offset in part by an 11.5% decrease in business average unit sales price. The majority of the revenue increase, as well as the decrease in average unit sales price, resulted primarily from Barnes&Noble.com shifting in 2003 from a model under which our booksellers fulfilled orders through our distribution center to a model under which our booksellers located in the United States and Canada ship directly to end customers located in those countries. This shift resulted in reduced shipping and handling costs, allowing us to reduce prices, which we believe resulted in increased sales volume. While Barnes&Noble.com began this shift in the second quarter of 2003, the full impact of the change was not realized until the third quarter 2003.

        Sales outside of the United States and Canada represented 11.1% and 10.6% of our total revenue in the quarters ended March 31, 2003 and March 31, 2004, respectively.

    Gross Profit

 
  Three Months Ended
March 31, 2003

  Three Months Ended
March 31, 2004

  % Change
2003 to
2004

 
 
  (in millions, except percentages)

 
Retail gross profit   $ 0.9   $ 1.8   86.0 %
  Retail gross margin     15.1 %   22.6 %    
Business gross profit   $ 0.8   $ 0.9   10.1  
  Business gross margin     20.7 %   15.4 %    
   
 
     
Total gross profit   $ 1.8   $ 2.7   50.3 %
   
 
     
  Total gross margin     17.3 %   19.4 %    
   
 
     

33


        Total gross margin increased from the quarter ended March 31, 2003 to the quarter ended March 31, 2004 primarily as a result of additions to the inventory reserve in the first quarter of 2003, affecting both retail and business gross margins, that were not repeated in the first quarter of 2004. This increase was offset in part by reduced gross margins in the business segment, resulting from Barnes&Noble.com's shifting to our new shipping model.

        The increase in retail gross margin was due primarily to an 11.4% decrease in the retail average cost per unit. The decrease in 2004 was primarily due to increasing our inventory reserve in the first quarter of 2003. The decline in retail average cost per unit was offset in part by a 2.8% decrease in the retail average unit sales price.

        The decline in business gross margin resulted primarily from a combination of two factors. The shift by our major business customers in 2003 to our new shipping model had a negative impact on gross margins because it resulted in a decrease in the business average unit sales price and a concurrent increase in the business average cost per unit as a percentage of revenue. The decrease in gross margin due to the shipping model change was offset, in part, by the fact that in the first quarter of 2004 we did not increase our inventory reserve as we had done in the first quarter of 2003. This had a positive impact on our gross margin. Overall, the business average unit sales price decreased by 11.5% and the business average cost per unit increased by 5.6%.

    Operating Expenses

 
  Three Months Ended
March 31, 2003

  Three Months Ended
March 31, 2004

  % Change
2003 to
2004

 
 
  (in millions, except percentages)

 
Marketing and sales   $ 0.9   $ 1.0   15.3 %
  Percentage of total revenue     8.8 %   7.5 %    
Operations   $ 1.7   $ 1.7   (4.5 )
  Percentage of total revenue     16.8 %   12.0 %    
General and administrative   $ 0.5   $ 0.5   4.9  
  Percentage of total revenue     4.9 %   3.9 %    
Stock-based compensation   $ 0.1   $ 0.3   *  
  Percentage of total revenue     0.6 %   2.5 %    
Amortization of goodwill and other intangible assets and impairment of goodwill   $   $   *  
  Percentage of total revenue     * %   * %    
   
 
     
    Total operating expenses   $ 3.2   $ 3.6   11.3 %
   
 
     
  Percentage of total revenue     31.2 %   26.0 %    
   
 
     

*
Percentage not meaningful.

        Marketing and sales expense increased $0.1 million from the quarter ended March 31, 2003 to the quarter ended March 31, 2004 due to increased spending on marketing programs of $0.2 million. This increase was offset, in part, by decreased depreciation, travel and temporary employee expenses. We expect to selectively increase our marketing and sales expenses in the future to increase personnel, and to expand our online marketing programs. We cannot assure you that we will be able to generate revenue to offset such increased expenses.

        Operations expense decreased $0.1 million from the quarter ended March 31, 2003 to the quarter March 31, 2004 due to lower depreciation expense. We expect to selectively increase our operations expenses in the future to increase personnel and purchase software and equipment to handle the

34



growth of our sales volume. We cannot assure you that we will be able to generate revenue to offset such increased expenses.

        General and administrative expense was unchanged from the quarter ended March 31, 2003 to the quarter ended March 31, 2004. We expect to increase our general and administrative expenses in the future, particularly in 2004 as we incur costs associated with being a public company. We cannot assure you that we will be able to generate revenue to offset such increased expenses.

        The increase in stock-based compensation expense was primarily due to an increase in the number of employee stock options granted in the second half of 2003 and amortized in 2004 combined with a higher average estimated price per share of our common stock at the time these options were granted.

Comparison of the Years Ended December 31, 2002 and 2003

    Revenue

 
  Year Ended
December 31, 2002

  Year Ended
December 31, 2003

  % Change
2002 to 2003

 
 
  (in millions, except percentages)

 
Retail revenue   $ 20.4   $ 27.1   32.7 %
  Percentage of total revenue     65.7 %   59.5 %    
Business revenue   $ 10.8   $ 18.4   70.0  
  Percentage of total revenue     34.9 %   40.5 %    
Stock-based sales discounts   $ (0.2 ) $   *  
  Percentage of total revenue     (0.6 )%   * %    
   
 
     
   
Total revenue

 

$

31.0

 

$

45.5

 

46.4

%
   
 
     

*
Percentage not meaningful.

        The growth of $6.7 million in retail revenue was attributable to a 39.4% increase in the number of units sold, which was offset by a 4.8% decrease in retail average unit sales price. We believe the increase in retail revenue was primarily due to an increased focus on marketing initiatives and website improvements that enhanced customer acquisition and retention. In 2003, $1.2 million of retail revenue was attributable to a project with one of our library customers. We do not expect to generate a similar amount of revenue from a single library project in 2004.

        The growth of $7.6 million in business revenue was attributable to a 74.1% increase in the number of units sold. Approximately 75% of this increase came from our largest business customers who shifted in 2003 from a model under which our booksellers fulfilled orders through our distribution center to a model under which our booksellers located in the United States and Canada ship directly to end customers located in those countries. This shift resulted in reduced shipping and handling costs, allowing us to reduce prices, which we believe resulted in increased sales volume. Although this shift began in the fourth quarter of 2002, we did not recognize the full impact of this shift until the third quarter of 2003, when Barnes&Noble.com completed its adoption of our new shipping model. Also, an additional $1.6 million of our business revenue increase was attributable to the full-year impact in 2003 of new business customer acquisitions in 2002 and $0.8 million of the increase resulted from our acquisition of new business customers in 2003. These increases were offset by a $0.5 million decline in revenues from other business accounts and a 2.4% decrease in our business average sales price.

        Sales outside of the United States and Canada represented 9.0% of our total revenue in 2002 and 11.2% of our total revenue in 2003.

35



        Stock-based sales discounts represent the amortization of fair value at the date of issuance of any warrants we have issued to business customers in connection with initiating our commercial relationship. These discounts were fully amortized by the first quarter of 2002, and resulted in a charge of $0.2 million in 2002.

    Gross Profit

 
  Year Ended
December 31, 2002

  Year Ended
December 31, 2003

  % Change
2002 to 2003

 
 
  (in millions, except percentages)

 
Retail gross profit   $ 4.8   $ 5.4   11.7 %
  Retail gross margin     23.6 %   19.9 %    
Business gross profit   $ 2.9   $ 3.3   14.0  
  Business gross margin     27.1 %   17.9 %    
   
 
     

Total gross profit

 

$

7.7

 

$

8.7

 

12.6

%
   
 
     
  Total gross margin     24.8 %   19.1 %    
   
 
     

        The decline in total gross margin between 2002 and 2003 was primarily due to a shift in our sales mix from retail customers to business customers. In addition, following the introduction of our pricing and demand technology in the first quarter of 2003, we reduced prices on certain books held in inventory by, or consigned to, our distribution center, resulting in lower gross margin on the sale of those books to retail and business customers.

        The decline in retail gross margin was due primarily to a 4.8% decrease in the retail average unit sales price while the retail average cost per unit remained constant.

        The decline in business gross margin was due to a 2.4% decrease in the business average unit sales price (excluding stock-based sales discounts), and an 11.8% increase in the business average cost per unit during the same period. The decrease in business average unit sales price and increase in the business average cost per unit was due primarily to the shift by some of our business customers to a model under which our booksellers located in the United States and Canada ship directly to end customers in those countries. While the direct shipping model change allowed us to reduce shipping and handling costs, we also reduced prices on books supplied by sellers in connection with the change, causing our business cost per unit to increase.

    Operating Expenses

 
  Year Ended
December 31, 2002

  Year Ended
December 31, 2003

  % Change
2002 to 2003

 
 
  (in millions, except percentages)

 
Marketing and sales   $ 3.9   $ 3.7   (6.5 )%
  Percentage of total revenue     12.6 %   8.1 %    
Operations   $ 8.8   $ 6.7   (23.7 )
  Percentage of total revenue     28.2 %   14.7 %    
General and administrative   $ 2.1   $ 1.9   (6.6 )
  Percentage of total revenue     6.6 %   4.2 %    
Stock-based compensation   $ 0.1   $ 1.1   *  
  Percentage of total revenue     0.2 %   2.4 %    
Amortization of goodwill and other intangible assets and impairment of goodwill   $   $   *  
  Percentage of total revenue     * %   * %    
   
 
     
    Total operating expenses   $ 14.9   $ 13.4   (9.8 )%
   
 
     
 
Percentage of total revenue

 

 

47.7

%

 

29.5

%

 

 
   
 
     

*
Percentage not meaningful.

36


        Marketing and sales expense decreased $0.4 million in 2003 due to lower salary, benefits and rent resulting from headcount reductions that commenced in 2002, and $0.2 million due to lower depreciation. These decreases were offset in part by increased spending on marketing programs.

        Operations expense decreased $1.6 million due to lower salary, benefits and rent resulting from the impact of headcount reductions that commenced in 2002, and $0.5 million due to lower depreciation.

        The decrease in general and administrative expense was primarily due to a reduction in depreciation expense of $0.2 million in 2003, offset in part by an increase in bad debt expense.

        The increase in stock-based compensation expense was due to the deferred compensation charge taken in association with the repricing of stock options in 2001 and the increased number of employee stock options granted and amortized in 2003 compared with 2002, offset in part by cancellation of stock options in connection with employment terminations.

    Provision for Income Taxes

        We have recorded no significant provision or benefit for federal income taxes as we have incurred net operating losses since inception. As of December 31, 2003 we had $57.5 million of net operating loss carryforwards which expire in tax years 2018 through 2023, if not utilized. We have aggregate net operating loss carryforwards for California state tax purposes of $21.3 million which expire in tax years 2006 through 2023, if not utilized. We also had separate federal and state research and development tax credits of $0.4 million.

Comparison of Years Ended December 31, 2001 and 2002

    Revenue

 
  Year Ended
December 31, 2001

  Year Ended
December 31, 2002

  % Change
2001 to 2002

 
 
  (in millions, except percentages)

 
Retail revenue   $ 15.1   $ 20.4   35.2 %
  Percentage of total revenue     71.9 %   65.7 %    
Business revenue   $ 6.7   $ 10.8   62.3  
  Percentage of total revenue     31.8 %   34.9 %    
Stock-based sales discounts   $ (0.8 ) $ (0.2 ) *  
  Percentage of total revenue     (3.7 )%   (0.6 )%    
   
 
     
    Total revenue   $ 21.0   $ 31.0   48.0 %
   
 
     

* Percentage not meaningful.

        The growth of $5.3 million in retail revenue was attributable to a 70.9% increase in the number of units sold, offset in part by a decrease in average unit sales price of 20.8%. We believe that the volume increase was primarily due to shifting in 2002 our booksellers located in the United States and Canada from a model under which they fulfilled all orders placed on our consumer website through our distribution center to a model under which they ship directly to end customers in those countries. This shift resulted in reduced shipping and handling costs, allowing us to reduce prices, which we believe resulted in increased sales volume.

        The growth of $4.1 million in business revenue was attributable to an 84.1% increase in the number of units sold. $1.5 million of this increase was attributable to sales growth from existing business customers, $2.2 million resulted from the full-year impact of new business customers acquired in 2001, and $0.4 million was due to our acquisition of new business customers in 2002.

37



        Sales outside of United States and Canada represented 7.5% of our total revenue in 2001 and 9.0% of our total revenue in 2002.

    Gross Profit

 
  Year Ended
December 31, 2001

  Year Ended
December 31, 2002

  % Change
2001 to 2002

 
 
  (in millions, except percentages)

 
Retail gross profit   $ 4.8   $ 4.8   1.3 %
  Retail gross margin     31.6 %   23.6 %    
Business gross profit   $ 1.1   $ 2.9   161.0  
  Business gross margin     18.8 %   27.1 %    
   
 
     
Total gross profit   $ 5.9   $ 7.7   31.4 %
   
 
     
    Total gross margin     28.0 %   24.8 %    
   
 
     

        The decline in total gross margin and the decline in retail gross margin was due to our decision to shift our booksellers located in the United States and Canada from a model under which they fulfilled all orders placed on our consumer website through our distribution center to a model under which they ship directly to end customers in those countries. Primarily as a result of this shift, the retail average cost per unit declined 11.7% from 2001 to 2002, while the retail average selling price per unit decreased 20.8%.

        The increase in business gross margin was primarily due to a decrease in equity based sales discounts. The business average selling price per unit (excluding stock-based sales discounts) decreased 11.8% in 2002, which was offset by a decrease in business average cost per business unit of 11.8%.

    Operating Expenses

 
  Year Ended
December 31, 2001

  Year Ended
December 31, 2002

  % Change
2001 to 2002

 
 
  (in millions, except percentages)

 
Marketing and sales   $ 3.8   $ 3.9   2.3 %
  Percentage of total revenue     18.3 %   12.6 %    
Operations   $ 10.2   $ 8.8   (14.3 )
  Percentage of total revenue     48.8 %   28.2 %    
General and administrative   $ 4.1   $ 2.1   (49.3 )
  Percentage of total revenue     19.4 %   6.6 %    
Stock-based compensation   $ 0.6   $ 0.1   (88.7 )
  Percentage of total revenue     2.8 %   0.2 %    
Amortization of goodwill and other intangible assets and impairment of goodwill   $ 1.3   $   (96.9 )
  Percentage of total revenue     6.0 %   * %    
   
 
     
    Total operating expenses   $ 20.0   $ 14.9   (25.6 )%
   
 
     
Percentage of total revenue     95.3 %   47.7 %    
   
 
     

* Percentage not meaningful.

        The increase in marketing and sales expense was primarily due to increased spending on marketing programs of $0.4 million, offset in part by headcount reductions in the third and fourth quarters of

38



2001 and in each quarter of 2002 resulting in lower salary, benefits, rent and severance costs of $0.3 million.

        Operations expense decreased $1.5 million due to lower salary, benefits, rent and severance costs resulting from headcount reductions in the second and third quarters of 2001 and in each quarter of 2002. These savings were offset in part by increases in other operations expenses of $0.1 million.

        The decrease in general and administrative expense was primarily due to $1.0 million in lower facilities and employee-related costs due to the closure of our U.K. office in the fourth quarter of 2001, and $0.5 million in lower costs associated with headcount reductions that commenced in 2001. Lower bad debt expense of $0.3 million, and legal, audit and tax expenses of $0.2 million also contributed to the decrease in general and administrative expense.

        Stock-based compensation declined due to fewer employee stock option grants in 2002 as compared to 2001, and a lower estimated price per share of common stock on average in 2002 compared with 2001, offset in part by cancellation of stock options in connection with employment terminations.

        In 2001, we amortized $1.1 million of goodwill associated with our acquisition of Bibliocity. In 2002, we adopted SFAS No. 142 which requires that any remaining goodwill is evaluated at least annually for impairment, rather than being amortized. In 2001, we determined that our goodwill associated with two acquisitions completed in the fourth quarter of 1998 and the first quarter of 2000 had been impaired and recorded a charge of $0.2 million. There was no goodwill impairment recorded in 2002.

39


Quarterly Results of Operations

        The following tables set forth our unaudited quarterly results of operations data for the nine most recent quarters ended March 31, 2004, as well as such data expressed as a percentage of our revenue for the periods presented. The information in the table below should be read in conjunction with our financial statements and the notes thereto included elsewhere in this prospectus. We have prepared this information on the same basis as the financial statements and the information includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair statement of our financial position and operating results for the quarters presented. Our quarterly operating results have varied substantially in the past and may vary substantially in the future. You should not draw any conclusions about our future results from the results of operations for any particular quarter.

 
  Three Months Ended
 
 
  Mar. 31,
2002

  June 30,
2002

  Sept. 30,
2002

  Dec. 31,
2002

  Mar. 31,
2003

  June 30,
2003

  Sept. 30,
2003

  Dec. 31,
2003

  Mar. 31,
2004

 
 
  (in thousands, except per share data)

 
Statements of Operations Data:                                                        
Revenue:                                                        
Product revenue   $ 5,739   $ 7,362   $ 8,285   $ 9,836   $ 10,350   $ 10,025   $ 11,799   $ 13,282   $ 13,830  
  Stock-based sales discounts     (178 )                                
   
 
 
 
 
 
 
 
 
 
    Total revenue     5,561     7,362     8,285     9,836     10,350     10,025     11,799     13,282     13,830  
Cost of product revenue     3,830     5,786     6,236     7,486     8,562     8,029     9,523     10,668     11,144  
   
 
 
 
 
 
 
 
 
 
Gross profit     1,731     1,576     2,049     2,350     1,788     1,996     2,276     2,614     2,686  
   
 
 
 
 
 
 
 
 
 
Operating expenses:                                                        
  Marketing and sales(1)     899     939     1,114     973     908     887     909     964     1,047  
  Operations(1)     2,194     2,376     2,112     2,083     1,739     1,636     1,625     1,692     1,661  
  General and administrative(1)     575     451     547     486     509     466     472     477     534  
  Stock-based compensation     31     54     60     (79 )   66     290     325     399     344  
  Amortization of goodwill and other intangible assets     12     11     11     5     9     10     10     10     10  
  Impairment of goodwill                                      
   
 
 
 
 
 
 
 
 
 
    Total operating expenses     3,711     3,831     3,844     3,468     3,231     3,289     3,341     3,542     3,596  
   
 
 
 
 
 
 
 
 
 
Operating loss     (1,980 )   (2,255 )   (1,795 )   (1,118 )   (1,443 )   (1,293 )   (1,065 )   (928 )   (910 )
Interest income     34     29     25     19     15     13     11     11     11  
Interest expense     (9 )   (9 )   (6 )   (7 )   (9 )   (13 )   (17 )   (19 )   (15 )
Other income (expense), net     25     21     24     (213 )   (31 )   (2 )   (20 )   (48 )   13  
   
 
 
 
 
 
 
 
 
 
Loss before income taxes     (1,930 )   (2,214 )   (1,752 )   (1,319 )   (1,468 )   (1,295 )   (1,091 )   (984 )   (901 )
Provision for income taxes     4     5     5     5                      
   
 
 
 
 
 
 
 
 
 
Net loss     (1,934 )   (2,219 )   (1,757 )   (1,324 )   (1,468 )   (1,295 )   (1,091 )   (984 )   (901 )
Accretions on redeemable preferred stock     (1,486 )   (1,486 )   (1,486 )   (1,486 )   (1,492 )   (1,492 )   (1,492 )   (1,492 )   (1,528 )
Deemed dividend on Series F preferred stock                                     (2,539 )
   
 
 
 
 
 
 
 
 
 
Net loss applicable to common stockholders   $ (3,420 ) $ (3,705 ) $ (3,243 ) $ (2,810 ) $ (2,960 ) $ (2,787 ) $ (2,583 ) $ (2,476 ) $ (4,968 )
   
 
 
 
 
 
 
 
 
 
Net loss per common share—basic and diluted(2)   $ (3.06 ) $ (3.28 ) $ (2.84 ) $ (2.44 ) $ (2.55 ) $ (2.38 ) $ (2.20 ) $ (2.09 ) $ (3.59 )
   
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding—basic and diluted(2)     1,117     1,131     1,141     1,151     1,163     1,171     1,175     1,183     1,383  
   
 
 
 
 
 
 
 
 
 

(1)
Amounts exclude stock-based compensation as follows:

  Marketing and sales   $ (22 ) $ (20 ) $ (6 ) $ (54 ) $ (8 ) $ 67   $ 75   $ 85   $ 68
  Operations     17     19     21     (24 )   36     68     75     61     47
  General and administrative     36     55     45     (1 )   38     155     175     253     229
   
 
 
 
 
 
 
 
 
    $ 31   $ 54   $ 60   $ (79 ) $ 66   $ 290   $ 325   $ 399   $ 344
   
 
 
 
 
 
 
 
 
(2)
See Note 2 of Notes to Financial Statements for discussion regarding computation and presentation.

40


 
  Three Months Ended
 
 
  Mar. 31,
2002

  June 30,
2002

  Sept. 30,
2002

  Dec. 31,
2002

  Mar. 31,
2003

  June 30,
2003

  Sept. 30,
2003

  Dec. 31,
2003

  Mar. 31,
2004

 
 
  (as a percentage of total revenue)

 
Statements of Operations Data:                                      
Revenue:                                      
  Product revenue   103.2 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
  Stock-based sales discounts   (3.2 )                
   
 
 
 
 
 
 
 
 
 
    Total revenue   100.0   100.0   100.0   100.0   100.0   100.0   100.0   100.0   100.0  
Cost of product revenue   68.9   78.6   75.3   76.1   82.7   80.1   80.7   80.3   80.6  
   
 
 
 
 
 
 
 
 
 
Gross profit   31.1   21.4   24.7   23.9   17.3   19.9   19.3   19.7   19.4  
   
 
 
 
 
 
 
 
 
 
Operating expenses:                                      
  Marketing and sales(1)   16.2   12.8   13.4   9.9   8.8   8.8   7.7   7.3   7.5  
  Operations(1)   39.5   32.3   25.5   21.2   16.8   16.3   13.8   12.7   12.0  
  General and administrative(1)   10.3   6.1   6.6   4.9   4.9   4.6   4.0   3.6   3.9  
  Stock-based compensation   0.6   0.7   0.7   (0.8 ) 0.6   2.9   2.8   3.0   2.5  
  Amortization of goodwill and other intangible assets   0.2   0.1   0.1   0.1   0.1   0.1   0.1   0.1   0.1  
   
 
 
 
 
 
 
 
 
 
    Total operating expenses   66.8   52.0   46.3   35.3   31.2   32.7   28.4   26.7   26.0  
   
 
 
 
 
 
 
 
 
 
Operating loss   (35.7 ) (30.6 ) (21.6 ) (11.4 ) (13.9 ) (12.8 ) (9.1 ) (7.0 ) (6.6 )
Interest income   0.6   0.4   0.3   0.2   0.1   0.1   0.1   0.1   0.1  
Interest expense   (0.2 ) (0.1 ) (0.1 ) (0.1 ) (0.1 ) (0.1 ) (0.1 ) (0.1 ) (0.1 )
Other income (expense), net   0.4   0.3   0.3   (2.2 ) (0.3 )   (0.2 ) (0.4 ) 0.1  
   
 
 
 
 
 
 
 
 
 
Loss before income taxes   (34.9 ) (30.0 ) (21.1 ) (13.5 ) (14.2 ) (12.8 ) (9.3 ) (7.4 ) (6.5 )
Provision for income taxes   0.1   0.1   0.1   0.1            
   
 
 
 
 
 
 
 
 
 
Net loss   (35.0 ) (30.1 ) (21.2 ) (13.6 ) (14.2 ) (12.8 ) (9.3 ) (7.4 ) (6.5 )
Accretions on redeemable preferred stock   (26.7 ) (20.2 ) (17.9 ) (15.1 ) (14.4 ) (14.9 ) (12.6 ) (11.2 ) (11.0 )
Deemed dividend on Series F preferred stock                   (18.4 )
   
 
 
 
 
 
 
 
 
 
Net loss applicable to common stockholders   (61.7 )% (50.3 )% (39.1 )% (28.7 )% (28.6 )% (27.7 )% (21.9 )% (18.6 )% (35.9 )%
   
 
 
 
 
 
 
 
 
 

(1)
Amounts exclude stock-based compensation as follows:
  Marketing and sales   (0.4 )% (0.3 )% (0.1 )% (0.6 )% (0.1 )% 0.7 % 0.6 % 0.6 % 0.5 %
  Operations   0.3   0.3   0.3   (0.2 ) 0.3   0.7   0.6   0.5   0.3  
  General and administrative   0.7   0.7   0.5     0.4   1.5   1.6   1.9   1.7  
   
 
 
 
 
 
 
 
 
 
    0.6 % 0.7 % 0.7 % (0.8 )% 0.6 % 2.9 % 2.8 % 3.0 % 2.5 %
   
 
 
 
 
 
 
 
 
 

Discussion of Quarterly Results of Operation

        Our revenue generally follows a seasonal pattern that we believe is typical of the overall book industry. As a percentage of total revenue for the year, we have generally had weaker demand in the quarter ending in June when compared to the quarters ending in March, September and December. We expect this pattern to continue. While we have experienced these patterns throughout our operating history, we cannot assure you that the results of any particular future quarter will follow this pattern. In addition to this seasonal pattern, our quarterly results for 2002 and 2003 reflect the following:

    Beginning in the second quarter of 2002, we required our booksellers located in the United States and Canada to begin shipping directly to our consumer website customers located in those countries. Prior to this change, all books were shipped through our distribution center. This shift resulted in reduced shipping and handling costs, allowing us to reduce prices, which we believe stimulated demand and increased sales volume and our overall revenue.

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    Beginning in the fourth quarter of 2002, but not having its full impact until the third quarter of 2003, we shifted our booksellers to a direct shipment model with respect to sales through certain of our business customers, in particular Barnes&Noble.com, to end customers located in the United States and Canada. This shift also resulted in reduced shipping and handling costs, allowing us to reduce prices, which we believe stimulated demand and increased sales volume and our overall revenue.

    In the first quarter of 2003, we increased our inventory reserve for obsolete and slow-moving inventory to $1.2 million as of March 31, 2003 from $0.9 million at December 31, 2002 due to the fact that, during the first quarter of 2003, demand for older books remaining in inventory was declining, market prices were falling and our inventory was aging.

        Gross margin decreased from 31.1% in the quarter ended March 31, 2002 to 21.4% in the quarter ended June 30, 2002 because of the shift to require booksellers located in the United States and Canada to ship directly to our consumer website customers in those countries. Gross margin decreased from 23.9% in the quarter ended December 31, 2002 to 17.3% in the quarter ended March 31, 2003, primarily due to the increase in our reserve for obsolete and slow-moving inventory in the first quarter of 2003. Since the second quarter of 2003, gross margin has been relatively stable between 19.3% and 19.9% because, during this period:

    our average unit selling prices have been more stable;

    we have substantially completed our move of requiring booksellers to ship directly to end customers;

    our mix of retail revenue and business revenue has generally stabilized; and

    we have been able to more accurately assess the market price of, and demand for, books purchased by our distribution center.

        As a percentage of net revenue, operating expenses have decreased each quarter since the beginning of 2002, except for the second quarter of 2003. This trend is primarily due to the fact that, in terms of absolute dollars, quarterly operating expenses have remained relatively flat during this time period, while net revenue has generally increased.

        The increased net loss in the quarter ended June 30, 2002 compared with the immediately preceding quarter resulted primarily from lowering our prices prior to the change in our fulfillment model in the second quarter of 2002. The increase in loss before income taxes in the quarter ended March 31, 2003 was due primarily to an increase in the reserve for obsolete and slow-moving inventory.

Liquidity and Capital Resources

        To date, we have funded our operations primarily through private sales of equity securities and borrowings. As of March 31, 2004 we had raised a total of $63.2 million, net of offering costs, from the issuance of preferred stock. As of March 31, 2004, our sources of liquidity consisted of $3.8 million in cash and cash equivalents and we had working capital of $3.3 million. We have a $1.25 million line of credit with Silicon Valley Bank, which bears interest at the bank's prime rate, plus 2.0%, with a floor of 6.25%. As of March 31, 2004, there were no amounts outstanding under the line of credit and the bank's prime rate was 4.25%. The line of credit will mature on June 29, 2004. We are required to pay a fee of 0.25% per year on the unused portion of the line of credit. The line of credit is secured by a security interest in all of our tangible and intangible assets, and contains financial covenants including maintaining tangible net worth of $1.4 million, subject to upward adjustment by $0.50 for each dollar raised in connection with any equity or subordinated debt financing, including this offering, we complete during the term of the line of credit. We are negotiating with Silicon Valley Bank to convert up to $0.5 million of our existing line of credit to a term loan available for the purchase of used and new equipment, furniture, software and leasehold improvements. Under this proposal, we would be able to draw on this facility through December 31, 2004, with minimum advances of $100,000. Each advance would be payable in 30 monthly payments of principal plus interest, subject to all other terms and conditions under the existing line of credit. We expect to enter into a new line of credit by the end of May 2004 and to let our existing line of credit expire pursuant to its terms on June 29, 2004.

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        Net cash flow used in operating activities was $8.3 million in 2001, $4.6 million in 2002, and $0.7 million in 2003. Uses of cash were primarily to fund net losses. Working capital was a source of cash in 2001, 2002, and 2003. In 2003, we increased our focus on customer collections resulting in a $0.3 million decrease in accounts receivable. In 2001, 2002 and 2003 and in the first quarters of 2001, 2002 and 2003, we reduced inventory. We also extended payment terms with most of our independent professional booksellers, contributing to a $1.5 million increase in accounts payable in 2003. Net cash flow used in operating activities was $0.3 million and $0.9 million in the first quarter of 2003 and 2004, respectively. Working capital was a source of cash in the first quarter of 2003. In the first quarter of 2004, prepaid expenses increased $0.5 million due to costs associated with this offering. Other changes in working capital were sources of cash in the first quarter of 2004.

        Net cash flow used in investing activities was $0.8 million in 2001, $0.4 million in 2002, and $0.3 million in 2003. Uses of cash flow for investing activities include capital expenditures for property and equipment. Net cash used in investing activities during the first quarter of 2003 and the first quarter of 2004 relate to capital expenditures of $0.2 million in each period.

        Net cash flow provided by financing activities was $4.8 million in 2001 and $0.4 million in 2002. Net cash flow used in financing activities was $0.4 million in 2003. In 2001, cash from financing activities primarily consisted of net proceeds from the issuance of Series E preferred stock, offset in part by repayments of notes payable. In 2002, net cash provided by financing activities consisted of $0.8 million from borrowings on a line of credit which was offset by debt repayments of $0.5 million. In 2003, net cash used in financing activities consisted of $0.3 million from net payments on lines of credit and $0.2 million in repayments of debt. Net cash used in financing activities of $0.4 million in the first quarter of 2003 was primarily due to the repayment of debt under a prior line of credit. Net cash provided by financing activities in the first quarter of 2004 consisted of net proceeds from the issuance of Series F preferred stock and proceeds from the exercise of employee stock options, offset in part by the repayment of our line of credit with Silicon Valley Bank.

        We lease our facilities under operating lease agreements that expire in 2006. We also lease equipment under operating and capital lease agreements that expire at various dates through 2007. The following presents our prospective future lease payments under these agreements (in thousands):

Year Ended December 31,

  Capital leases
  Equipment
  Total
2004   $ 92   $ 174   $ 266
2005     90     166     256
2006     67     80     147
2007     3         3
   
 
 
Total minimum lease payments   $ 252   $ 420   $ 672
   
 
 

        We believe that we have sufficient cash and available borrowings under our line of credit with Silicon Valley Bank to meet our operating and capital requirements for at least the next twelve months. Long-term, we may require additional funds to support our working capital requirements or for other purposes and may seek to raise additional funds through public or private equity or debt financing or from other sources. We cannot assure you that additional financing will be available on acceptable terms, or at all.

        If adequate funds are not available to satisfy either short- or long-term capital requirements, we might be required to limit our operations significantly and our business might fail.

Quantitative and Qualitative Disclosures about Market Risk

        We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, trade accounts

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receivable, accounts payable and long-term obligations. We consider investments in highly liquid instruments purchased with a remaining maturity of 90 days or less at the date of purchase to be cash equivalents. Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities.

        At March 31, 2004, we had $3.8 million in cash and cash equivalents. A hypothetical 10% increase or decrease in interest rates would not have a material impact on our earnings or loss, or the fair market value or cash flow of these instruments.

Effect of Recent Accounting Pronouncements

        In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets". Statement of Financial Accounting Standard (SFAS) No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and for long-lived assets to be disposed of. We adopted SFAS No. 144 on January 1, 2002. The initial adoption of SFAS No. 144 did not have a significant impact on our reporting for impairment or disposals of long-lived assets.

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which supersedes Emerging Issues Task Force Issue (EITF) No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when the costs are incurred rather than at the date of a commitment to an exit disposal plan. Costs covered by SFAS No. 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operations, plant closing, or other exit or disposal activity. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a significant impact on our consolidated financial statements.

        In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirement for Guarantees, Including Indirect Guarantees and Indebtedness of Others," an interpretation of FASB Statements No. 5, 57, and 107, and rescission of FIN 34, "Disclosure of Indebtedness of Others." FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor's obligation does not apply to product warranties or to guarantees accounted for as derivatives. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, while the disclosure requirements are effective for financial statements for interim or annual periods ending after December 15, 2002. The adoption of this interpretation did not have a significant impact on our consolidated financial statements.

        In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure provisions are effective for interim periods beginning after December 15,

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2002. We continue to account for stock-based compensation using the intrinsic value method in accordance with the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed by SFAS No. 123. As a result, the adoption of SFAS No. 148 did not have any impact on our consolidated financial statements.

        In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. We do not have any ownership in any variable interest entities as of December 31, 2002. We will apply the consolidation requirement of FIN 46 in future periods if it should own any interest in a variable interest entity.

        In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures financial instruments with characteristics of both debt and equity and requires an issuer to classify the following instruments as liabilities in its balance sheet: (1) a financial instrument issued in the form of shares that is mandatorily redeemable and embodies an unconditional obligation that requires the issuer to redeem it by transferring its assets at a specific or determined date or upon an event that is certain to occur; (2) a financial instrument, other than an outstanding share, that embodies an obligation to replace the issuer's equity shares, or is indexed to such obligation, and requires the issuer to settle the obligation by transferring assets; and (3) a financial instrument that embodies an unconditional obligation that the issuer must settle by issuing a variable number of equity shares if the monetary value of the obligation is based solely or predominantly on (a) a fixed monetary amount, (b) variations in something other than fair value of the issuer's equity shares, or (c) variations inversely related to changes in the fair value of the issuer's equity shares.

        In November 2003, The FASB issued FASB Staff Position No. 150-3, which deferred the effective dates of applying certain provisions of SFAS No. 150 related to mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests for public and nonpublic entities or public entities, SFAS No. 150 is effective for mandatorily redeemable financial instruments entered into or modified after May 31, 2003 and is effect for all other financial instruments as of the first interim period beginning after June 15, 2003.

        For mandatorily redeemable noncontrolling interests that would not have to be classified as liabilities by a subsidiary under the exception in paragraph 9 of SFAS No. 150, but would be classified as liabilities by the parent, the classification and measurement provisions of SFAS No. 150 are deferred indefinitely. For other mandatorily redeemable noncontrolling interests that were issued before November 5, 2003, the measurement provisions of SFAS No. 150 are deferred indefinitely. For those instruments, the measurement guidance for redeemable shares and noncontrolling interests in other literature shall apply during the deferral period.

        The convertible redeemable preferred stock does not meet the definition of a mandatorily redeemable financial instrument and, upon completion of this offering, all of our preferred stock will be converted into common stock. As a result, the adoption of SFAS No. 150 did not have any impact on our consolidated financial statements.

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BUSINESS

OVERVIEW

        Alibris operates an online marketplace for used and hard-to-find books. We use the Internet and our specialized technology and logistics capabilities to aggregate this highly fragmented market by bringing buyers and sellers together. Our selection of over 40 million books is supplied primarily by our international network of over 5,000 professional independent booksellers. We provide these independent booksellers with specialized inventory management, logistics and distribution services to assist them in increasing their sales volume. Additionally, we use our knowledge of the used and hard-to-find book market to selectively purchase or consign low-cost book inventory from retailers, publishers, non-profit organizations and liquidators, which we resell to our retail and business customers.

        We maintain multiple sales channels through which books are sold. We provide consumers one of the largest selections of book titles on the Internet through our website, www.alibris.com. In addition, we enable libraries to meet their special collections and replacement needs through our library website. We also maintain business relationships with online and traditional book retailers and wholesalers, including several of the largest online and traditional book retailers such as Amazon.com, Barnes&Noble.com and Borders, which use us to supply used and hard-to-find books to their customers.

        Alibris has built a strategic position in the used and hard-to-find book market by bringing together a broad selection and multiple sales channels. We have developed a powerful data architecture that enables us to classify supply, demand and price information associated with our sellers and our selling activities, and in the process we have developed deep market intelligence. This allows us to offer inventory management and pricing services to our sellers, effectively purchase and consign inventory, and efficiently market to our customers. In addition, our logistics services enable our distribution system to aggregate supply from thousands of sellers and distribute products through multiple sales channels. This allows us to satisfy the differing logistics needs of our many suppliers and business customers.

INDUSTRY OVERVIEW

        Books are available through a wide variety of stores, catalogs and websites. Book purchasing lends itself particularly well to online shopping because of the ease of viewing and comparing a wide selection of products quickly via the web. Generally, the book market is fragmented among independent bookstores, large chain bookstores, book clubs, internet retailers, mass merchandisers and warehouse clubs.

        Historically, the market for used and hard-to-find books has been fragmented and inefficient for both consumers and booksellers. These problems affect consumers, independent retailers of used books and large retailers of new books in the following ways:

    Consumers. In general, consumers of used and hard-to-find books have relied on their local, independently owned used bookstores to supply them with books. However, because of resource and capacity constraints, we believe these booksellers cannot offer a wide enough selection of books to meet the varied tastes of the potential customers in the areas they serve. To find a desired title or price, to compare prices, or to locate books of a desired quality, consumers must search from bookstore to bookstore. We believe that a combination of the unreliable title selection at any given bookstore, the inconvenience of searching from store to store, and the inability to easily compare prices have contributed to an unsatisfying, inefficient and time-consuming shopping experience for consumers.

    Independent Used Book Sellers. Since most second-hand bookstores are independently owned and serve local markets, we believe most sellers of used and hard-to-find books cannot easily reach

46


      customers outside of their local markets and, therefore, find it difficult to sell their inventory efficiently. Because they tend to be small businesses, these booksellers are resource constrained, which prevents them from developing and maintaining adequate inventory levels.

    Large Retailers of New Books. We believe that large retailers of new books are seeking to broaden their offerings by including a greater selection of used and hard-to-find titles. However, these retailers have generally not sought to create and maintain their own inventory of used and hard-to-find titles due to the operational challenges of selling used books in a highly automated retail environment designed for standard new book sales. Additionally, both larger traditional and online retailers of new books have avoided developing and maintaining supply from networks of independent used booksellers because the cost of creating the necessary infrastructure is a low return investment for any one given retailer.

As a result of these difficulties, we believe there is a considerable degree of unsatisfied demand in the market for used and hard-to-find books, which frustrates both consumers, used booksellers and new book retailers.

THE ALIBRIS SOLUTION

        We create an effective and more efficient market for used and hard-to-find books. We provide our retail customers with quick and convenient access to used and new books, as well as special-order, out-of-print, international, and other hard-to-find books. We operate an online marketplace for independent professional booksellers to price and sell their products through a variety of online and traditional retail channels and give more established online and traditional book retailers a convenient and cost-effective way to broaden their product offerings with used and hard-to-find books.

        Consumers.    We offer consumers one of the largest selections of book titles on the Internet through our website, www.alibris.com. Key advantages for our retail customers include:

    Broad selection of titles. We offer a wide variety of books. While we focus on providing used and hard-to-find books, we also offer new books to supplement our offerings to our retail customers.

    Competitive pricing with a money-back guarantee. Our retail customers may review and compare the price and quality of used and hard-to-find titles from a variety of independent sellers on our website, and can compare prices against new alternatives. We back all purchases with a money-back guarantee.

    Convenient and efficient shopping. We help our customers to find books quickly and conveniently using user-friendly search and browse engines. In addition, our matching technology enables us to display content, such as cover art, synopses, excerpts, reviews and subject classifications, for books without standard commercial number identifiers, which helps consumers make more informed purchase decisions.

        Our library customers benefit from the same advantages as our retail customers. In addition, we also can handle these customer's institutional needs by, among other things, accepting and processing purchase orders and consolidating multiple orders into one shipment that is invoiced as a single order.

        Independent used booksellers.    We offer our booksellers a means to access a wider customer base and outsourced solutions for offering their books online. Key advantages for our booksellers include:

    Increased customer reach. We provide our booksellers access to a broad range of widely dispersed customers. Sellers are able to offer their products on our consumer website, on our library website and through a variety of online retailers, such as Amazon.com and Barnes&Noble.com. Traditional book retailers such as Borders and Books-A-Million also use our network to offer their customers used and hard-to-find titles.

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    Integrated selling tools and services. Our booksellers can improve their operations and sales efficiency with our integrated set of services and selling tool, including:

    inventory management services that facilitate effective cataloging;

    automatic updating of listings across our diverse set of sales channels;

    order management and payment services to complete purchase orders and track payments; and

    returns processing and customer service, enabling our booksellers to focus on buying and cataloging their inventory.

  We believe these tools and services help our booksellers grow their revenue and manage their online sales at costs significantly lower than they would incur to do it themselves, while improving our retail customers' shopping experience.
    Improved pricing. Our network of independent professional booksellers can use our proprietary commercial cataloging tools to catalog their inventory, and the Alibris Pricing Service to compare their prices to those in the market and update their prices to more accurately reflect prevailing market prices. We believe these offerings help them to remain competitive and increase sales volume.

        New book retailers.    We provide our business customers, including several of the largest online and traditional book retailers, several key advantages:

    Outsourced solution for aggregating a supply of used and hard-to-find books. We enable new book retailers to offer used and hard-to-find books to their customers without devoting significant time and resources to developing and maintaining their own inventory or distribution networks. Our business customers can rely on us to manage the supply network and create and maintain the technical linkages necessary to process orders and payments between their customers and a disparate supply network.

    Private label solutions and consolidated, flexible shipping. Our patent pending NetDock technology offers retailers the ability to have their orders shipped in packaging with their own branding or invoices. We also can consolidate multiple orders into a single shipment, which improves the offering of our business customers by lowering their shipping costs and improving institutional processing.

    Enable better merchandising. Our specialized technology allows us to standardize and otherwise utilize non-uniform data received from our booksellers and match it to our database to generate content of interest to the end customer.

BUSINESS STRATEGY

        We believe that our broad selection, multiple sales channels, deep market intelligence and specialized logistics allow us to compete successfully in the market for used and hard-to-find books. We intend to continue to use and build on these competitive advantages to grow our sales of used and hard-to-find books as well as to expand into new geographic markets and product categories. We believe that we have opportunities to grow our business, increase revenue and achieve profitability by continuing to implement the following strategies:

    Increase and diversify our product offering. We intend to expand our product offerings by growing the selection of book titles offered by sellers and our own inventory of used, new and hard-to-find books. Our efforts are focused on increasing our supply of titles by growing our network of booksellers, small independent publishers and university presses. In addition, we believe that our experience and infrastructure can be applied to other media product offerings,

48


      such as used movies and music, which we believe are highly fragmented and present opportunities that are similar to the used and hard-to-find book market.

    Grow revenue through expanding marketing and sales activities. We intend to use our customer and market intelligence to continue to grow our retail and library customer sales through online direct marketing activities and improvements to website merchandising and customer retention efforts. We also intend to increase seller participation in our business customer programs, and to invest in infrastructure systems to support growth in our business channels and pursue new business customer opportunities, some of which are outside of the United States.

    Leverage our market intelligence and logistics assets. We intend to grow and improve our proprietary classification systems and continue to use them, together with historical sales and transaction data from our website, to identify books that we can purchase in large quantities and that we believe we can sell quickly and profitably. We will also continue to use this data to improve and grow bookseller usage of the Alibris Pricing Service and to provide other services to our independent professional booksellers. Better pricing of our bookseller's inventory can improve their sales and ours.

    Expand geographic reach. We intend to enter new geographic markets, particularly in English-speaking areas, such as the United Kingdom and Australia. We intend to accomplish this by attracting additional international booksellers, retail customers and business customers through direct marketing efforts and by creating local websites for overseas customers.

KEY FEATURES OF OUR BUSINESS

Broad selection

        We integrate over 40 million books in our database from an international network of thousands of independent professional booksellers. Additionally, we use our market intelligence and logistics to purchase or take on consignment book inventory for our distribution center. To supplement our offerings to our retail customers we also sell new books acquired from the Ingram Book Group. Our selection includes used, new and hard-to-find books across virtually all genres, including fiction and literature, nonfiction, history, biography and religion.

        Independent Professional Seller Network.    We currently have relationships with over 5,000 booksellers. Our network of sellers primarily includes sellers in North America, the United Kingdom and Australia, with other international sellers from over 40 countries worldwide. We also offer titles from a limited number of small and independent publishers.

        We provide our booksellers with services to enable, facilitate and improve their sales and quality of service. These services are summarized below.

Service Offerings

  Description
Inventory management   Enables our booksellers to make their inventory available for sale and automatically update their listings across our diverse set of sales channels.
Order management   Enables our booksellers to easily process orders from a broad variety of customers and increase customer satisfaction without significant investments in resources and infrastructure.
Business management   Enables our booksellers to manage their business better through payment processing, reporting and other services.
Alibris Pricing Service   A subscription-based online tool that allows sellers easy access to our proprietary market intelligence and the ability to accurately and efficiently price and reprice their used book inventory.

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        We also provide support services to answer our booksellers' technical, financial, or operational questions, using our staff and customer relationship management tools.

        To ensure the reliability of our service, we seek to work only with sellers that are professional and reliable. Presently, we require our sellers to maintain acceptable levels of service and prefer that they list at least 500 items for sale. We enter into agreements with these sellers that detail our respective responsibilities.

        Purchased and consigned inventory.    We have assembled a proprietary data architecture through which we can quickly and efficiently distinguish and classify millions of used and hard-to-find titles. Combining this architecture with current inventory listings and our historical transaction data, we can estimate prevailing market prices and estimate demand for individual book titles, which we use to manage our own inventory more profitably. We purchase books for our own inventory from a variety of sources. We negotiate high volume contracts with retailers, wholesalers, liquidators and publishers for returned, remaindered, overstock or damaged inventory. We also provide tools to non-profit organizations such as select Goodwill Industries regions and others, that allow us to select books that are sent to us on a consignment basis.

        New titles.    To supplement our offerings to our retail customers, we sell new books supplied and fulfilled directly by wholesalers. As of March 31, 2004, we offered over 600,000 new titles primarily supplied by the Ingram Book Group on our consumer website.

        Movies and music.    We added movies and music offerings to our consumer website in 2003. Currently, we have more than 200 sellers of used movies and music in our network. We enter into direct relationships with our movies and music sellers on similar terms as with our booksellers. Although revenue from movies and music sales has not been significant to date, we believe that this will represent a growing percentage of our business in the future as we continue to improve our network of suppliers, our catalog assets, our customer base, and our marketing and merchandising initiatives.

Multiple sales channels

        Retail Sales.    Through our consumer website, www.alibris.com, our retail customers can browse and purchase from a wide selection of books. We design our site to appeal to our targeted demographic of educated professionals between the ages of 35 and 55 who are avid readers and frequent online buyers. We have acquired approximately 1.1 million customers since our inception. Based upon data we have collected since January 2003, we estimate that approximately 30% of our new customers make at least one repeat purchase within twelve months.

        We serve our library customers, which consist primarily of academic institutions seeking to replace books or to meet the needs of special collections, at www.alibris.com/library. Libraries use our services to obtain single vendor access to thousands of domestic and international independent professional booksellers. We have acquired over 6,000 library customers since our inception, and we estimate that there are over 30,000 library institutions in the United States.

        Business Customers.    We supply used and hard-to-find books to several of the largest traditional and online book retailers. We believe that our services provide a convenient and cost-effective way for these retailers to expand their product offerings. The table below identifies our most significant business customers, based on revenue in 2003.

•    Amazon.com websites
•    Barnes&Noble.com
•    Books-A-Million
•    Borders Group, Inc.
  •    eBay and Half.com by eBay
•    Indigo/Chapters
•    Ingram Book Group
•    Powell's Books

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        The terms of these relationships vary by business customer. In some cases, we use our brand in connection with these sales, and in other cases we effectively serve as a specialty wholesaler to these business customers. For some of our business customers, such as Amazon.com and Barnes&Noble.com, we offer titles from both our network of independent professional sellers as well as our own inventory, while in other cases only the owned and consigned books in our distribution center are offered for sale. When we offer titles from our independent professional seller network, major online retailers, such as Amazon.com and Barnes&Noble.com, typically require that our sellers in the United States and Canada ship directly to their customers in those countries. Traditional retailers and some wholesalers typically require either branded fulfillment or order consolidation and delivery to their stores.

        All business customers require that we provide them with accurate, continually updated inventory information. The manner in which we accomplish this requirement varies, with some customers preferring to receive a replicated copy of our inventory, with immediate deletions from inventory as items sell on other channels, and inventory additions or modifications several times each day. Other business customers prefer to use our technology to access our inventory from their websites or web-based electronic ordering systems in real-time. Business customers also generally require that we process orders electronically based on their systems standards.

        Across our retail and business segments, our revenue to date has been derived primarily from accounts in the United States; revenue from outside of the United States represented 10.0%, 11.2% and 13.1% of our total revenue in 2001, 2002 and 2003, respectively. For additional information regarding our market segments and segment revenue, geographic areas and significant customers, please refer to Note 13 of our Notes to Consolidated Financial Statements.

Deep market intelligence

        We have developed a deep understanding of the used and hard-to-find book market using a combination of our proprietary catalog, software and database assets. We leverage our market intelligence by:

    providing pricing and inventory management services to our booksellers;

    providing high quality data to our retail and business customers;

    buying and consigning, and quickly selling, large quantities of used, remaindered, donated and returned books, with a high degree of confidence in current prices and market demand;

    cost-effectively marketing to retail customers; and

    merchandising our broad selection.

        We have developed an extensive bibliographic book catalog that allows us to categorize all titles, regardless of the date of print and without using standard unique commercial numeric identifiers, such as International Standardized Book Numbers (ISBNs). This ability enables us to maintain and expand our supply of books, and distinguishes us from other retailers who do not process, or have difficulty processing, older books that are not subject to standard classification schemes. We derive our proprietary catalog by combining standard commercial databases with information from a variety of other non-commercial sources, such as library databases.

        We have also designed systems that standardize the otherwise non-uniform data of our booksellers and accurately and efficiently match this data against our catalog. This standardizing and matching technology allows us to provide a variety of seller services, such as our inventory management services, and to implement consumer conveniences, such as search and browse engines and enhanced product content, including cover art, synopses, excerpts, reviews and subject classifications. We believe these benefits improve customer satisfaction and facilitate book sales.

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        We also use our proprietary catalog, together with our inventory information and historical transaction data, to estimate current prices and analyze historical demand, supply and pricing trends. This pricing information enables the Alibris Pricing Service and allows us to gauge demand and improve our buying and selling decisions associated with our own inventory. In addition, the market intelligence we obtain through this process helps us to optimize our marketing and merchandising efforts by enabling us to classify our customers' purchases and to cost-effectively acquire customers by assessing performance of online purchases by genre, author and titles.

Specialized logistics

        We offer customers and sellers specialized logistics services. Our logistics services enable our distribution system to aggregate supply from thousands of sellers and distribute products through multiple sales channels. Our patent-pending NetDock technology allows us to process hundreds of inbound and outbound shipping variables for any one order. This enables us to accept shipments from a wide variety of sources and to provide sellers and customers with low cost solutions to their international shipping, order consolidation, invoicing and private label shipping needs.

        We provide these logistics solutions through our distribution center in Sparks, Nevada. Our distribution center operation can be adjusted to accommodate the needs of individual booksellers and our retail and business customers at very low cost using our NetDock technology and accumulated logistical experience. We negotiate competitive shipping rates and integrate our services with a variety of courier, postal and transportation solutions for both domestic and international markets.

        When a consumer purchases a title offered for sale by one of our booksellers, we electronically notify the bookseller. If both the consumer and the seller are located in the United States or Canada, we require the bookseller to ship the item directly to the end customer. If the consumer is located outside of the United States or Canada, we require the bookseller to send the item through our distribution center.

        Library customers rely on our distribution center to consolidate shipments from multiple sellers and to enclose invoices with each shipment. Some of our business customers require us to consolidate and deliver to each store or their distribution centers for their special order books. We also provide these customers with invoicing options and private label shipping services that can be used to promote their brand and enable a seamless shopping experience for their customers.

        Booksellers located outside of the United States and Canada use our distribution center, together with our shipping consolidators, to ship to customers located anywhere in the world quickly and cost-effectively. Conversely, United States and Canadian booksellers use our distribution center to ship to customers located outside of those countries. Our logistics capabilities combined with these distribution services can simplify customs processes and improve the quality of service customers experience.

ADDITIONAL INFORMATION ABOUT OUR BUSINESS

Technology infrastructure and our website

        Our technology infrastructure processes a wide range of data formats from our booksellers and business customers. It manages a very large number of unique items of inventory, a wide range of commercial relationships, and very high transaction volumes. For example, as of March 31, 2004, we:

    maintained millions of books for sale, some of which were different copies or editions of the same title and over 500,000 of which changed daily, and processed over one million updates daily;

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    maintained relationships with over 5,000 independent professional booksellers and over 20 business customers;

    received bookseller and business customer data in dozens of different formats; and

    maintained multiple forms of inventory management with our business customers and processed orders in multiple formats.

        We seek to address the demands of growth and complexity by creating redundancy where commercially appropriate and continually upgrading our infrastructure. We have systems in place to monitor the use of our technology platforms 24 hours a day, seven days a week. We periodically upgrade various components of that technology to provide scalability and reliable performance. We have fully segregated development, test, and production environments.

        Our public-facing systems, including our websites and our order processing systems, are located at a secure hosting provider. This provider is responsible for providing us with a high-speed, scalable, fault-tolerant Internet connection, clean power and physical security. Our core software is written in a variety of languages and runs on scalable, industry standard platforms. In limited cases, we also use specialized technology tools or license purpose-built tools and technology to support our technology infrastructure.

        Our public-facing servers are protected with redundant firewalls from multiple vendors. Customer financial information is segregated from regular order data and stored in a separate, secure and encrypted database. This customer financial data is only accessible through highly controlled protocols that enable specific financial transactions.

Marketing and Customer Service

        We selectively devote resources to increase demand on our consumer website. Typically, we concentrate our efforts on acquiring highly qualified traffic from general Internet search engines, such as Google and Overture, and from vertical shopping comparison websites, such as Bookfinder and AddAll. Additionally, we operate a program for independent third-party websites to create affiliate links. We list items with shopping comparison engines such as Shopping.com, MSN Shopping and Yahoo! Shopping that also help drive customers to our website. We also engage in a variety of direct marketing e-mail initiatives.

        We provide customer and seller service using software that has enabled us to dramatically reduce the cost to serve both our booksellers and our retail and business customers. We provide e-mail support, but not telephone support, to most of our retail customers. To supplement customer services, we use third-party vendors to reduce costs and provide customer service on demand. We also provide our booksellers and business customers with telephone support.

Intellectual Property

        We believe that our registered trademark, "Alibris," and the brand name recognition that we have developed are of significant value. We strive to preserve the quality of our brand name and protect our trademark and other intellectual property rights to ensure that the value of our proprietary rights is maintained. We rely on a combination of trademark, trade secret and copyright law and contractual restrictions to protect the proprietary aspects of our technology. We have applied for two U.S. patents covering our NetDock technology and the Alibris Pricing Service, but we cannot assure you that these patents will be issued.

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Competition

        We operate in a highly competitive environment. We principally compete with a variety of Internet and specialty retailers that offer products similar to or the same as our products. Increased competition could result in some combination of price reductions, reduced gross margins, loss of market share and slower growth, any of which could seriously harm our net revenue and results of operations. We currently or potentially compete with a variety of other companies including:

    other online retailers, such as Amazon.com and Barnes&Noble.com;

    large traditional book retailers, such as Borders and Barnes & Noble;

    traditional used and hard-to-find book retailers, such as independent second-hand bookstores;

    online auction websites, such as eBay;

    Internet portals and online service providers that feature shopping services, such as AOL, Yahoo! and MSN;

    other Internet marketplaces focused on used, rare and out-of-print books, such as abebooks.com and zvab.com; and

    online shopping comparison sites, such as shopping.com and BookFinder.com.

These current and potential competitors include some of our largest business customers, such as Amazon.com and Barnes&Noble.com. Our business customers could and, in some cases, do maintain on their websites a market for used and hard-to-find books not supplied by Alibris. Those business customers that do not maintain a separate market could decide to do so without us; to the extent that these business customers internally develop their own offerings of used and hard-to-find books, they would directly compete with us.

        Many of our traditional and online competitors have longer operating histories, larger customer or user bases, greater brand recognition and significantly greater resources, particularly financial and marketing resources. Many of these competitors can devote substantially more resources to website development and catalog retailing than we can. In addition, large, well-established or well-financed entities may become, or join with other, online competitors in the future. Our competitors may be able to secure products from vendors on more favorable terms, offer popular products to which we do not have access, fulfill customer orders more efficiently and adopt more aggressive pricing or inventory availability policies than we can.

        In addition, new or currently unconventional book formats and means of distribution could lower demand and margins in the market for used and hard-to-find books and undermine any competitive advantages we may have. If e-books, electronic publishing, print-on-demand and other similar technologies gain greater prominence in the book market, second-hand books might lose their appeal. Consumers could prefer an electronically formatted or delivered title over a new or used one, which could cause sales of traditional new, used and hard-to-find books to decline, limit our future supply of books and harm our revenue. Further, books that derive value from their scarcity could become less valuable, if they become available electronically, which could harm margins in the used and hard-to-find book market and cause our revenue to decline. If a broad selection of titles becomes available for electronic distribution and consumers adopt these new means of obtaining books, our supply of books, market intelligence and logistics capabilities would become less valuable and others would be able to more effectively compete with us.

        The U.S. book retailer industry and the online commerce sector are highly competitive, dynamic in nature and have undergone significant changes over the past several years, and will likely continue to undergo significant changes. Our ability to anticipate and respond successfully to these changes is critical to our long-term growth and we cannot assure you that we will anticipate and respond

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successfully to changes in the book retailer industry and online commerce sectors. Competition in the used and hard-to-find book industry is primarily based on a combination of price, selection and quality of service. Through the combination of our broad selection, multiple sales channels, market intelligence and specialized logistics, we believe that we compete effectively in each of these categories across both our retail and business segments. While we believe that we are competing effectively in the market for used and hard-to-find books, if we are unable to maintain or increase our market share or compete effectively, our business, financial condition and operating results would be adversely affected.

Seasonality

        We experience seasonality in our business that we believe is typical of the overall book industry. We have generally had weaker demand in the quarter ending in June when compared to the quarters ending in March, September and December. We expect this pattern to continue. While we have experienced these patterns throughout our operating history, we cannot assure you that the results of any particular future quarter will follow this pattern.

Employees

        As of March 31, 2004, we had a total of 55 full-time employees, all of which were located in the United States, including 12 in marketing and sales, 33 in operations and 10 in general and administrative. None of our employees is represented by a collective bargaining agreement, nor have we experienced any work stoppage. We consider our relations with our employees to be good.

        Our future operating results depend in significant part on the continued service of our key technical, sales and senior management personnel. Other than as described in "Management—Employment, Severance and Change of Control Arrangements," none of these individuals is bound by an employment agreement.

Facilities

        We lease approximately 9,000 square feet of office space for our corporate headquarters in Emeryville, California, under a lease that expires in June 2006. We also operate an approximately 100,000 square foot warehouse and distribution facility in Sparks, Nevada, under a service contract with a month-to-month term. This contract also provides us with access to contract workers to staff our distribution center. We believe that our existing distribution center facilities are adequate for our current needs, and that we would be able to lease additional space on commercially acceptable terms. We are currently in the process of locating additional office space for expansion of our principal offices. We cannot assure you that suitable alternative space will be available in the future on commercially reasonable terms.

Legal Proceedings

        Interloc, Inc., our corporate predecessor, provided booksellers with e-mail services and an online listing service. Three weeks after the completion of our merger with Interloc in 1998, we learned that Interloc was the subject of an investigation by the U.S. Attorney's Office in the District of Massachusetts. The investigation was prompted by the actions of two employees working in Greenfield, Massachusetts. It was based on allegations that these employees had both before and for a short period of time after the merger intercepted e-mails sent to booksellers using Interloc's e-mail services, and had shortly after the merger accessed protected computers of a potential systems service provider, in each case without their authorization. The U.S. Attorney's Office asserted that "[o]ne of the purposes of the interceptions was to compile a database of dealer's purchases and to analyze the bookselling market for competitive advantage." We cooperated fully with the federal investigation and conducted our own investigation. Although the U.S. Department of Justice found no evidence of compensable harm to any

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business or retail customer, we discontinued all operations in Greenfield and discontinued providing e-mail services to booksellers. Following the completion of its investigation, in November 1999, the U.S. Department of Justice filed a criminal information against Alibris and, in separate actions, indictments against the two employees. As a successor in interest to Interloc with an interest in a full and prompt resolution of this matter, we pled guilty to criminal charges and paid a fine of $0.25 million.

        One of these individuals, who was a former officer and director and whose employment was terminated in 1999, has challenged the claims of the U.S. Department of Justice. If this individual prevails, we may be subject to indemnification claims arising out of this matter. This former employee has also alleged that we made unspecified false accusations and committed other unspecified tortious acts and offered to settle his claims without litigation if we paid him $1.0 million. As of the date of this prospectus, we are not aware that a lawsuit has been filed with respect to these allegations and claims. We dispute these allegations and intend to defend vigorously against any related action or claim. Although it is not possible to ascertain the definitive outcome of any litigation involving these potential claims, an unfavorable outcome may harm our financial condition. The cost of litigation, regardless of the outcome, may also harm our financial condition.

        We are not a party to any other potentially material legal proceedings. We could become involved in litigation from time to time relating to claims arising out of our ordinary course of business.

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MANAGEMENT

Directors and Executive Officers

        The following table presents information regarding our directors and executive officers as of April 15, 2004.

Name

  Age
  Position
Martin J. Manley   51   President, Chief Executive Officer, Secretary and Director
Steven G. Gillan   43   Chief Financial Officer
Brian P. Elliott   36   Chief Operating Officer
Peggy DeLeon   44   Vice President, Employee, Customer and Seller Relations
Mark Nason   41   Vice President, Operations
Michael W. Schaffer   43   Vice President, Engineering
Craig M. Gentner(1)   57   Director
Katrina Heron(2)   49   Director
Amal M. Johnson(2)   51   Director
Robert B. Kaplan(1)(3)   59   Director
Michael A. Keller(2)(3)   59   Director
Paul H. Klingenstein(1)   48   Director and Chairman of the Board

(1)
Member of the Audit Committee.

(2)
Member of the Compensation Committee.

(3)
Member of the Nominating and Governance Committee.

        Martin J. Manley co-founded Alibris and has served as our President, Chief Executive Officer and Secretary and as a member of our Board of Directors since May 1998. Mr. Manley also served as a consultant and independent contractor to our predecessor, Interloc, Inc., from October 1997 to May 1998. Prior to joining Alibris, from December 1995 to June 1997, Mr. Manley served as Managing Director of Strategy and Business Services for Kaiser Permanente, a healthcare company. Mr. Manley previously held positions with McKinsey & Co., a management consulting firm, and served as Assistant Secretary of Labor for the United States Department of Labor. Mr. Manley's employment agreement provides that Mr. Manley's employment is contingent upon his appointment to and continued membership on our Board of Directors. Mr. Manley holds a BS in politics and education from the University of California at Santa Cruz and an MBA from Harvard University.

        Steven G. Gillan has served as our Chief Financial Officer since February 2002. Mr. Gillan served as our Vice President of Accounting and Controller from May 2000 to February 2002 and as our Director of Accounting and Corporate Controller from December 1999 to May 2000. Prior to joining Alibris, from December 1990 to December 1999, Mr. Gillan served in a number of capacities, including Vice President of Finance, at Raychem Corporation, a materials science company. Mr. Gillan holds a BS in accountancy from the University of Illinois and an MBA from the University of Chicago.

        Brian P. Elliott has served as our Chief Operating Officer since June 2003. Mr. Elliott served as our Senior Vice President, Sales and Marketing from October 2000 to June 2003 and as our Vice President, Business Development from June 1999 to October 2000. Prior to joining Alibris, from August 1993 to June 1999, Mr. Elliott served in a number of positions, including Manager, for The Boston Consulting Group, Inc., a management consulting firm. Mr. Elliott holds a BS in economics and mathematics from Northwestern University and an MBA from Harvard University.

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        Peggy DeLeon has served as our Vice President, Employee, Customer and Seller Relations since June 1999. Prior to joining Alibris, from August 1995 to December 1998, Ms. DeLeon served as Vice President, Human Resources for Red Brick Systems, Inc., a data warehousing software company. Ms. DeLeon holds a BS in organizational behavior from the University of San Francisco.

        Mark Nason has served as our Vice President, Operations since May 1998. Prior to joining Alibris, from March 1982 to January 1998, Mr. Nason served in a number of capacities, including Customer Resource Group Manager, at United Parcel Service, Inc. Mr. Nason holds a BS in finance and an MBA from the University of Nevada.

        Michael W. Schaffer has served as our Vice President, Engineering since July 2001. From May 2001 to July 2001, Mr. Schaffer served us as a consultant and independent contractor. From December 2000 to May 2001, Mr. Schaffer served as an independent contractor, providing technical consulting services to DaniloBlack USA, a publishing company and QuantumShift, Inc., a communications management solution company. From July 1999 to November 2000, Mr. Schaffer served as Vice President of Engineering for Interactive Bureau, LLC, an Internet services agency. From August 1998 to June 1999, Mr. Schaffer served in a number of technical positions for Documentum, Inc., a web-based software application developer (now a division of EMC Corporation), including most recently as Manager, Development Services. From August 1994 to June 1998, Mr. Schaffer served in a variety of technical and managerial positions, most recently as Manager, Web Infrastructure Team at Sybase, Inc., an enterprise software company. Mr. Schaffer holds a BS in engineering from the University of Pennsylvania.

        Craig M. Gentner has served as a member of our Board of Directors since April 2004. Since January 2001, Mr. Gentner has worked in philanthropic endeavors in support of his wife and others affected with Primary Lateral Sclerosis and other rare neurological diseases. From October 1999 to January 2001, Mr. Gentner served as Vice President of Finance, Chief Financial Officer and Corporate Secretary of Redback Networks Inc., a telecommunications and networking equipment manufacturer. From July 1989 to December 1998, Mr. Gentner was the Senior Vice President of Finance and Chief Financial Officer for Network Equipment Technologies, Inc., a multi-service wide area networking equipment company. Mr. Gentner holds a BS in accounting from the University of Utah.

        Katrina Heron has served as a member of our Board of Directors since April 2004. Ms. Heron has served as a principal of Heron Ventures LLC since June 2003. Since January 2003, Ms. Heron has taught at the Journalism School at the University of California at Berkeley. From June 2001 to June 2003, Ms. Heron worked on various freelance public speaking and writing projects. From September 1995 to June 2001, Ms. Heron served in a number of positions, most recently as Editor-in-Chief of WIRED Magazine. From September 1994 to June 1995, Ms. Heron served as the John S. Knight Fellow in journalism at Stanford University. Ms. Heron holds a BA in English from Yale University.

        Amal M. Johnson has served as a member of our Board of Directors since May 1999. Since April 2004, Ms. Johnson has served as an independent consultant to various venture capital firms (other than Lightspeed Venture Partners). Ms. Johnson served in a number of positions, including general partner, of Lightspeed Venture Partners (formerly Weiss, Peck and Greer Venture Partners), a venture capital partnership and a significant stockholder of ours, from March 1999 to April 2004. From January 1998 to December 1998, she served as President of Baan Supply Chain Solutions, a supply chain solutions company. Ms. Johnson also serves as a director of Blue Martini Software, Inc., a sales and marketing solution company, and MAE Software, Inc., a merger and acquisition efficiency company. Ms. Johnson holds a BA in math and physics from Montclair State University (formerly Montclair College).

        Robert B. Kaplan has served as a member of our Board of Directors since February 2004. Since April 2003, Mr. Kaplan has served as Chief Knowledge Officer, and since December 2003 he has

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served as acting Chief Information Officer, of Silicon Valley Bank. From February 2000 to April 2003, Mr. Kaplan served several companies as an executive counselor and consultant. In 2002, Mr. Kaplan served as Acting Chief Executive Officer of Netliant, Inc., a software company. From February 1998 to February 2000, Mr. Kaplan served as our Chief Technology Officer on a consulting basis. Mr. Kaplan holds a BA in economics from Yale University and an MBA from Stanford University.

        Michael A. Keller has served as a member of our Board of Directors since November 1999. Since 1994, Mr. Keller has served as University Librarian and Director of Academic Information Resources for Stanford University. In 1995, Mr. Keller founded HighWire Press, an online academic journal publishing company, and serves as Publisher. Mr. Keller also serves as a director of Cisco Learning Institute, an education technology integration company, and Long Now Foundation, a time-focused cultural institution. Mr. Keller holds a BA in biology and music from Hamilton College, an MLS from State University of New York, Geneseo, and an MA in musicology from State University of New York, Buffalo.

        Paul H. Klingenstein has served as a member of our Board of Directors since October 1998 and as Chairman of the Board since February 2004. Mr. Klingenstein has served as general partner of Aberdare Ventures, a venture capital partnership and a significant stockholder of ours, since April 1999 and has served as managing director of Aberdare Management Co., LLC since April 1999. Mr. Klingenstein also serves as general partner of Prosper Partners, a family investment partnership. Mr. Klingenstein also serves as a director of Ample Medical, Inc., a medical device company, Anacor Pharmaceuticals, a pharmaceutical company, and Neuroscience Solutions Corp., a therapeutic software company. Mr. Klingenstein holds a BA in anthropology from Harvard University and an MBA from Stanford University.

        Each of our executive officers will serve in his or her office until he or she resigns or is removed from office. There are no family relationships among any of our directors and executive officers.

Board of Directors Composition

        We have eight authorized directors, with seven directors serving and one vacancy. We expect to fill this vacancy prior to the completion of this offering. Other than Mr. Manley's employment agreement, which conditions his employment upon his membership on our Board of Directors, there are no arrangements under which the directors currently serve on the Board of Directors.

        Upon the consummation of this offering, our Board of Directors will be divided into three classes:

    Class I directors, whose term will expire at the annual meeting of stockholders expected to be held in 2005;

    Class II directors, whose term will expire at the annual meeting of stockholders expected to be held in 2006; and

    Class III directors, whose term will expire at the annual meeting of stockholders expected to be held in 2007.

        At each annual meeting of stockholders after the initial classification, the successors to directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following election. The Class I directors currently consist of Ms. Johnson and Mr. Manley; the Class II directors currently consist of Messrs. Gentner, Keller and Klingenstein; and the Class III directors currently consist of Ms. Heron and Mr. Kaplan.

        Our bylaws and certificate of incorporation provide that the Board of Directors may fill vacancies on the Board of Directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors.

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        This classification of the Board of Directors and the provisions described above, and certain other provisions we intend to adopt upon the completion of this offering, may have the effect of delaying or preventing changes in our control or management. See "Description of Capital Stock—Anti-Takeover Provisions—Certificate of Incorporation and Bylaw Provisions."

Committee Composition

        Our Board of Directors has established three standing committees: the audit committee, the compensation committee and the nominating and governance committee.

        Audit Committee.    The audit committee provides oversight of our audit and financial reporting process and internal control procedures, and reviews and evaluates our financial statements, accounting practices and our internal audit and control functions, selects and provides oversight of our independent auditors and reviews the results and scope of the audit and other services provided by our independent auditors. The members of our audit committee are Messrs. Gentner, Kaplan and Klingenstein, with Mr. Gentner serving as the chairperson of the audit committee.

        Compensation Committee.    The compensation committee reviews and makes recommendations to our Board of Directors concerning the compensation and benefits and the performance of our officers and directors, administers our equity compensation and employee benefits plans and reviews general policy relating to compensation and benefits. The members of our compensation committee are Ms. Heron, Ms. Johnson and Mr. Keller, with Ms. Johnson serving as the Chairperson of the compensation committee. Each member of this committee is a "non-employee director," as defined in Rule 16b-3 promulgated under the Exchange Act and an "outside director," as defined pursuant to Section 162(m) of the Internal Revenue Code of 1986.

        Nominating and Governance Committee.    The members of our nominating and governance committee are Messrs. Kaplan and Keller. The nominating and governance committee makes recommendations to our Board of Directors concerning candidates for election to our Board of Directors and other corporate-governance related matters.

        Each member of these committees is an "independent director" as defined in Rule 4200 of the Marketplace Rules of the National Association of Securities Dealers, Inc. The members of the Audit Committee also meet the independence requirements of Rule 10A-3(b)(i) of the Securities Exchange Act of 1934, and each of the other criteria set forth in Marketplace Rule 4350(d)(2)(A). The Board of Directors has determined that Mr. Gentner qualifies as an "audit committee financial expert" as defined by the rules of the Securities Exchange Commission. We intend to comply with all independence requirements within the prescribed time limits.

Compensation Committee Interlocks and Insider Participation

        None of the members of our compensation committee has at any time been one of our officers or employees. None of our executive officers serves or in the past has served as a member of the Board of Directors or compensation committee of any entity that has one or more of its executive officers serving on our Board of Directors or our compensation committee.

        Mr. Klingenstein was the sole member of our compensation committee during fiscal year 2003. Our compensation committee currently consists of Ms. Heron, Ms. Johnson and Mr. Keller.

Preferred Stock Financings.

        Entities associated with Lightspeed Venture Partners purchased 72,836 shares of Series E preferred stock in July 2001 and 305,876 shares of Series F preferred stock in February 2004. Ms. Johnson, one of our directors, is a limited partner of the entities associated with Lightspeed Venture Partners that

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have invested in Alibris. Ms. Johnson does not have voting or dispositive control of the shares of our common stock held by the Lightspeed funds.

        Entities associated with Aberdare Ventures purchased 145,674 shares of Series E preferred stock in July 2001 and 127,450 shares of Series F preferred stock in February 2004. Mr. Klingenstein is the general partner of Aberdare Ventures and may be deemed to own beneficially the shares held by entities associated with Aberdare Ventures.

        Entities associated with Prosper Partners purchased 10,325 shares of Series E preferred stock in July 2001 and 4,319 shares of Series F preferred stock in February 2004. Mr. Klingenstein is a general partner of Prosper Partners and may be deemed to own beneficially the shares held by entities associated with Prosper Partners.

Director Compensation

        Following the consummation of this offering, our non-employee directors will receive annual compensation of $10,000 and a $2,500 fee for each meeting of the Board of Directors attended, our Audit Committee Chairperson will receive an additional $5,000 per year and our Compensation Committee Chairperson will receive an additional $2,500 per year. Prior to the consummation of this offering, our non-employee directors did not receive cash compensation for their services as directors. None of our employee directors receive cash compensation for their services as directors. All of our directors, including our non-employee directors, are reimbursed for their reasonable expenses in attending Board of Directors and Board of Directors committee meetings.

        After the completion of this offering, each non-employee director who is a member of our Board of Directors or first becomes a member of our Board of Directors will be granted an option to purchase 15,000 shares of common stock under our 2004 equity incentive plan. We will adjust this award to reflect the unvested portion of any option held by an existing director to ensure that all directors begin their Board service after the completion of this offering with options to purchase 15,000 unvested shares of common stock. Immediately following each annual meeting of our stockholders, each non-employee director will automatically be granted an additional option to purchase 3,000 shares of common stock under the 2004 equity incentive plan if the director has served continuously as a member of the Board of Directors for at least one year. Each option has or will have an exercise price equal to the fair market value of our common stock on the date of grant and has or will have a 10-year term and will terminate three months following the date the director ceases to provide services to us as a director or a consultant or 12 months following that date if the termination is due to death or disability. All options granted under the 2004 equity incentive plan will vest as to 25% on the first anniversary of the date of grant and the remainder will vest ratably over the 36-month period thereafter, provided that the director remains in continuous service as a director or consultant through each such date. In the event of our dissolution or liquidation or a change in control transaction, options granted to our non-employee directors under the plan will become completely vested and exercisable in full.

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Executive Compensation

        The following table presents compensation information for the fiscal year ended December 31, 2003 awarded to, earned by, or paid to our chief executive officer and each of our five other most highly compensated executive officers whose salary and bonus for fiscal 2003 was more than $100,000. We refer to these executives as our named executive officers elsewhere in this prospectus.


Summary Compensation Table

 
   
   
  Long Term
Compensation
Awards

   
 
  2003 Annual Compensation
   
Name and Principal Position

  Securities
Underlying
Options

  All Other
Compensation*

  Salary
  Bonus(1)
Martin J. Manley
President, Chief Executive Officer and Secretary
  $ 225,000   $ 30,078   52,333   $ 719
Brian P. Elliott
Chief Operating Officer
    192,188     8,594   37,334     5,653
Michael W. Schaffer
Vice President, Engineering
    157,500       22,334     7,665
Steven G. Gillan
Chief Financial Officer
    144,000     5,156   23,833     7,533
Mark Nason
Vice President, Operations
    144,000       23,833     4,587
Peggy DeLeon
Vice President, Employee, Customer and Seller Relations
    135,000     4,297   20,417     5,024

*
Represents health insurance benefits and $87 in group term life insurance.
(1)
Bonuses received in January 2004.

Stock Option Grants in Last Fiscal Year

        The following table presents information regarding grants of stock options during the fiscal year ended December 31, 2003 to the named executive officers. We granted these options to the named executive officers under our 2000 equity incentive plan. All options granted under the 2000 equity incentive plan are immediately exercisable and are either incentive stock options or nonqualified stock options. Except as set forth in the footnotes to the table below, we have a right to repurchase the shares issued upon exercise of these options at the original purchase price if they are unvested at the time the grantee terminates employment with us. Except as set forth in the footnotes to the table below, this repurchase right lapses as to 25% of the shares on the first anniversary of the date of grant and the remainder expire ratably over a 36-month period thereafter. The option agreements relating to the shares listed in the table below which are subject to our right of repurchase provide that upon a change of control of Alibris, 100% of the named executive officer's unvested shares will automatically vest and our right of repurchase will fully lapse. All of the options listed on the following table expire ten years from the date of grant and were granted at an exercise price equal to the fair market value of our common stock as determined by our Board of Directors on the date of grant. The percentage of total options granted to employees in 2003 is based on options to purchase a total of 233,088 shares of our common stock granted in 2003.

        Potential realizable values are computed by:

    multiplying the number of shares of common stock subject to a given option by the exercise price per share;

    assuming that the aggregate stock value derived from that calculation compounds at the annual 5% or 10% rates shown in the table for the entire 10-year term of the option; and

    subtracting from that result the aggregate option exercise price.

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        The 5% and 10% assumed annual rates of stock price appreciation are required by the rules of the Securities and Exchange Commission and do not represent our estimate or projection of future common stock prices.

 
  Individual Grants
   
   
 
  Number of
Securities
Underlying
Options
Granted

  Percent of
Total Options
Granted to
Employees
in 2003

   
   
  Potential Realizable Value at Assumed
Annual Rates of Stock Price Appreciation for Option Term

Name

  Exercise
Price
Per Share

  Expiration
Date

  5%
  10%
Martin J. Manley(1)   2,333
8,333
41,667
  1.0
3.6
17.9
%

$

0.66
0.66
0.66
  2/26/2013
6/18/2013
10/15/2013
  $

968
3,459
17,295
  $

2,454
8,765
43,828

Brian P. Elliott(2)

 

1,500
6,667
29,167

 

0.6
2.9
12.5

 

 

0.66
0.66
0.66

 

2/26/2013
6/18/2013
10/15/2013

 

 

623
2,767
12,106

 

 

1,578
7,013
30,680

Michael W. Schaffer(3)

 

667
5,000
16,667

 

0.3
2.2
7.2

 

 

0.66
0.66
0.66

 

2/26/2013
6/18/2013
10/15/2013

 

 

277
2,075
6,918

 

 

702
5,259
17,532

Steven G. Gillan(4)

 

1,333
5,833
16,667

 

0.6
2.5
7.2

 

 

0.66
0.66
0.66

 

2/26/2013
6/18/2013
10/15/2013

 

 

553
2,421
6,918

 

 

1,402
6,136
17,532

Mark Nason(5)

 

1,333
5,833
16,667

 

0.6
2.5
7.2

 

 

0.66
0.66
0.66

 

2/26/2013
6/18/2013
10/15/2013

 

 

553
2,421
6,918

 

 

1,402
6,136
17,532

Peggy DeLeon(6)

 

1,250
5,000
14,167

 

0.5
2.2
6.1

 

 

0.66
0.66
0.66

 

2/26/2013
6/18/2013
10/15/2013

 

 

519
2,075
5,880

 

 

1,315
5,259
14,902

(1)
Mr. Manley's options for 2,333 and 8,333 shares were fully vested at the time of grant.
(2)
Mr. Elliott's options for 1,500 and 6,667 shares were fully vested at the time of grant.
(3)
Mr. Schaffer's options for 667 and 5,000 shares were fully vested at the time of grant.
(4)
Mr. Gillan's options for 1,333 and 5,833 shares were fully vested at the time of grant.
(5)
Mr. Nason's options for 1,333 and 5,833 shares were fully vested at the time of grant.
(6)
Ms. DeLeon's options for 1,250 and 5,000 shares were fully vested at the time of grant.

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Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

        The following table sets forth certain information regarding exercised stock options during the fiscal year ended December 31, 2003 and unexercised options held as of December 31, 2003 by each of the named executive officers. There was no public trading market for our common stock as of December 31, 2003. Accordingly, these values have been calculated on the basis of the initial public offering price of $    , less the applicable exercise price per share, multiplied by the number of shares issued or issuable, as the case may be, on the exercise of the option. All options were granted under our 1998 stock option plan and/or our 2000 equity incentive plan.

 
   
   
  Number of Securities Underlying Unexercised Options at December 31, 2003
  Value of Unexercised In-the-Money Options at December 31, 2003
 
  Number of
Shares
Acquired on
Exercise

   
Name

  Value
Realized

  Exercisable(1)
  Unexercisable
  Exercisable
  Unexercisable
Martin J. Manley     $   126,333     $     $
Brian P. Elliott         78,667            
Michael W. Schaffer         59,917            
Steven G. Gillan         54,167            
Mark Nason   16,191         20,556            
Peggy DeLeon   10,789         31,958            

(1)
All options are immediately exercisable, and, when and if exercised, will be subject to a repurchase right held by Alibris, which right lapses in accordance with the respective vesting schedules for such options.

Employment, Severance and Change of Control Arrangements

        Martin J. Manley's employment agreement, dated April 1, 1998, provides for an initial annual salary of $60,000, with an increase to at least $144,000 tied to our revenue and our ability to pay competitive compensation to our other executives, and eligibility for standard benefits and incentive bonuses that may be established from time to time. This agreement also provides for his election to the Board of Directors as a condition of employment. This agreement continues until it is terminated upon written notice by Mr. Manley or by us. If his employment is terminated for any reason, he is entitled to receive his salary and other benefits, including any bonus he may have earned, through the date of his termination. If his employment is terminated by us without cause or if he terminates his employment within twelve months following a change in control, in addition to any compensation and benefits to which he is entitled through the date of his termination, he is entitled to receive in one lump sum his then-current annual base salary and continuance of his and his immediate family's health benefits for twelve additional months after that date, plus acceleration of any unvested options and restricted stock owned by him on such date. In addition, Mr. Manley will be entitled to exercise his stock options for at least twelve months following the date of such termination. In the event Mr. Manley voluntarily terminates his employment within twelve months following any constructive termination not in connection with a change of control, Mr. Manley shall receive all the aforementioned severance benefits, with the exception that only two-thirds of all unvested options and restricted stock owned by Mr. Manley on such date shall vest. In each case, our obligation to make any severance payments is expressly conditioned upon Mr. Manley's execution and delivery of a general release and waiver of all claims.

        On May 20, 1999, Mr. Manley also received an option to purchase 38,690 shares of our common stock at an exercise price of $2.15 per share under the 1998 stock option plan, of which 9,672 shares vested on April 1, 2000 and the remainder vested ratably over the 36-month period thereafter. On October 26, 1998, pursuant to his employment agreement, we also issued Mr. Manley 20,833 shares of restricted common stock at a price of $0.38 per share for services rendered to us as a consultant and

64



independent contractor and, upon the achievement of certain target revenue, paid him a bonus to compensate him for income taxes associated with this issuance. The shares purchased by Mr. Manley were subject to our right to repurchase any unvested shares upon termination of his employment prior to April 2001. In each case, Mr. Manley would be able to purchase or exercise any unvested shares within 12 months of the termination.

        Officer Severance Agreements.    In January 2004, we entered into separate officer severance agreements with each of Messrs. Elliott, Gillan, Schaffer and Nason, and Ms. DeLeon, that provide for severance payments under circumstances related to termination of employment with us. Under the agreement, if we terminate an officer without cause, or if he or she terminates his or her employment due to a constructive termination, he or she will be entitled to receive his or her then-current salary and health insurance benefits, in each case, for 6 months following such termination. In addition, if within 12 months following a change in control of Alibris, we terminate an officer without cause, or if he or she terminates his or her employment due to a constructive termination, then such officer will be entitled to receive in one lump sum an amount equal to his or her then-current annual salary and continuance of his or her health insurance benefits for 12 months following such termination. These officers will also be eligible for senior executive level outplacement services following any termination resulting in any of these severance benefits.

        Acceleration of stock option vesting upon a change of control.    The 1998 stock option plan and 2000 equity incentive plan provide that if we are merged or consolidated with another entity, or sell all or substantially all of our assets, and the optionee's employment or service with us is terminated without cause within 6 months following such transaction, 12.5% of the shares subject to each option or restricted stock award held by such optionee at the time, which is granted under the 1998 stock option plan and 12.5% of the then unvested shares subject to each option or restricted stock award held by such optionee at the time, which is granted under the 2000 equity incentive plan will automatically accelerate and become vested. Other of our current stock option agreements with our officers and non-employee directors provide that if we are merged or consolidated with another entity or sell all or substantially all of our assets, and the officer's employment is terminated without cause or constructively terminated within 12 months following a change in control transaction, then 100% of the officer's unvested shares will automatically accelerate and become vested. For additional information, see "—Employee Benefit Plans and Option Grants."

Employee Benefit Plans and Option Grants

1998 Stock Option Plan and 2000 Equity Incentive Plan

        As of March 31, 2004, options to purchase 13,499 shares of our common stock were outstanding under our 1998 stock option plan, and options to purchase 360,230 shares had been exercised, and of that number none remained subject to our repurchase right. The options outstanding under the 1998 stock option plan had a weighted average exercise price of $0.5984 per share. As of March 31, 2004, options to purchase 200,699 shares of our common stock were outstanding under our 2000 equity incentive plan, and options to purchase 463,641 shares had been exercised, but of that number 134,369 shares remained subject to our repurchase right. The options outstanding under the 2000 equity incentive plan had a weighted average exercise price of $1.7057 per share. Our employees, consultants and directors were eligible to receive awards under the 2000 equity incentive plan. We discontinued granting options under our 1998 stock option plan upon our adoption of our 2000 equity incentive plan. Upon the effective date of our 2004 equity incentive plan, we do not intend to grant options under our 2000 equity incentive plan. However, any outstanding options under our 1998 stock option plan or 2000 equity incentive plan will remain outstanding and subject to our 1998 stock option plan and 2000 equity incentive plan, as applicable, and related stock option agreements until they are exercised or until they terminate or expire by their terms. Except for the acceleration provisions discussed above, outstanding options under our 1998 stock option plan or 2000 equity incentive plan

65



are subject to terms substantially similar to those described below with respect to options granted under our 2004 equity incentive plan.

2004 Equity Incentive Plan

        The 2004 equity incentive plan will serve as the successor to our previously existing stock option plans. This plan will become effective on the date of our initial public offering prospectus and will terminate after 10 years, unless it is terminated earlier by our board. The plan will authorize the award of options, restricted stock awards, stock appreciation rights, stock unit awards and stock bonuses. No awards have yet been granted under this plan.

        Our 2004 equity incentive plan will be administered by the compensation committee of our Board of Directors. Our compensation committee has the authority to interpret this plan and any agreement entered into under the plan, grant awards and make all other determinations for the administration of the plan.

        Our 2004 equity incentive plan provides for the grant of both incentive stock options that qualify under Section 422 of the Internal Revenue Code and nonqualified stock options. The incentive stock options may be granted only to our employees or employees of any of our subsidiaries. The nonqualified stock options, and all awards other than incentive stock options, may be granted to our employees, officers, directors, consultants, independent contractors and advisors and those of any of our subsidiaries. However, consultants, independent contractors and advisors are only eligible to receive awards if they render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. The exercise price of incentive stock options must be at least equal to the fair market value of our common stock on the date of grant. The exercise price of incentive stock options granted to 10% stockholders must be at least equal to 110% of the fair market value of our common stock on the date of grant.

        The other types of awards permitted under our 2004 equity incentive plan are briefly described below.

        Restricted stock awards are shares of our common stock that vest in accordance with terms and conditions established by the compensation committee. The compensation committee will determine the period of restriction and the number of shares of restricted stock granted to any director, employee or consultant. The compensation committee may impose whatever conditions to vesting it determines to be appropriate. For example, the compensation committee may set restrictions based on the achievement of specific performance goals. Holders of restricted stock may exercise voting rights and receive dividends with respect to those restricted shares, unless the compensation committee determines otherwise. Shares of restricted stock that do not vest are subject to our right of repurchase or forfeiture.

        Stock appreciation rights allow the recipient to receive the appreciation in the fair market value of our common stock between the exercise date and the date of grant. The compensation committee determines the terms of stock appreciation rights, including when such rights become exercisable and whether to pay the appreciation in cash or with shares of our common stock, or a combination thereof.

        Stock units allow the recipient to receive, on a date after the date of grant, cash or shares of our stock (that may be subject to additional vesting) on conditions determined by our compensation committee. Stock units may provide for "dividend equivalent units" to account for dividends made prior to settlement, but never provide for voting rights until settled in shares. Settlement may be made in a lump sum or in installments.

        Stock bonuses allow the recipient to receive shares that carry voting rights and are eligible for dividends at the same level as other holders of our common stock, but which may be subject to vesting and other restrictions.

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        The maximum term of the options granted under our 2004 equity incentive plan is ten years. The awards granted under this plan may not be transferred in any manner other than by will or by the laws of descent and distribution and may be exercised during the lifetime of the optionee only by the optionee. Our compensation committee may allow exceptions to this restriction for awards that are not incentive stock options. Options granted under our 2004 equity incentive plan expire one month after the termination of the optionee's service to us or to a parent or subsidiary of ours for cause, three months if the termination is for reasons other than death, disability or cause, or 12 months if the termination is due to death or disability. In the event of a liquidation, dissolution or change in control transaction, the options may be assumed or substituted by the successor company. Options that are not assumed or substituted will expire on the transaction at the time and on the conditions as our Board will determine. In the event of a corporate transaction in which an optionee, other than a non-employee director, is terminated without cause within 6 months following the change in control, 12.5% of the optionee's then unvested shares of our common stock shall become vested and exercisable.

        Our 2004 equity incentive plan provides for the automatic grant of options to each non-employee director. Each such non-employee director on our board at the time of, or appointed to the board after the completion of, this offering will receive, at such time, an initial option to purchase 15,000 shares (for a non-employee director who has already been granted options, this will instead be the number of shares necessary to bring to 15,000, the total of unvested shares under all such non-employee director's options). In addition, with each annual stockholder meeting after this offering, all non-employee directors will receive a subsequent option to purchase 3,000 shares (pro-rated if this option would be granted less than 12 months after the date such non-employee was last automatically granted an option) on the day after each annual meeting of our stockholders. All options granted under the automatic grant provisions have a term of ten years and an exercise price equal to fair market value on the date of grant. Each option shall vest and become exercisable as to 25% on the first anniversary of the date of grant and the remainder will vest ratably over the 36-month period thereafter, provided the non-employee director remains in continuous service as a director or consultant through each such date. Notwithstanding the foregoing, each automatic option will become fully vested if a corporate transaction occurs prior to or at the non-employee director's termination of service.

        Initially, there will be a number of shares of our common stock reserved for issuance under our 2004 equity incentive plan equal to 1,189,900 shares, plus 126,027 shares of our common stock reserved under our 2000 equity incentive plan that were not issued or subject to outstanding awards on the date of our initial public offering prospectus. The number of shares reserved for issuance under this plan will be increased by:

    the number of shares of our common stock issued under our 1998 stock option plan or 2000 equity incentive plan that are forfeited at the original purchase price; and

    the number of shares of our common stock issuable upon exercise of options granted under our 1998 stock option plan or 2000 equity incentive plan that expire, are terminated or become unexercisable at any time after this offering without having been exercised in full.

        Shares available for grant and issuance under our 2004 equity incentive plan include:

    shares of our common stock issuable upon exercise of an option granted under this plan that expires, is terminated or cancelled before the option is exercised;

    shares of our common stock subject to awards granted under this plan that are forfeited at the original issue price; and

    shares of our common stock subject to other awards granted under this plan that otherwise terminate without shares being issued.

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        During any calendar year, no person will be eligible to receive more than 1,000,000 shares, or 2,000,000 shares in the case of a new employee, under our 2004 equity incentive plan. In addition, no more than 50% of the shares reserved under the 2004 equity incentive plan may be issuable pursuant to an award that is at a discount from the fair market value on the date of grant of such award.

2004 Employee Stock Purchase Plan

        The 2004 employee stock purchase plan is intended to qualify under Section 423 of the Internal Revenue Code, and is designed to enable eligible employees to purchase shares of our common stock at a discount on a periodic basis following the date of this prospectus. Our compensation committee administers the 2004 employee stock purchase plan. Our employees generally are eligible to participate in this plan if they are employed by us, or a subsidiary of ours that we designate, for more than 20 hours per week and more than five months in a calendar year. Our employees are not eligible to participate in our 2004 employee stock purchase plan if they are 5% stockholders or would become 5% stockholders as a result of their participation in the plan. Under the 2004 employee stock purchase plan, eligible employees may acquire shares of our common stock through payroll deductions, or through a single lump sum cash payment in the case of the first offering period. Our eligible employees may select a rate of payroll deduction between 1% and 15% of their cash compensation. For the first offering period, employees were automatically granted an option based on 15% of their cash compensation during the first purchase period. An employee's participation in this plan will end automatically upon termination of employment for any reason. In the event of a change in control transaction, this plan will continue with regard to any offering periods that commenced prior to the closing of the proposed transaction and shares will be purchased based on the fair market value of the surviving corporation's stock on each purchase date, unless otherwise provided by our compensation committee.

        No participant will be able to purchase shares having a fair market value of more than $25,000, determined as of the first day of the applicable offering period, for each calendar year in which the employee participates in the 2004 employee stock purchase plan. Except for the first offering period, each offering period will be for two years and will consist of four six-month purchase periods. The first offering period will begin on the date of this prospectus. The first purchase period may be more or less than six months long. After that, the offering periods will begin on February 1 and August 1. The purchase price for shares of our common stock purchased under the 2004 employee stock purchase plan will be 85% of the lesser of the fair market value of our common stock on the first day of the applicable offering period or the last day of each purchase period. Our compensation committee has the power to change the starting date of any later offering period, the purchase date of a purchase period and the duration of any offering period or purchase period without stockholder approval if this change is announced before the relevant offering period or purchase period.

        No more than 1,000 shares may be purchased on any single purchase date. However, our compensation committee has the power to set a larger number of shares that may be purchased on any single purchase date.

        We have reserved 560,000 shares of our common stock for issuance under the 2004 employee stock purchase plan. The number of shares reserved for issuance under the plan will increase automatically on January 1 of each year, starting in 2006, by an amount equal to 1% of our total outstanding shares as of the immediately preceding December 31. Our Board of Directors or compensation committee may reduce the amount of the increase in any particular year. The 2004 employee stock purchase plan will terminate in April 2014, unless it is terminated earlier by our Board of Directors.

68



401(k) Plan

        We sponsor a defined contribution plan intended to qualify under Section 401(a) of the Internal Revenue Code that contains a cash or deferred arrangement governed by Section 401(k) of the Code. Employees who have attained at least 18 years of age are generally eligible to become participants in the plan on the first day of the calendar quarter coinciding with or next following the date they have completed one hour of service in a month. Participants may make pre-tax contributions to the plan from their eligible earnings up to the statutorily prescribed annual limit on pre-tax contributions under the Code. Participants may also make after-tax contributions subject to the statutory limit on annual additions to defined contribution plans and applicable nondiscrimination tests under the Code. We do not make contributions on behalf of participants to the plan. Pre-tax contributions by participants to the plan and the income earned on such contributions are generally not taxable to participants until withdrawn. The income earned on after-tax contributions made by participants to the plan is generally not taxable to participants until withdrawn. Participant contributions are held in trust as required by law.

Indemnification of Directors and Officers and Limitation of Liability

        Our certificate of incorporation includes a provision that eliminates the personal liability of our directors for monetary damages resulting from breach of fiduciary duty as a directors, except for liability:

    for any breach of the director's duty of loyalty to us or our stockholders;

    for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;

    under section 174 of the Delaware General Corporation Law regarding unlawful dividends and stock purchases; or

    for any transaction from which the director derived an improper personal benefit.

        Such limitation of liability does not apply to liabilities arising under federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or recission.

These provisions are permitted under Delaware law.

        Our bylaws provide that:

    we must indemnify our directors and executive officers to the fullest extent permitted by Delaware law, subject to very limited exceptions;

    we must advance expenses, as incurred, to our directors and executive officers in connection with a legal proceeding to the fullest extent permitted by Delaware law, subject to very limited exceptions; and

    we may indemnify our other employees and agents as permitted by Delaware law;

    the rights conferred in the bylaws are not exclusive.

These provisions are permitted under Delaware law.

        We entered into an indemnification agreement with Amal M. Johnson, a director of ours, and Weiss Peck & Greer Venture Partners (an affiliate fund of Lightspeed Venture Partners, one of our principal stockholders) while Ms. Johnson was associated with Lightspeed Venture Partners. We also entered into a substantially similar indemnification agreement with Paul H. Klingenstein, a director of ours, and Aberdare Ventures (one of our principal stockholders, of which Mr. Klingenstein is general partner). These indemnification agreements provide for indemnification of these directors and their

69



affiliate funds for certain expenses (including attorney's fees), costs, damages, judgments, penalties and settlements arising out of such party's service as a director, officer, employee or agent, control person or fidiciary of ours or of any other company or enterprise to which such party is serving at our request (all subject to certain exemptions set forth in such agreements). The indemnification provided pursuant to the terms of these agreements will not apply to events occurring 90 days after the date that Ms. Johnson or any other person designated by or affiliated with Lightspeed Venture Partners no longer serves as a member of our Board of Directors. We have entered into agreements to indemnify our executive officers and other directors, in addition to the indemnification provided for in our certificate of incorporation and bylaws, subject to the relevant limitations imposed by Delaware law. Presently, there is no pending litigation or proceeding involving any of our directors, executive officers or employees for which indemnification is sought. However, one former officer and director is involved in certain legal proceedings and, if this individual prevails, we may be subject to indemnification claims. See "Business—Legal Proceedings."

        We intend to obtain liability insurance for our directors and officers, including coverage for public securities matters, prior to the closing of this offering.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        Other than the employment and severance agreements described in "Management," and the transactions described below, since January 1, 2001 there has not been nor is there currently proposed, any transaction or series of similar transactions to which we were or will be a party:

    in which the amount involved exceeded or exceeds $60,000; and

    in which any director, executive officer, holder of more than 5% of any class of our common stock or any member of their immediate family had or will have a direct or indirect material interest.

Preferred Stock Financings

        In July and September 2001, we sold an aggregate of 775,543 shares of Series E preferred stock at a purchase price of $6.86 per share and an aggregate purchase price of $5.3 million. In February 2004, we sold an aggregate of 611,746 shares of Series F preferred stock at a purchase price of $7.85 per share and an aggregate purchase price of $4.8 million.

        The following table summarizes the shares of Series E and Series F preferred stock (reflected on an as-converted into common stock basis) purchased by our executive officers, directors and holders of more than 5% of our outstanding stock. The terms of these purchases were the same as those made available to unaffiliated purchasers.

 
  Shares of
Preferred Stock

Stockholder

  Series E
  Series F
Entities associated with Bedrock Venture Partners   189,376   25,488
Entities associated with CMGI@Ventures   141,169  

Entities associated with Lightspeed Venture Partners(1)

 

72,836

 

305,876
Paul H. Klingenstein        
  Entities associated with Aberdare Ventures(2)   155,999   131,769
Entities associated with KbooK Investors LLC   145,674   104,122
Mark Nason   145   6,372
Brian P. Elliott   145  

(1)
These transactions took place while Ms. Johnson was a general partner or an employee of Lightspeed Venture Partners.

(2)
Includes 10,325 shares of Series E preferred stock and 4,319 shares of Series F preferred stock held by Prosper Partners.

        Ms. Johnson, one of our directors, is a limited partner of the entities associated with Lightspeed Venture Partners that have invested in Alibris. Ms. Johnson does not have voting or dispositive control of the shares of our common stock held by the Lightspeed funds. Ms. Johnson disclaims beneficial ownership of the shares held by the Lightspeed entities except to the extent of her pecuniary interest in the entities associated with this venture capital firm. Mr. Klingenstein, one of our directors, is a general partner of Aberdare Ventures and may be deemed to own beneficially the shares held by entities associated with Aberdare Ventures. Mr. Klingenstein disclaims beneficial ownership of shares held by Aberdare Ventures except to the extent of his pecuniary interest in this venture capital firm. Mr. Klingenstein is also a general partner of Prosper Partners and may be deemed to own beneficially the shares held by entities associated with Prosper Partners. Mr. Klingenstein disclaims beneficial ownership of shares held by Prosper Partners except to the extent of his pecuniary interest in this investment fund.

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Loans to Executive Officers

        Martin J. Manley.    On September 29, 1999, in connection with the exercise of options to purchase common stock granted to Mr. Manley, our President, Chief Executive Officer, Secretary and a member of our Board of Directors, pursuant to our 1998 stock option plan, we provided a loan to Mr. Manley pursuant to a promissory note with an interest rate of 5.50% per annum and with an initial outstanding aggregate principal amount of approximately $98,400. The note is secured by a pledge agreement whereby the stock purchased with the note is pledged as collateral for the note. The promissory note is due on September 29, 2004. As of March 31, 2004, the total aggregate amount owed under the note, including accrued interest, is $125,246.

        Brian P. Elliott.    On September 29, 1999, in connection with the exercise of an option to purchase common stock granted to Mr. Elliott, our Chief Operating Officer, pursuant to our 1998 stock option plan, we provided a loan to Mr. Elliott pursuant to a promissory note with an interest rate of 5.50% per annum and with an initial outstanding principal amount of approximately $53,850. The note is secured by a pledge agreement whereby the stock purchased with the note is pledged as collateral for the note. The promissory note is due on September 29, 2004. As of March 31, 2004, the total aggregate amount owed under the note, including accrued interest, is $68,545.

        Steven G. Gillan.    On January 28, 2000, in connection with the exercise of an option to purchase common stock granted to Mr. Gillan, our Chief Financial Officer, pursuant to our 2000 equity incentive plan, we provided a loan to Mr. Gillan pursuant to a secured full recourse promissory note with an interest rate of 6.21% per annum and with an initial outstanding principal amount of approximately $50,000. The note is secured by a pledge agreement whereby the stock purchased with the note is pledged as collateral for the note. The promissory note is due on January 28, 2005. As of March 31, 2004, the total aggregate amount owed under the note, including accrued interest, is $64,284.

        Mark Nason.    On June 29, 1999 and March 11, 2002, in connection with the exercise of options to purchase common stock granted to Mr. Nason, our Vice President, Operations, pursuant to our 1998 stock option plan and 2000 equity incentive plan, respectively, we provided loans to Mr. Nason pursuant to six promissory notes, one with an interest rate of 5.50% per annum and five others with an interest rate of 4.52% per annum and with an initial outstanding aggregate principal amount under all notes of approximately $29,391. Each note is secured by a pledge agreement whereby the stock purchased with the notes is pledged as collateral for the notes. The promissory note issued in June 1999 is due on June 29, 2004 and the promissory notes issued in March 2002 are due on March 11, 2007. As of March 31, 2004, the total aggregate amount owed under the notes, including accrued interest, is $35,151.

        Peggy DeLeon.    On September 29, 1999, in connection with the exercise of an option to purchase common stock granted to Ms. DeLeon, our Vice President, Employee, Customer and Seller Relations, pursuant to our 1998 stock option plan, we provided a loan to Ms. DeLeon pursuant to a promissory note with an interest rate of 5.50% per annum and with an initial outstanding principal amount of approximately $31,412. The note is secured by a pledge agreement whereby the stock purchased with the note is pledged as collateral for the note. The promissory note is due on September 29, 2004. As of March 31, 2004, the total aggregate amount owed under the note, including accrued interest, is $39,985.

        We believe that our loans to our executive officers were on terms materially no more favorable than those they could have obtained from unrelated lenders.

Options

        We issue options for our common stock to our officers and non-employee directors. See "Management—Director Compensation," "—Stock Option Grants in Last Fiscal Year," "—Employment, Severance and Change of Control Arrangements."

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Registration Rights

        Pursuant to the terms of our investor rights agreement, which is attached as an exhibit to this registration statement, holders of our preferred stock and certain holders of warrants exercisable for shares of common stock, including certain officers and entities with which certain of our directors are affiliated, have registration rights with respect to the shares of common stock issuable upon conversion of the preferred stock and issuable upon exercise of such warrants and they will continue to have such rights following this offering. See "Description of Capital Stock—Registration Rights."

Indemnification

        We have entered into an indemnification agreement with Amal M. Johnson, a director of ours, and Weiss Peck & Greer Venture Partners (an affiliate fund of Lightspeed Venture Partners, one of our principal stockholders) while Ms. Johnson was associated with Lightspeed Venture Partners. We also entered into a substantially similar indemnification agreement with Paul H. Klingenstein, a director of ours, and Aberdare Ventures (one of our principal stockholders, of which Mr. Klingenstein is general partner). These indemnification agreements provide for indemnification of these directors and their affiliate funds for certain expenses (including attorney's fees), costs, damages, judgments, penalties and settlements arising out of such party's service as a director, officer, employee or agent, control person or fiduciary of ours or of any other company or enterprise to which such party is serving at our request (all subject to certain exemptions set forth in such agreements). The indemnification provided pursuant to the terms of these agreements will not apply to events occurring 90 days after the date that Ms. Johnson or any other person designated by or affiliated with Lightspeed Venture Partners no longer serves as a member of our Board of Directors. We have entered into agreements to indemnify our executive officers and other directors, in addition to the indemnification provided for in our certificate of incorporation and bylaws, subject to the relevant limitations imposed by Delaware law. Presently, there is no pending litigation or proceeding involving any of our directors, executive officers or employees for which indemnification is sought. However, one former officer and director is involved in certain legal proceedings and, if this individual prevails, we may be subject to indemnification claims. See "Indemnification of Directors and Officers and Limitation of Liability."

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PRINCIPAL STOCKHOLDERS

        The following table presents information as to the beneficial ownership of our common stock as of March 31, 2004 by:

    each stockholder known by us to be the beneficial owner of more than 5% of our common stock;

    each other stockholder who we deem to have significant holdings of our common stock;

    each of our directors;

    each named executive officer; and

    all executive officers and directors as a group.

 
   
  Percentage of Shares Outstanding
 
Name and Address of Beneficial Owner

  Number of Shares
Beneficially Owned

  Before Offering
  After Offering
 
Entities associated with Bedrock Capital(1)
c/o Volpe Brown Whelan & Company, LLC
One Boston Place
Boston, MA 02108
  926,983   16.7 %          %
Entities associated with CMGI@Ventures(2)
200 Brickstone Square, Suite 202
Andover, MA 01810
Attention: Peter Mills
  676,447   12.2      
Entities associated with Lightspeed Venture Partners(3)
2882 Sand Hill Road, Suite 106
Menlo Park, CA 94025
Attention: Dave Markland
  746,353   13.4      
Paul H. Klingenstein(4)
Aberdare Ventures, LP
One Embarcadero Center, Suite 4000
San Francisco, CA 94111
  578,214   10.4      
KbooK Investors LLC(5)
111 Radio Circle
Mt. Kisco, NY 10549
  352,909   6.3      
Martin J. Manley(6)   318,006   5.7      
Harpeth Holdings LLC(7)
One Ingram Boulevard
La Vergne, TN 37086-1986
Attn: Frank Kerrigan
  244,272   4.4      
Paul and Cheryl Jean Pritchard(8)   183,522   3.3      
Brian P. Elliott(9)   104,572   1.9      
Mark Nason(10)   100,305   1.8      
Steven G. Gillan(11)   62,495   1.1      
Michael W. Schaffer(12)   59,913   1.1      
Peggy DeLeon(13)   57,708   1.0      
Robert B. Kaplan(14)   29,179   *      
Michael A. Keller(15)   7,735   *      
Amal M. Johnson(16)          
Katrina Heron          
Craig M. Gentner          
All 12 directors and executive officers as a group(17)   1,318,127   23.7 %          %

*
Equals less than one percent.

(1)
Represents 861,964 shares held by Bedrock Capital Partners I, LP, 36,108 shares held by Credit Suisse First Boston Bedrock Fund, LP and 28,912 shares held by VBW Employee Bedrock

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    Fund, LP. Bedrock has informed us that James L. McLean, Jason M. Rosenblath, David J. Duval and Paul W. Brown have voting and dispositive control of these shares.

(2)
Represents 676,447 shares held by CMGI@Ventures IV, LLC. CMGI@Ventures has informed us that Peter H. Mills, Marc D. Poirier and David J. Nerrow have voting and dispositive control of these shares.

(3)
Represents 182,988 shares held by Weiss, Peck & Greer Venture Associates IV, LLC, 23,082 shares held by Weiss, Peck & Greer Venture Associates IV Cayman, LLC, 61,274 shares held by Weiss, Peck & Greer Venture Associates V Cayman, LLC, 298,551 shares held by Weiss, Peck & Greer Venture Associates V, LLC, 2,497 shares held by Weiss, Peck & Greer Venture Associates V-A, LLC, 160,021 shares held by WPG Enterprises Fund III, LLC, 6,715 shares held by WPG Information Sciences Entrepreneur Fund II, LLC, 4,139 shares held by WPG Information Sciences Entrepreneur Fund II-A, LLC, 7,086 shares held by WPG Information Sciences Entrepreneur Fund, LP. Lightspeed Venture Partners has informed us that Philip Greer and Gill Cogan have voting and dispositive control of these shares.

(4)
Represents 516,813 shares held by Aberdare Ventures and 52,693 shares held by Prosper Partners. Includes 3,162 shares of common stock exercisable pursuant to a warrant held by Aberdare Ventures, 3,162 shares of common stock exercisable pursuant to a warrant held by Prosper Partners and 8,708 shares of common stock issuable upon exercise of a fully vested option held by Mr. Klingenstein. Mr. Klingenstein is a general partner of Aberdare Ventures. Mr. Klingenstein disclaims beneficial ownership of shares held by Aberdare Ventures except to the extent of his pecuniary interest in this venture capital firm. Aberdare Ventures has informed us that Mr. Klingenstein has voting and dispositive control of these shares. Mr. Klingenstein is a general partner of Prosper Partners. Mr. Klingenstein disclaims beneficial ownership of shares held by Prosper Partners except to the extent of his pecuniary interest in this investment fund.

(5)
KbooK Investors LLC has informed us that James A. Kohlberg has voting and dispositive control of these shares.

(6)
Includes 54,981 shares subject to our right of repurchase within 60 days of March 31, 2004.

(7)
Includes 59,166 shares of common stock exercisable pursuant to a warrant held by Harpeth Holdings LLC. Harpeth Holdings LLC has informed us that Mary Cavarra has voting and dispositive control of these shares.

(8)
Represents 86,663 shares deemed to be held beneficially by Mr. Pritchard, 86,663 shares deemed to be held beneficially by Mrs. Pritchard and 10,196 shares held by Mr. and Mrs. Pritchard jointly. Includes 2,117 shares subject to our right of repurchase within 60 days of March 31, 2004. Mr. Pritchard is our Chief Scientist.

(9)
Includes 78,661 shares of common stock held by the Elliott-McAvoy 2001 Revocable Trust and 38,644 shares subject to our right of repurchase within 60 days of March 31, 2004.

(10)
Includes 955 shares subject to our right of repurchase within 60 days of March 31, 2004, and 20,555 shares of common stock subject to immediately exercisable options, 19,860 of which would, if they had been exercised, be subject to our right of repurchase within 60 days of March 31, 2004.

(11)
Includes 278 shares subject to our right of repurchase within 60 days of March 31, 2004 and 49,163 shares of common stock subject to immediately exercisable options, 23,611 of which would, if they had been exercised, be subject to our right of repurchase within 60 days of March 31, 2004.

(12)
Includes 47,499 shares of common stock subject to immediately exercisable options, 26,666 of which would, if they had been exercised, be subject to our right of repurchase within 60 days of March 31, 2004.

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(13)
Includes 31,955 shares of common stock held by the Peggy DeLeon Trust and 14,078 shares subject to our right to repurchase within 60 days of March 31, 2004.

(14)
Includes 972 shares subject to our right of repurchase within 60 days of March 31, 2004.

(15)
Includes 6,666 shares of common stock issuable upon exercise of a fully vested option held by Mr. Keller.

(16)
Ms. Johnson, one of our directors, is a limited partner of the entities associated with Lightspeed Venture Partners that have invested in Alibris. Ms. Johnson does not have voting or dispositive control of the shares of our common stock held by the Lightspeed funds. Ms. Johnson disclaims beneficial ownership of shares held by the Lightspeed entities except to the extent of her pecuniary interest in the entities associated with this venture capital firm.

(17)
Includes 109,908 shares subject to our right of repurchase within 60 days of March 31, 2004 and 123,883 shares of common stock subject to immediately exercisable options, 70,137 which would, if they had been exercised, be subject to our right of repurchase within 60 days of March 31, 2004.

        The percentage of shares beneficially owned prior to the offering is based on 5,566,006 shares of common stock outstanding as of March 31, 2004, assuming that all outstanding preferred stock has been converted into common stock. The percentage of shares beneficially owned after this offering includes shares of common stock being offered but does not include the shares which are subject to the underwriters' over-allotment option. Percentage ownership figures after the offering do not include shares that may be purchased by each person in this offering.

        Beneficial ownership is determined under the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Unless indicated above, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of common stock subject to options and warrants that are currently exercisable or exercisable within 60 days of March 31, 2004 are deemed to be outstanding and to be beneficially owned by the person holding the options or warrants for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless indicated above, the address for each listed stockholder is c/o Alibris, 1250 45th Street, Suite 100, Emeryville, California, 94608.

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DESCRIPTION OF CAPITAL STOCK

        Upon the closing of this offering, we will amend and restate our certificate of incorporation to eliminate the current rights, preferences and privileges of our preferred stock. Following the closing of this offering, our authorized capital stock will consist of 100,000,000 shares of common stock, $0.00001 par value per share, and 5,000,000 shares of preferred stock, $0.00001 par value per share.

        The certificate of incorporation and bylaws that we will adopt upon the closing of this offering and our investor rights agreement, each described below, are included as exhibits to the registration statement of which this prospectus forms a part.

Common Stock

        As of March 31, 2004, there were 5,566,006 shares of common stock outstanding held by 208 stockholders of record, including 4,012,287 shares that will be issued upon conversion of all outstanding preferred stock.

        Dividend Rights.    Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at the times and in the amounts as our Board of Directors may from time to time determine. However, pursuant to the terms of our credit facility with Silicon Valley Bank, we have covenanted to refrain from paying or declaring dividends on our stock (except for dividends payable solely in our stock).

        Voting Rights.    Each common stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for in our certificate of incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election.

        No preemptive or similar rights.    The common stock is not entitled to preemptive rights and is not subject to conversion or redemption.

        Right to receive liquidation distributions.    Upon a liquidation, dissolution or winding-up of Alibris, the assets legally available for distribution to stockholders are distributable ratably among the holders of the common stock and any participating preferred stock outstanding at that time after payment of liquidation preferences, if any, on any outstanding preferred stock and payment of other claims of creditors. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable.

Preferred Stock

        Upon completion of this offering, each outstanding share of Series A preferred stock will be converted into four shares of common stock, each outstanding share of Series B preferred stock will be converted into 1.128550 shares of common stock, each outstanding share of Series C preferred stock will be converted into 1.142687 shares of common stock, each outstanding share of Series D preferred stock will be converted into 1.159771 shares of common stock, and each outstanding share of Series E preferred stock and Series F preferred stock will be converted into one share of common stock. See Note 8 of Notes to the Consolidated Financial Statements for a description of this preferred stock.

        Following this offering, our Board of Directors will be authorized, subject to the limits imposed by Delaware law, to issue up to 5,000,000 shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any of its qualifications, limitations or restrictions. Our Board of Directors can also increase or decrease the number of shares of any series,

77



but not below the number of shares of a given series then outstanding, without any further vote or action by the stockholders.

        The Board of Directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of Alibris and may adversely affect the market price of our common stock and the voting and other rights of the holders of common stock. We have no current plan to issue any shares of preferred stock.

Warrants

        As of March 31, 2004, we had outstanding the following warrants to purchase our common stock:

Total number of
shares subject to
Warrants

  Exercise price
per share

  Expiration date
83,565   $ 27.12   May 2005
27,855     42.90   March 2006
13,265     3.75   November 2005
666     2.76   September 2004
666     2.15   August 2004
666     2.15   June 2004
59,166     29.83   December 2006

Registration Rights

        Pursuant to the terms of our investor rights agreement, which is attached as an exhibit to this registration statement, holders of approximately 4,012,287 shares of common stock and holders of warrants exercisable for 16,427 shares of common stock or their respective transferees have the right to require us to register such shares with the Securities and Exchange Commission so that those shares may be publicly resold, subject to certain limitations in such agreement.

Right to demand registration.

        At any time six months after this offering, these holders can request that we file a registration statement so they can publicly sell their shares. The underwriters of any underwritten offering will have the right to limit the number of shares to be included in a registration statement.

        Who may make a demand.    At any time six months after the closing of this offering, the holders of at least 40% of the shares with the registration rights described above have the right to demand that we file a registration statement on a form other than Form S-3, so long as the amount of securities to be sold in that registration will result in aggregate proceeds of at least $20,000,000. If we are eligible to file a registration statement on Form S-3, the holders of 10% of the shares with the registration rights described above will have the right to demand that we file a registration statement on Form S-3, so long as the amount of securities to be sold in that registration will result in an aggregate price to the public of not less than $2,000,000.

        Number of times holders can make demands.    We will only be required to file an aggregate of two registration statements, provided such registration statements have been declared or ordered effective, on a form other than Form S-3. If we are eligible to file a registration statement on Form S-3, we are not required to file more than one such registration statement during any 12-month period.

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        Postponement.    We may postpone the filing of a registration statement on a form other than Form S-3 for up to 90 days once in a 12-month period if we determine that the filing would be seriously detrimental to us and our stockholders. In the case of a registration statement on Form S-3, our postponement period is limited to no more than 60 days once in a 12-month period.

Piggyback registration rights.

        If we register any securities for public sale following our initial public offering, holders of approximately 4,012,287 shares of common stock and holders of warrants exercisable for 16,427 shares of common stock will have the right to include their shares in the registration statement. The underwriters of any underwritten offering will have the right to limit or exclude the number of shares to be included in a registration statement, provided that no such limitation shall reduce the amount of securities held by the holders of shares with registration rights below 40% of the total amount of securities included in such registration, unless such offering is the initial public offering.

Expenses of registration.

        We will pay all of the expenses relating to any demand, piggyback or Form S-3 registration. However, we will not pay for any expenses of any demand or Form S-3 registration if the request is subsequently withdrawn by the holders requesting that we file such registration statement, subject to limited exceptions. We are not obligated to pay any underwriting discounts or selling commission applicable to any such registration.

Expiration of registration rights.

        The registration rights described above will expire five years after this offering is completed. The registration rights will terminate earlier with respect to a particular stockholder to the extent the shares held by and issuable to such holder (and its affiliates) may be sold under Rule 144 of the Securities Act in any ninety day period.

Anti-Takeover Provisions

        Provisions of Delaware law and the certificate of incorporation and bylaws that we intend to adopt following the closing of this offering could make the acquisition of Alibris and the removal of incumbent 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 Alibris to negotiate with us first.

    Delaware Law

        Following the closing of this offering, we will be subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. 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 in control of us without further action by the stockholders.

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    Certificate of Incorporation and Bylaw Provisions

        The certificate of incorporation that we will adopt upon the closing of this offering provides that stockholder action can be taken only at an annual or special meeting of stockholders and may not be taken by written consent. In addition, such certificate of incorporation authorizes undesignated preferred stock, making it possible for our Board of Directors to issue, without further stockholder action, preferred stock having voting or other rights or preferences that could prevent or make more difficult an attempted hostile takeover of Alibris. Further, our Board of Directors will be divided into three classes. The directors in each class will serve for a three-year term, with our stockholders electing one class each year. For more information on the classification of our Board of Directors, please see "Management—Board of Directors Composition." This system of electing and removing directors may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of us, because it generally makes it more difficult for stockholders to replace a majority of the directors. The certificate of incorporation that we will adopt upon the closing of this offering provides that special meetings of stockholders can be called only by our Board of Directors, the Chairman of our Board, if any, or our President. Moreover, the business permitted to be conducted at any special meeting of stockholders is limited to the business brought before the meeting by our Board of Directors, the Chairman of our Board, if any, or our President.

NASDAQ National Market Listing

        We have applied to list our common stock on The NASDAQ National Market under the proposed trading symbol "ALBR."

Transfer Agent

        The Transfer Agent Registrar for our common stock is Mellon Investor Services LLC. The transfer agent's address is Overpeck Centre, 85 Challenger Road, Ridgefield Park, NJ 07660.

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SHARES ELIGIBLE FOR FUTURE SALE

        Prior to this offering, there has been no public market for our common stock. We cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of our common stock prevailing from time to time. Nevertheless, sales of substantial amounts of our common stock in the public market could adversely affect the market price of our common stock and could impair our future ability to raise capital through the sale of our equity securities.

        Upon the completion of this offering, we will have            shares of our common stock outstanding, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options or warrants after March 31, 2004. Of these outstanding shares, the                        shares sold in this offering will be freely tradable, except that any shares held by our "affiliates" as that term is defined in Rule 144 promulgated under the Securities Act may only be sold in compliance with the limitations described below. The remaining 5,566,006 shares of our common stock will continue to be deemed "restricted securities" as defined under Rule 144. Restricted shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 promulgated under the Securities Act, both of which are summarized below. In addition, substantially all of our stockholders have entered into market stand-off agreements with us and/or lock-up agreements with WR Hambrecht + Co under which they have agreed, subject to specified exceptions, not to sell any of their stock for at least 180 days following the date of this prospectus. Subject to the provisions of Rule 144 and Rule 701, shares will be available for sale in the public market as follows:

    beginning on the effective date of the registration statement, the            shares sold in this offering will be immediately available for sale in the public market.

    after 180 days following the effective date of the registration statement 4,844,069 additional shares will become eligible for sale in the public market.

    the remaining 721,937 shares will be eligible for sale beginning one year following the effective date of the registration statement.

Lock-Up Agreements

        Each of our officers, directors and holders of a substantial majority of our common stock have agreed, subject to specified exceptions, that, without the prior written consent of WR Hambrecht + Co, they will not, directly or indirectly, sell, offer, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, transfer the economic risk of ownership in, make any short sale, lend, pledge or otherwise dispose of any shares of our capital stock or any securities convertible into or exchangeable or exercisable for or any other rights to purchase or acquire any shares of our capital stock (or publicly announce their intention to do any of the foregoing), or enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any shares of our capital stock, during the 180-day period following the effective date of the registration statement. WR Hambrecht + Co, may, in its sole discretion, permit early release of shares subject to the lock-up agreements. In considering any request to release shares subject to a lock-up agreement, WR Hambrecht + Co will consider the possible impact of the release of the shares on the trading price of the stock sold in the offering. WR Hambrecht + Co does not have any present intention or any understandings, implicit or explicit, to release any of the shares subject to the lock-up agreements prior to the expiration of these lock-up periods. Substantially all of the shares that are not subject to the underwriters' lock-up agreement are subject to similar contractual lock-up restrictions with us.

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Rule 144

        In general, under Rule 144 as currently in effect, a person, or group of persons whose shares are required to be aggregated, including an affiliate of Alibris, who has beneficially owned shares for at least one year, is entitled to sell within any three-month period, a number of shares that does not exceed the greater of one percent of the then outstanding shares of our common stock, or the average weekly trading volume in our common stock during the four calendar weeks preceding the date on which notice of the sale is filed. In addition, a person who is not deemed to have been an affiliate at any time during the 3 months preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years would be entitled to sell those shares under Rule 144(k) without regard to the requirements described above. When a person acquires shares from one of our affiliates, that person's holding period for the purpose of effecting a sale under Rule 144 would commence on the date of transfer from the affiliate. However, any such shares that are eligible for sale under Rule 144 are subject to the lock-up agreements described above and will only become eligible for sale upon the expiration or waiver of those agreements.

Rule 701

        In general, under Rule 701 of the Securities Act, an employee, officer, director, consultant or advisor who purchased shares from us in connection with a compensatory stock or option plan or other written agreement in compliance with Rule 701 is eligible, ninety days after the issuer becomes subject to the reporting requirements of the Exchange Act, to resell those shares in reliance on Rule 144, but without compliance with certain restrictions, including the holding period contained in Rule 144. However, the shares issued pursuant to Rule 701 are subject to the lock-up agreements described above and will only become eligible for sale upon the expiration or waiver of those agreements.

Registration of Shares Issued Pursuant to Benefits Plans

        We intend to file registration statements under the Securities Act as promptly as possible after the effective date of this offering to register shares to be issued pursuant to our employee benefit plans. As a result, any options or rights exercised under our 1998 stock option plan, our 2000 equity incentive plan, our 2004 equity incentive plan, our 2004 employee stock purchase plan or any other benefit plan after the effectiveness of these registration statements will also be freely tradable in the public market, subject to the market stand-off and lock-up agreements discussed above. However, such shares held by affiliates will still be subject to the volume limitation, manner of sale, notice and public information requirements of Rule 144. As of March 31, 2004, there were outstanding options under our benefit plans for the purchase of 214,198 shares of common stock, with an average exercise price of $1.6359, each of which options were exercisable and subject to a standard repurchase option in favor of Alibris, or subject to vesting, to the extent such shares were not vested, in accordance with the terms of the grant.

Registration Rights

        Pursuant to the terms of our investor rights agreement, which is attached as an exhibit to this registration statement, holders of approximately 4,012,287 shares of common stock and holders of warrants exercisable for 16,427 shares of common stock or their transferees have registration rights with respect to those shares of common stock. For a discussion of these rights please see "Description of Capital Stock—Registration Rights." After such shares are registered, they will be freely tradable without restriction under the Securities Act.

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Warrants

        As of March 31, 2004, we had outstanding warrants to purchase 185,849 shares of common stock. When these warrants are exercised and the exercise price is paid in cash the shares must be held for one year before they can be sold under Rule 144. Warrants to purchase up to 74,429 shares of common stock contain "net exercise provisions." These provisions allow a holder to exercise the warrant for a lesser number of shares of common stock in lieu of paying the exercise price in cash. The number of shares which would be issued upon a net exercise would be based upon the market price of the common stock at the time of the net exercise. If the warrant had been held for at least one year, the shares of common stock could be publicly sold under Rules 144. After the lock-up agreements described above expire, warrants to purchase 74,429 shares of our common stock, which also contain net exercise provisions, will have been outstanding for at least one year.

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PLAN OF DISTRIBUTION

        In accordance with the terms of the underwriting agreement between WR Hambrecht + Co, LLC and Pacific Growth Equities, LLC, as representatives of the underwriters, and us, each underwriter has agreed to purchase from us that number of shares of common stock set forth opposite the underwriter's name below at the public offering price less the underwriting discounts and commissions described on the cover page of this prospectus.

Underwriters

  Number of Shares
WR Hambrecht + Co, LLC    
Pacific Growth Equities, LLC    
   
  Total    
   

        The underwriting agreement provides that the obligations of the underwriters are subject to conditions, including:

    the absence of any material misstatements or omissions in this prospectus or the registration statement, including any related amendments or supplements;

    the absence of any current or prospective material adverse change in our business;

    the continuing accuracy of representations and warranties made to the underwriters by us; and

    the receipt of certificates, opinions and letters from us, counsel and independent accountants, including a letter from our independent accountants stating the results of their review of our internal accounting controls.

Subject to those conditions, the underwriters are committed to purchase all of the shares of our common stock offered by this prospectus if any of the shares are purchased.

        The underwriters propose to offer the shares of our common stock directly to the public at the offering price set forth on the cover page of this prospectus, as this price is determined by the OpenIPO process described below, and to certain dealers at this price less a concession not in excess of $                              per share. The underwriters may allow, and dealers may reallow, a concession not to exceed $                              per share on sales to other dealers. Any dealers that participate in the distribution of our common stock may be deemed to be underwriters within the meaning of the Securities Act, and any discount, commission or concession received by them and any provided by the sale of the shares by them may be deemed to be underwriting discounts and commissions under the Securities Act. After completion of the initial public offering of the shares, the underwriters may change the public offering price and other selling terms.

        The following table shows the per share and total underwriting discount to be paid to the underwriters by us in connection with this offering. The underwriting discount has been determined through negotiations between us and the underwriters, and has been calculated as a percentage of the offering price. These amounts are shown assuming both no exercise and full exercise of the over-allotment option.

 
  Per Share
  No Exercise
  Full Exercise
Public offering price   $     $     $  
Underwriting discount   $     $     $  
Proceeds, before expenses, to us   $     $     $  

        The fees and expenses of the offering, exclusive of the underwriting discounts, will be approximately $    million. These fees and expenses are payable entirely by us. These fees include, among other things, our legal and accounting fees, printing expenses, expenses incurred in connection

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with meetings with potential investors, filing fees of the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., fees of our transfer agent and registrar and the listing fees of the NASDAQ National Market.

        An electronic prospectus is available on the website maintained by WR Hambrecht + Co, one of the underwriters in this offering, and may also be made available on websites maintained by other underwriters, selected dealers and selling group members participating in this offering. Other than the prospectus in electronic format, the information on these websites is not part of the prospectus.

The OpenIPO Auction Process

        The distribution method being used in this offering is known as the OpenIPO auction, which differs from methods traditionally used in underwritten public offerings. In particular, the public offering price and the allocation of shares are determined primarily by an auction conducted by the underwriters. All qualified individual and institutional investors may place bids in an OpenIPO auction and investors submitting valid bids have an equal opportunity to receive an allocation of shares.

        The following describes how the underwriters and some selected dealers conduct the auction process and confirm bids from prospective investors:

Prior to the Effectiveness of the Registration Statement

    Before the registration statement relating to this offering becomes effective, the underwriters and participating dealers solicit bids from prospective investors through the Internet and by telephone and facsimile. The bids specify the number of shares of our common stock the potential investor proposes to purchase and the price the potential investor is willing to pay for the shares. These bids may be above or below the range set forth on the cover page of the prospectus. The minimum size of any bid is 100 shares.

    The shares offered by this prospectus may not be sold, nor may offers to buy be accepted, prior to the time that the registration statement filed with the Securities and Exchange Commission becomes effective. A bid received by the underwriters or a dealer involves no obligation or commitment of any kind prior to the closing of the auction. Bids can be modified or revoked at any time prior to the closing of the auction.

    Approximately two business days prior to the registration statement being declared effective, prospective investors receive, by e-mail, telephone or facsimile, a notice indicating the proposed effective date.

Effectiveness of the Registration Statement and Confirmation of Bids

    After the registration statement relating to this offering has become effective, potential investors who have submitted bids to the underwriters or a dealer are contacted by e-mail, telephone or facsimile. Potential investors are advised that the registration statement has been declared effective and are requested to confirm their bids.

Closing of the Auction and Pricing

        

    The auction will close and a public offering price will be determined after the registration statement becomes effective at a time agreed to by us and WR Hambrecht + Co, which we anticipate will be immediately after the close of trading on the NASDAQ National Market on the same day on which the registration statement is declared effective. However, the date on which the auction will close and a public offering price will be determined cannot currently be predicted and will be determined by us and WR Hambrecht + Co based on general market conditions during the period after the registration statement is declared effective. If we are

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      unable to close the auction, determine a public offering price and file a final prospectus with the Securities and Exchange Commission within 15 days after the registration statement is initially declared effective, we will be required to file with the Securities and Exchange Commission and have declared effective a post-effective amendment to the registration statement before the auction may be closed and before any bids may be accepted. If we are unable to close the auction within 15 days after the registration statement is initially declared effective, the underwriters or dealers will reconfirm all bids by either telephone or email following the filing and effectiveness of the post-effective amendment. After the registration statement has been declared effective, the public offering price of the common stock may be set at a price that is within or outside the range set forth on the cover of the prospectus.

    All bids that are not confirmed before the time specified by WR Hambrecht + Co, or if the time is not specified, by the close of the auction, are deemed withdrawn.

    Once a potential investor affirmatively confirms its previous bid, the confirmation remains valid unless subsequently withdrawn by the potential investor. Potential investors are able to withdraw their bids at any time before the close of the auction by notifying the underwriters or a participating dealer.

    If the public offering price range is changed before or after a potential investor affirmatively confirms a bid, or if the public offering price is outside the public offering range previously provided to the potential investor in the prospectus, the underwriters and participating dealers notify potential investors of the change and that offers will not be accepted until the potential investor has again reconfirmed its bid regardless of whether the potential investor's initial bid was above, below or at the public offering price.

    Following the closing of the auction, the underwriters determine the highest price at which all of the shares offered, including shares that may be purchased by the underwriters to cover any over-allotments, may be sold to potential investors. This price, which is called the "clearing price," is determined based on the results of all valid bids at the time the auction is closed. The clearing price is not necessarily the public offering price, which is set as described in "Determination of Public Offering Price" below. The public offering price determines the allocation of shares to potential investors, with all bids submitted at or above the public offering price receiving a pro rata portion of the shares bid for.

    Once the auction closes and a clearing price is set as described below, the underwriters or a participating dealer accept the bids from those bidders whose bid is at or above the public offering price but may allocate to a prospective investor fewer shares than the number included in the investor's bid.

    Bidders receiving a pro rata portion of the shares bid receive an allocation of shares on a round lot basis, rounded to multiples of 100 or 1000 shares, depending on the size of the bid. No bids are rounded to a round lot higher than the original bid size. Because bids may be rounded down to round lots in multiples of 100 or 1000 shares, some bidders may receive allocations of shares that reflect a greater percentage decrease in their original bid than the average pro rata decrease. Thus, for example, if a bidder has confirmed a bid for 200 shares, and there is an average pro rata decrease of all bids of 30%, the bidder may receive an allocation of 100 shares (a 50% decrease from 200 shares) rather than receiving an allocation of 140 shares (a 30% decrease from 200 shares). In addition, some bidders may receive allocations of shares that reflect a lesser percentage decrease in their original bid than the average pro rata decrease. For example, if a bidder has confirmed a bid for 100 shares, and there is an average pro rata decrease of all bids of 30%, the bidder may receive an allocation of all 100 shares to avoid having the bid rounded down to zero.

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    The underwriters or a participating dealer notify successful bidders by e-mail, telephone, facsimile or mail that the auction has closed and that their confirmed bids have been accepted. Other bidders are notified that their bids have not been accepted.

    Potential investors may at any time expressly request that all, or any specific, communications between them and the underwriters and participating dealers be made by specific means of communication, including e-mail, telephone and facsimile.

        Some underwriters and selected dealers that participate in this offering may request prospective investors to confirm their bids prior to the effective date of the registration statement, if that practice is used by these institutions in connection with initial public offerings that are not conducted using the OpenIPO process. Bidders should carefully review the procedures of, and communications from, the institution through which they bid to purchase our shares. In general, approximately two business days before the registration statement is declared effective, these underwriters and dealers will request potential investors to reconfirm the bids that they have submitted. If a bid is not reconfirmed prior to the close of the auction, it is rejected. If a bid is reconfirmed, it may still be modified or revoked prior to the auction closing; however, if the reconfirmed bid is not revoked prior to the closing of the auction, it is considered a firm bid and may be accepted at the closing of the auction. These underwriters and dealers will also seek reconfirmation of bids in the event that the price range of the offering is changed, the initial public offering price is set at a price that is outside the range that has previously been provided to potential investors, or we are otherwise required to recirculate the prospectus.

Determination of Public Offering Price

        The public offering price for this offering is ultimately determined by negotiation between the underwriters and us after the auction closes and does not necessarily bear any direct relationship to our assets, current earnings or book value or to any other established criteria of value, although these factors are considered in establishing the initial public offering price. Prior to the offering, there has been no public market for our common stock. The principal factor in establishing the public offering price is the clearing price resulting from the auction. The clearing price is used by the underwriters and us as the principal benchmark in determining the public offering price for the stock that will be sold in this offering.

        The clearing price is the highest price at which all of the shares offered, including the shares that may be purchased by the underwriters to cover any over-allotments, may be sold to potential investors, based on the valid bids at the time the auction is run. The shares subject to the underwriters' over-allotment option are used to calculate the clearing price whether or not the option is actually exercised.

        Depending on the outcome of negotiations between the underwriters and us, the public offering price may be lower, but will not be higher, than the clearing price. The bids received in the auction and the resulting clearing price are the principal factors used to determine the public offering price of the stock that will be sold in this offering. The public offering price may be lower than the clearing price depending on a number of additional factors, including general market trends or conditions, the underwriters' assessment of our management, operating results, capital structure and business potential and the demand for and price of similar securities of comparable companies. The underwriters and us may also agree to a public offering price that is lower than the clearing price in order to facilitate a wider distribution of the stock to be sold in the offering.

        The public offering price always determines the allocation of shares to potential investors. Therefore, if the public offering price is below the clearing price, all bids that are at or above the public offering price receive a pro rata portion of the shares bid for. If sufficient bids are not received, or if we do not consider the clearing price to be adequate, or if the underwriters and we are not able

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to reach agreement on the public offering price, then the underwriters and we will either postpone or cancel this offering. Alternatively, we may file with the Commission a post-effective amendment to the registration statement in order to conduct a new auction.

        The following simplified example illustrates how the public offering price is determined through the auction process:

            Company X offers to sell 1,000 shares in its public offering through the auction process. The underwriters, on behalf of Company X, receive five bids to purchase, all of which are kept confidential until the auction closes.

            The first bid is to pay $10.00 per share for 200 shares. The second bid is to pay $9.00 per share for 300 shares. The third bid is to pay $8.00 per share for 600 shares. The fourth bid is to pay $7.00 per share for 400 shares. The fifth bid is to pay $6.00 per share for 800 shares.

            Assuming that all of these bids are confirmed and not withdrawn or modified before the auction closes, and assuming that no additional bids are received, the clearing price used to determine the public offering price would be $8.00 per share, which is the highest price at which all 1,000 shares offered may be sold to potential investors who have submitted valid bids. However, the shares may be sold at a price below $8.00 per share based on negotiations between Company X and the underwriters.

            If the public offering price is the same as the $8.00 per share clearing price, the underwriters would confirm bids at or above $8.00 per share. Because 1,100 shares were bid for at or above the clearing price, each of the three potential investors who bid $8.00 per share or more would receive approximately 90% of the shares for which bids were made. The two potential investors whose bids were below $8.00 per share would not receive any shares in this example.

            If the public offering price is $7.00 per share, the underwriters would confirm bids that were made at or above $7.00 per share. No bids made at a price of less than $7.00 per share would be accepted. The four potential investors with the highest bids would receive a pro rata portion of the 1,000 shares offered, based on the 1,500 shares they requested, or two-thirds of the shares for which bids were made. The potential investor with the lowest bid would not receive any shares in this example.

            Because bids that are reduced on a pro rata basis may be rounded down to round lots, a potential investor may be allocated less than two-thirds of the shares bid for by such potential investor. Thus, the potential investor who bid for 200 shares may receive a pro rata allocation of 100 shares (one-half of the shares bid for by such potential investor), rather than receiving a pro rata allocation of 133 shares (two-thirds of the shares bid for by such potential investor).

        The following table illustrates the example described above, before rounding down any bids to the nearest round lot, assuming that the initial public offering price is set at $8.00 per share. The table also

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assumes that these bids are the final bids, and that they reflect any modifications that have been made to reflect any prior changes to the offering range, and to avoid the issuance of fractional shares.

 
  Initial Public Offering of Company X
  

 
  Bid Information
  Auction Results
 
  Shares
Requested

  Cumulative
Shares
Requested

  Bid
Price

  Shares
Allocated

  Approximate
Allocated
Requested
Shares

  Clearing
Price

  Amount
Raised

    200   200   $ 10.00   180   90 % $ 8.00   $ 1,440
    300   500     9.00   270   90     8.00     2,160
Clearing Price   600   1,100     8.00   550   90     8.00     4,400
    400   1,500     7.00            
    800   2,300     6.00            
                 
           
              Total:   1,000             $ 8,000
                 
           

Requirements for Valid Bids

        Valid bids are those that meet the requirements, including eligibility, account status and size, established by the underwriters or participating dealers. In order to open a brokerage account with WR Hambrecht + Co, a potential investor must deposit $2,000 in its account. This brokerage account will be a general account subject to WR Hambrecht + Co's customary rules, and will not be limited to this offering. In addition, once the registration statement becomes effective and the auction closes, a prospective investor submitting a bid through a WR Hambrecht + Co brokerage account must have an account balance equal to or in excess of the amount of its bid or WR Hambrecht + Co does not accept its bid. However, other than the $2,000 described above, prospective investors are not required to deposit any money into their accounts until after the registration statement becomes effective. No funds will be transferred to WR Hambrecht + Co, and any amounts in excess of $2,000 may be withdrawn at any time until the acceptance of the bid. Conditions for valid bids, including eligibility standards and account funding requirements of other underwriters or participating dealers other than WR Hambrecht + Co, may vary.

The Closing of the Auction and Allocation of Shares

        The auction closes on a date estimated and publicly disclosed in advance by the underwriters on the websites of WR Hambrecht + Co at www.wrhambrecht.com and www.openipo.com. The                        shares offered by this prospectus, or                        shares if the underwriters' over-allotment option is exercised in full, will be purchased from us by the underwriters and sold through the underwriters and participating dealers to investors who have submitted valid bids at or higher than the public offering price. These investors are notified by e-mail, telephone, voice mail, facsimile or mail as soon as practicable following the closing of the auction that their bids have been accepted.

        Each participating dealer has agreed with the underwriters to sell the shares it purchases from the underwriters in accordance with the auction process described above, unless the underwriters otherwise consent. The underwriters reserve the right to reject bids that they deem manipulative or disruptive in order to facilitate the orderly completion of this offering, and they reserve the right, in exceptional circumstances, to alter this method of allocation as they deem necessary to ensure a fair and orderly distribution of the shares of our common stock. For example, large orders may be reduced to ensure a public distribution and bids may be rejected or reduced by the underwriters or participating dealers based on eligibility or creditworthiness criteria. In addition, the underwriters or the participating dealers

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may reject or reduce a bid by a prospective investor who has engaged in practices that could have a manipulative, disruptive or otherwise adverse effect on the offering.

        Some dealers participating in the selling group may submit firm bids that reflect indications of interest from their customers that they have received at prices within the initial public offering price range. In these cases, the dealer submitting the bid is treated as the bidder for the purposes of determining the clearing price and allocation of shares.

        Price and volume volatility in the market for our common stock may result from the somewhat unique nature of the proposed plan of distribution. Price and volume volatility in the market for our common stock after the completion of this offering may adversely affect the market price of our common stock.

        We have granted to the underwriters an option, exercisable no later than 30 days after the date of this prospectus, to purchase up to an aggregate of            additional shares of our common stock from us at the offering price, less the underwriting discounts and commissions set forth on the cover page of this prospectus. To the extent that the underwriters exercise this option, they will have a firm commitment to purchase the additional shares and we will be obligated to sell the additional shares to the underwriters. The underwriters may exercise the option only to cover over-allotments made in connection with the sale of shares offered. The underwriting agreement provides that we will indemnify the underwriters against specified liabilities, including liabilities under the Securities Act, or contribute to payments that the underwriters may be required to make.

        We have agreed not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of any shares of common stock, or any options or warrants to purchase common stock other than the shares of common stock or options to acquire common stock issued under our stock plans, for a period of 180 days after the date of this prospectus, except with the prior written consent of WR Hambrecht + Co. Each of our officers, directors and stockholders holding in excess of 95% of the outstanding shares of our common stock, have agreed, subject to specified exceptions, that, without the prior written consent of WR Hambrecht + Co, they will not, directly or indirectly, sell, offer, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, transfer the economic risk of ownership in, make any short sale, lend, pledge or otherwise dispose of any shares of our capital stock or any securities convertible into or exchangeable or exercisable for or any other rights to purchase or acquire any shares of our capital stock (or publicly announce their intention to do any of the foregoing), or enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any shares of our capital stock, during the 180-day period following the effective date of the registration statement. WR Hambrecht + Co may, in its sole discretion, permit early release of shares subject to the lock-up agreements. In considering any request to release shares subject to a lock-up agreement, WR Hambrecht + Co will consider the possible impact of the release of the shares on the trading price of the stock sold in the offering. WR Hambrecht + Co does not have any present intention or any understandings, implicit or explicit, to release any of the shares subject to the lock-up agreements prior to the expiration of these lock-up periods.

        In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. "Covered" short sales are sales made in an amount not greater than the underwriters' option to purchase additional shares from us in the offering. The underwriters may close out any covered short position by either exercising its option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the

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price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. "Naked" short sales are any sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of common stock made by the underwriters in the open market prior to the completion of the offering.

        The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because one underwriter has repurchased shares sold by or for the account of the other underwriter in stabilizing or short covering transactions.

        These activities by the underwriters may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, the underwriters may discontinue them at any time. These transactions may be effected on The NASDAQ National Market, in the over-the-counter market or otherwise.

        The underwriters currently intend to act as a market maker for the common stock following this offering. However, the underwriters are not obligated to do so and may discontinue any market making at any time.

Indemnity

        The underwriting agreement contains covenants of indemnity between the underwriter and us against certain civil liabilities, including liabilities under the Securities Act, and liabilities arising from breaches of representations and warranties contained in the underwriting agreement.


LEGAL MATTERS

        Fenwick & West LLP, San Francisco, California, will pass upon the validity of the issuance of the shares of common stock offered by this prospectus. The underwriters have been represented by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Two investment funds associated with Fenwick & West LLP own an aggregate of 15,531 shares of our common stock.


EXPERTS

        The consolidated financial statements as of December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003 and the related financial statement schedule included in this prospectus have been audited by Rowbotham and Company LLP, independent auditors, as stated in their report appearing herein (which report expresses an unqualified opinion and includes an explanatory paragraph relating to a change in accounting for goodwill and other intangible assets during 2002), and have been so included in reliance upon the report of such firm given their authority as experts in accounting and auditing.


CHANGE IN INDEPENDENT ACCOUNTANTS

        KPMG LLP served as our independent public accountants through 2001. On January 2, 2003, we dismissed KPMG LLP as our independent public accountants. The decision to change accountants was ratified by the Board of Directors on February 23, 2004.

        The report of KPMG LLP on our consolidated financial statements as of and for the years ended December 31, 2001 and 2000 did not contain an adverse opinion or a disclaimer of opinion, nor was

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any such report qualified or modified as to uncertainty, audit scope or accounting principles, except as follows:

        KPMG LLP's report on the consolidated financial statements as of and for the years ended December 31, 2001 and 2000, contained a separate paragraph stating "the Company has suffered from recurring losses from operations and has a net capital deficiency, which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in note 13. The financial statements do not include any adjustments that might result from the outcome of this uncertainty."

        Further, in connection with the audits of the two fiscal years ended December 31, 2001 and 2000 and through January 2, 2003, we had no disagreements with KPMG LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement if not resolved to the satisfaction of KPMG LLP would have caused them to make reference to the subject matter of the disagreement in their opinion on our financial statements for those years.

        On January 2, 2003, we engaged Rowbotham and Company LLP as our independent public accountant for 2002. Prior to the engagement of Rowbotham and Company LLP, we had not directly or indirectly consulted Rowbotham and Company LLP during the two most recent fiscal years prior to the date of Rowbotham and Company LLP's appointment as our independent public accountants and through January 2, 2003 as to either the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements and we did not consult Rowbotham and Company LLP as to any matter that was either the subject of a disagreement or a reportable event.

        We requested KPMG LLP to furnish a letter addressed to the Commission, stating whether it agrees with these statements made by us and, if not, stating the respects in which it does not agree. A copy of this letter, dated as of March 3, 2004, is filed as Exhibit 16.01 to the Form S-1 registration statement of which this prospectus forms a part.


WHERE YOU CAN FIND MORE INFORMATION

        We have filed with the SEC a registration statement on Form S-1, of which this prospectus is a part, under the Securities Act with respect to the common stock offered in this offering. This prospectus, which is part of the registration statement, does not contain all of the information included in the registration statement or the accompanying exhibits and schedules. For additional information about us and our common stock, you should refer to the registration statement and the accompanying exhibits and schedules. Statements contained in this prospectus regarding the contents of any contract, agreement or other document to which we make reference are not necessarily complete. In each instance, we make reference to the copy of the contract, agreement or other document filed as an exhibit to the registration statement, of which this prospectus is a part.

        You may also read and copy the registration statement, the related exhibits and the other materials we file with the SEC at its public reference facilities at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may also obtain copies of those documents at prescribed rates by writing to the Public Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding issuers that file with the SEC. The site's address is www.sec.gov.

        Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Securities and Exchange Act of 1934 and, accordingly, will file periodic reports, proxy statements and other information with the SEC. Our periodic reports, proxy statements and other information will be available for inspection and copying at the SEC's public reference rooms and on the SEC's website.

92



ALIBRIS, INC.

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

 
  Page
Report of Independent Auditors   F-2
Consolidated Balance Sheets   F-3
Consolidated Statements of Operations   F-4
Consolidated Statements of Stockholders' Equity (Deficit)   F-5
Consolidated Statements of Cash Flows   F-6
Notes to the Consolidated Financial Statements   F-8
Schedule II—Valuation and Qualifying Accounts   F-34

F-1



Report of Independent Auditors

The Board of Directors of
Alibris, Inc.
Emeryville, California

        We have audited the accompanying consolidated balance sheets of Alibris, Inc. and subsidiary ("the Company") as of December 31, 2003 and 2002 and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index to the Consolidated Financial Statements and Schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 the management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Alibris, Inc. and its subsidiary as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statements schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

        As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets during 2002 as a result of adopting Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets".

San Francisco, California
February 27, 2004, except for paragraph 4 of Note 1 as to which date is April    , 2004

        The accompanying consolidated financial statements include the effects of the reincorporation described in Note 1 of the consolidated financial statements that has not been consummated as of February 27, 2004. The above opinion is in the form that will be signed by Rowbotham & Company LLP upon consummation of the reincorporation assuming that from February 27, 2004 to the date of such reincorporation, no other events have occurred that would affect the accompanying consolidated financial statements and notes thereto.

/s/  ROWBOTHAM & COMPANY LLP    
San Francisco, California
February 27, 2004

F-2



ALIBRIS, INC.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 
  December 31,
2002

  December 31,
2003

  March 31,
2004

  Pro Forma
March 31,
2004

 
 
   
   
  (unaudited)

 
Assets                          
Current assets:                          
  Cash and cash equivalents   $ 1,915   $ 472   $ 3,807   $ 3,807  
  Accounts receivable, net     1,733     1,433     1,437     1,437  
  Inventories, net     1,805     1,372     1,344     1,344  
  Prepaid expenses and other current assets     103     228     749     749  
   
 
 
 
 
    Total current assets     5,556     3,505     7,337     7,337  

Fixed assets, net

 

 

960

 

 

610

 

 

671

 

 

671

 
Goodwill, net     2,867     2,867     2,867     2,867  
Other intangibles, net     160     121     111     111  
Restricted cash     150     50          
Other assets     231     145     169     169  
   
 
 
 
 
    Total assets   $ 9,924   $ 7,298   $ 11,155   $ 11,155  
   
 
 
 
 

Liabilities, Convertible Redeemable Preferred Stock, and Stockholders' Equity (Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 
Current liabilities:                          
  Accounts payable   $ 1,154   $ 2,651   $ 2,797   $ 2,797  
  Accrued expenses     1,169     1,224     1,120     1,120  
  Current installment of obligations under capital leases     118     61     64     64  
  Revolving line of credit     800     500          
  Note payable     30              
  Other liabilities     257     107     93     93  
   
 
 
 
 
    Total current liabilities     3,528     4,543     4,074     4,074  

Obligations under capital leases, excluding current installment

 

 

16

 

 

144

 

 

127

 

 

127

 
   
 
 
 
 
    Total liabilities     3,544     4,687     4,201     4,201  
   
 
 
 
 

Commitments and contingencies

 

 


 

 


 

 


 

 


 
   
 
 
 
 

Series A, B, C, D, E and F convertible redeemable preferred stock; $0.00001 par value. Authorized 5,000,000 shares; issued and outstanding 2,635,757 shares as of December 31, 2002 and December 31, 2003, and 3,247,503 shares as of March 31, 2004 (unaudited) (liquidation value of $61,499 at December 31, 2003 and $66,299 at March 31, 2004 (unaudited)), no shares issued or outstanding pro forma (unaudited)

 

 

75,845

 

 

81,813

 

 

88,023

 

 


 
   
 
 
 
 

Stockholders' equity (deficit):

 

 

 

 

 

 

 

 

 

 

 

 

 
  Common stock; $.00001 par value. Authorized 100,000,000 shares; issued and outstanding 1,180,412 shares as of December 31, 2002, 1,210,945 shares as of December 31, 2003 and 1,553,719 shares as of March 31, 2004 (unaudited), and 5,566,006 shares outstanding pro forma (unaudited)                  
  Additional paid-in capital                 88,023  
  Deferred compensation     (252 )   (1,671 )   (1,535 )   (1,535 )
  Notes receivable from stockholders     (544 )   (570 )   (578 )   (578 )
  Accumulated deficit     (68,669 )   (76,961 )   (78,956 )   (78,956 )
   
 
 
 
 
    Total stockholders' equity (deficit)     (69,465 )   (79,202 )   (81,069 )   6,954  
   
 
 
 
 
    Total liabilities, convertible redeemable preferred stock, and stockholders' equity (deficit)   $ 9,924   $ 7,298   $ 11,155   $ 11,155  
   
 
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

F-3



ALIBRIS, INC.

Consolidated Statements of Operations

(in thousands, except per share amounts)

 
  Year Ended
  Three Months Ended
 
 
  December 31,
2001

  December 31,
2002

  December 31,
2003

  March 31, 2003
  March 31, 2004
 
 
   
   
   
  (unaudited)

 
Revenue:                                
  Product revenue   $ 21,752   $ 31,222   $ 45,456   $ 10,350   $ 13,830  
  Stock-based sales discounts     (783 )   (178 )            
   
 
 
 
 
 
    Total revenue     20,969     31,044     45,456     10,350     13,830  

Cost of product revenue

 

 

15,103

 

 

23,338

 

 

36,782

 

 

8,563

 

 

11,144

 
   
 
 
 
 
 
    Gross profit     5,866     7,706     8,674     1,787     2,686  
   
 
 
 
 
 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Marketing and sales (excluding stock-based compensation of $50, $(102), $219, $(8) unaudited, and $68 unaudited)     3,835     3,925     3,668     908     1,047  
  Operations (excluding stock-based compensation of $126, $33, $240, $36 unaudited, and $47 unaudited)     10,231     8,765     6,692     1,739     1,661  
  General and administrative (excluding stock-based compensation of $406, $135, $621, $38 unaudited, and $229 unaudited)     4,064     2,059     1,924     509     534  
  Stock-based compensation     582     66     1,080     66     344  
  Amortization of goodwill and other intangible assets     1,095     39     39     9     10  
  Impairment of goodwill     165                  
   
 
 
 
 
 
    Total operating expenses     19,972     14,854     13,403     3,231     3,596  
   
 
 
 
 
 
      Operating loss     (14,106 )   (7,148 )   (4,729 )   (1,444 )   (910 )

Interest income

 

 

324

 

 

107

 

 

50

 

 

15

 

 

11

 
Interest expense     (53 )   (31 )   (58 )   (8 )   (15 )
Other income (expenses), net     108     (143 )   (101 )   (31 )   13  
   
 
 
 
 
 
  Loss before provision for income taxes     (13,727 )   (7,215 )   (4,838 )   (1,468 )   (901 )

Provision for income taxes

 

 


 

 

19

 

 


 

 


 

 


 
   
 
 
 
 
 
  Net loss     (13,727 )   (7,234 )   (4,838 )   (1,468 )   (901 )

Accretions on redeemable preferred stock

 

 

(5,670

)

 

(5,944

)

 

(5,968

)

 

(1,492

)

 

(1,528

)
Deemed dividend on Series F preferred stock                     (2,539 )
   
 
 
 
 
 
  Net loss applicable to common stockholders   $ (19,397 ) $ (13,178 ) $ (10,806 ) $ (2,960 ) $ (4,968 )
   
 
 
 
 
 

Net loss per share—basic and diluted

 

$

(18.53

)

$

(11.61

)

$

(9.21

)

$

(2.55

)

$

(3.59

)
   
 
 
 
 
 

Weighted average shares outstanding—basic and diluted

 

 

1,047

 

 

1,135

 

 

1,173

 

 

1,163

 

 

1,383

 
   
 
 
 
 
 

Pro forma net loss per share (unaudited)

 

 

 

 

 

 

 

$

(1.06

)

 

 

 

$

(0.18

)
               
       
 

Shares used in computing pro forma net loss per share (unaudited)

 

 

 

 

 

 

 

 

4,573

 

 

 

 

 

5,089

 
               
       
 

The accompanying notes are an integral part of these consolidated financial statements.

F-4



ALIBRIS, INC.

Consolidated Statements of Stockholders' Equity (Deficit)

(in thousands)

 
  Common stock
   
   
   
   
  Total
stockholders'
equity
(deficit)

 
 
  Additional
paid-in
capital

  Deferred
compensation

  Receivable
from
stockholders

  Accumulated
deficit

 
 
  Shares
  Amount
 
    Balances as of January 1, 2001   1,082   $   $ 8,360   $ (2,198 ) $ (525 ) $ (44,270 ) $ (38,633 )
Issuance of common stock pursuant to exercise of stock options   2         7         (5 )       2  
Common stock issued upon acquisition   8         35                 35  
Repurchases of restricted common stock   (9 )       (49 )       34         (15 )
Warrants issued to customers           73     (73 )            
Amortization of warrants issued to customers               783             783  
Deferred compensation related to stock options           319     (319 )            
Reversal of deferred compensation and compensation expense upon termination of employment           (463 )   241             (222 )
Amortization of deferred compensation               851             851  
Repayments of notes receivable                   9         9  
Interest accrued on notes receivable                   (29 )       (29 )
Net loss                       (13,727 )   (13,727 )
Accretions on redeemable preferred stock           (5,670 )               (5,670 )
   
 
 
 
 
 
 
 
    Balances as of December 31, 2001   1,083         2,612     (715 )   (516 )   (57,997 )   (56,616 )
Issuance of common stock pursuant to exercise of stock options   27         18         (17 )       1  
Common stock issued upon acquisition   69         117                 117  
Repurchases of restricted common stock   (4 )       (21 )       19         (2 )
Reclassification of shares issued, previously recorded as options issued   5                          
Amortization of warrants issued to customers               177             177  
Deferred compensation related to stock options           173     (173 )            
Reversal of deferred compensation and compensation expense upon termination of employment           (393 )   38             (355 )
Amortization of deferred compensation               421             421  
Interest accrued on notes receivable                   (30 )       (30 )
Net loss                       (7,234 )   (7,234 )
Accretions on redeemable preferred stock           (2,506 )           (3,438 )   (5,944 )
   
 
 
 
 
 
 
 
    Balances as of December 31, 2002   1,180             (252 )   (544 )   (68,669 )   (69,465 )
Issuance of common stock pursuant to exercise of stock options   33         21                 21  
Repurchases of restricted common stock   (1 )       (6 )       5         (1 )
Deferred compensation related to stock options           2,803     (2,803 )            
Reversal of deferred compensation and compensation expense upon termination of employment           (304 )   71             (233 )
Amortization of deferred compensation               1,313             1,313  
Interest accrued on notes receivable                   (31 )       (31 )
Net loss                       (4,838 )   (4,838 )
Accretions on redeemable preferred stock           (2,514 )           (3,454 )   (5,968 )
   
 
 
 
 
 
 
 
    Balances as of December 31, 2003   1,211             (1,671 )   (570 )   (76,961 )   (79,202 )
Issuance of common stock pursuant to exercise of stock options   343         226                 226  
Deferred compensation related to stock options           208     (208 )            
Amortization of deferred compensation               344             344  
Interest accrued on notes receivable                   (8 )       (8 )
Net loss                       (901 )   (901 )
Accretions on redeemable preferred stock           (434 )           (1,094 )   (1,528 )
Deemed dividend on Series F preferred stock                            
   
 
 
 
 
 
 
 
  Balances as of March 31, 2004 (unaudited)   1,554   $   $   $ (1,535 ) $ (578 ) $ (78,956 ) $ (81,069 )
   
 
 
 
 
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

F-5



ALIBRIS

Consolidated Statements of Cash Flows

(in thousands)

 
  Year Ended
  Three Months Ended
 
 
  December 31,
2001

  December 31,
2002

  December 31,
2003

  March 31,
2003

  March 31,
2004

 
 
   
   
   
  (unaudited)

 
Cash flow from operating activities:                                
  Net loss   $ (13,727 ) $ (7,234 ) $ (4,838 ) $ (1,468 ) $ (901 )
    Adjustments to reconcile net loss to net cash used in operating activities:                                
        Depreciation and amortization of fixed assets     1,732     1,758     920     322     155  
        Amortization of stock-based sales discounts     783     177              
        Amortization of stock-based compensation     582     66     1,080     66     344  
        Amortization of goodwill and other intangible assets     1,095     39     39     10     10  
        Write down of goodwill     165                  
        Loss on disposal of fixed assets     41     39     12     12      
        Interest receivable on notes from stockholders     (29 )   (30 )   (31 )   (8 )   (8 )
        Changes in operating assets and liabilities, net of acquisitions:                                
          Accounts receivable     69     (549 )   300     534     (4 )
          Inventories     919     832     433     677     28  
          Prepaid expenses and other current assets     145     140     (125 )   (48 )   (522 )
          Other assets     46     18     85     147     (23 )
          Accounts payable     (171 )   233     1,496     (57 )   146  
          Accrued expense and other liabilities     44     (49 )   (94 )   (518 )   (119 )
   
 
 
 
 
 
            Net cash used in operating activities     (8,304 )   (4,560 )   (723 )   (331 )   (894 )
   
 
 
 
 
 

Cash flow from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Capital expenditures     (618 )   (469 )   (379 )   (158 )   (216 )
  Proceeds from sale of fixed assets     15     2     5     5      
  Restricted cash     (128 )   100     100     100     50  
  Cash paid for acquisitions     (74 )                
   
 
 
 
 
 
            Net cash used in investing activities     (805 )   (367 )   (274 )   (53 )   (166 )
   
 
 
 
 
 
Cash flow from financing activities:                                
  Proceeds from issuance of preferred stock     5,243                 4,682  
  Proceeds from notes payable         30     40     30      
  Repayments of notes payable     (414 )   (323 )   (70 )        
  Borrowings (repayments) on revolving line of credit         800     (300 )   (450 )   (500 )
  Repurchase of common stock     (15 )   (2 )   (1 )   (6 )    
  Proceeds from issuance of common stock     2     1     22     1     226  
  Repayments of notes receivable from stockholders     8             5      
  Repayments of capital lease obligations     (68 )   (150 )   (137 )   (22 )   (14 )
   
 
 
 
 
 
            Net cash provided by (used in) financing activities     4,756     356     (446 )   (442 )   4,394  
   
 
 
 
 
 
                Net decrease in cash and cash equivalents     (4,353 )   (4,571 )   (1,443 )   (827 )   3,334  
Cash and cash equivalents at beginning of the period     10,839     6,486     1,915     1,915     472  
   
 
 
 
 
 
    Cash and cash equivalents at the end of the period   $ 6,486   $ 1,915   $ 472   $ 1,088   $ 3,806  
   
 
 
 
 
 

(Continued)

F-6



ALIBRIS, INC.

Consolidated Statements of Cash Flows (Continued)

(in thousands)

 
  Year Ended
  Three Months Ended
 
  December 31,
2001

  December 31,
2002

  December 31,
2003

  March 31,
2003

  March 31,
2004

 
   
   
   
  (unaudited)

Supplemental disclosure of cash flow information:                              
  Cash paid for income taxes   $   $   $   $   $
   
 
 
 
 
 
Cash paid for interest

 

$

56

 

$

31

 

$

58

 

$

10

 

$

15
   
 
 
 
 
Supplemental schedule of non-cash investing and financing activities:                              
  Fixed assets acquired through capital lease transactions   $   $ 254   $ 210   $   $
   
 
 
 
 
  Write-off of fully depreciated fixed assets   $   $ 278   $ 229   $   $
   
 
 
 
 
 
Notes receivable from stockholders from issuance of common stock

 

$

5

 

$

17

 

$


 

$


 

$

   
 
 
 
 
 
Cancellation notes receivable from stockholders upon repurchase of common stock

 

$

34

 

$

19

 

$

5

 

$


 

$

   
 
 
 
 
 
Accretions on redeemable preferred stock

 

$

5,670

 

$

5,944

 

$

5,968

 

$

1,492

 

$

1,528
   
 
 
 
 
 
Deemed dividend on Series F preferred stock

 

$


 

$


 

$


 

$


 

$

2,539
   
 
 
 
 
 
Acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
    Common stock issued as purchase consideration   $ 35   $ 117   $   $   $
    Common stock payable as purchase consideration     117     (117 )          
    Goodwill and other intangibles     (226 )              
   
 
 
 
 
     
Cash paid for acquisitions

 

$

(74

)

$


 

$


 

$


 

$

   
 
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

F-7



ALIBRIS, INC.

Notes to the Consolidated Financial Statements

(in thousands, except share and per share amounts)

(1) Organization and Business

        Alibris, a California corporation ("Alibris (CA)"), was incorporated in May 1998, and was reincorporated in Delaware prior to a proposed public offering (such successor, "Alibris (DE)" and together with Alibris (CA), the "Company" or "Alibris"). Alibris operates an online marketplace for used, new and hard-to-find books. Alibris uses the Internet and its specialized technology and logistics capabilities to aggregate this highly fragmented market, bringing buyers and sellers together. The Company's broad selection of books is supplied primarily by its international network of independent professional booksellers. Alibris provides these independent booksellers with specialized inventory management, logistics and distribution services. Additionally, the Company uses its knowledge of the used and hard-to-find book market to selectively purchase or consign low-cost book inventory.

        As of December 31, 2003, the Company had one wholly owned subsidiary, Alibris Europe Ltd. Alibris Europe Ltd. is located in the United Kingdom and is a dormant entity.

        As shown in the consolidated financial statements, the Company has a stockholders' deficit of $79,202 as of December 31, 2003 and incurred a net loss of $7,234 and $4,838 for the years ended December 31, 2002 and 2003. The Company used $4,598 of cash in operations for the year ended December 31, 2002 and $723 of cash in operations for the year ended December 31, 2003. The Company used $329 of cash in investing activities for the year ended December 31, 2002 and $274 of cash in investing activities for the year ended December 31, 2003. The Company provided $356 of cash in financing activities for the year ended December 31, 2002 and used $446 of cash in financing activities for the year ended December 31, 2003. The Series A, B, C, D, E, and F convertible redeemable preferred stock is only redeemable if the holders of at least 662/3% of the outstanding preferred stock, voting together as a single class, require the Company to redeem the preferred stock. If redemption is required, one payment will be made July 11, 2006. As a result of issuing Series F convertible redeemable preferred stock in February 2004 in the amount of $4,725 (net of estimated issuance costs of $75) the Company has substantially improved its working capital and liquidity. In addition to the improved liquidity, the Company has experienced certain favorable trends in its operations during 2003. Total revenue for the year ended December 31, 2003 increased by $14,234 or 46% over 2002 and gross profit for the year ended December 31, 2003 increased by $968 or 13% over 2002. This is primarily due to increased revenue due to increased volumes through the Company's Retail and Business Customer channels, which grew 32% and 74%, respectively, in 2003 and increased cost of revenue due to changing certain channels, and in particular the Company's relationship with Barnes&Noble.com, to a model whereby the Company's booksellers located in the United States and Canada ship product directly to customers in those countries, thereby lowering the Company's operations costs but decreasing its gross margin percentages. Further, the Company has taken actions to continue to reduce the cost structure of the Company in 2003. Considering these factors, management believes that it has sufficient cash and available borrowings under its revolving line of credit to meet the Company's operating and capital requirements for at least the next twelve months.

        In connection with a proposed public offering of the Company's common stock, the Company's Board of Directors authorized the reincorporation of the Company in the State of Delaware. The reincorporation was accomplished by establishing Alibris (DE) and then merging Alibris (CA) into Alibris (DE) via the exchange of preferred stock and common stock at a conversion rate of one share of Alibris (DE) for each six shares of Alibris (CA) outstanding. As a result of the reincorporation, the Company is authorized to issue 105,000,000 shares in total, 5,000,000 shares of $0.00001 par value

F-8



preferred stock and 100,000,000 shares of $0.00001 par value common stock. The Board of Directors has the authority to issue undesignated preferred stock in one or more series and to fix the rights, preferences, privileges, and restrictions thereof. Share and per share information for each of the periods presented have been retroactively adjusted to reflect the reincorporation.

(2) Summary of Significant Accounting Policies

        Quarterly information—The accompanying unaudited interim financial statements as of and for the three months ended March 31, 2003 and March 31, 2004 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the audited financial statements and related notes thereto included in this Prospectus. The accompanying unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. The results of operations for the three-month period ended March 31, 2004 are not necessarily indicative of the results to be expected for any future period or the full fiscal year.

        Unaudited pro forma information—Upon closing of the planned initial public offering, each of the outstanding shares of preferred stock will convert into shares of common stock. The pro forma balance sheet presents the Company's balance sheet as if this had occurred at March 31, 2004. The pro forma balance sheet gives effect to the conversion of the outstanding preferred stock into shares of common stock. The pro forma balance sheet does not give effect to the offering proceeds.

        The pro forma net loss per share is computed using the weighted average number of shares of common stock outstanding, including the pro forma effects of the automatic conversion of the Company's Series A, B, C, D, E, and F preferred stock into shares of the Company's common stock effective upon the closing of the Company's initial public offering as if such conversion occurred at the beginning of the period, or at the date of issuance, if later, and a decrease in net loss attributed to common stockholders for the accretions on redeemable preferred stock and deemed dividend. The net

F-9



loss applicable to common stockholders and the shares used in calculating the pro forma net loss per share is as follows:

 
  Year Ended
December 31,
2003

  Three Months Ended
March 31,
2004

 
Net loss applicable to common stockholders   $ (10,806 ) $ (4,968 )
Accretions on redeemable preferred stock     5,968     1,528  
Deemed dividend on Series F preferred stock         2,539  
   
 
 
  Pro forma net loss applicable to common stockholders   $ (4,838 ) $ (901 )
   
 
 

Weighted average common shares outstanding

 

 

1,172,953

 

 

1,383,345

 
Plus weighted average preferred shares outstanding:              
  Series A (conversion rate of 1 to 4)     694,736     694,736  
  Series B (conversion rate of 1 to 1.13)     785,878     785,878  
  Series C (conversion rate of 1 to 1.14)     264,173     264,173  
  Series D (conversion rate of 1 to 1.16)     880,211     880,211  
  Series E (conversion rate of 1 to 1)     775,543     775,543  
  Series F (conversion rate of 1 to 1)         305,873  
   
 
 
    Total weighted average preferred shares outstanding (as converted)     3,400,541     3,706,414  
   
 
 
      Total weighted average shares outstanding used in computing pro forma net loss per share     4,573,494     5,089,759  
   
 
 
        Pro forma net loss per share   $ (1.06 ) $ (0.18 )
   
 
 

        Basis of Presentation—The accompanying consolidated financial statements have been prepared in accordance with principles generally accepted in the United States of America.

        Principles of Consolidation—The consolidated financial statements include the accounts of Alibris and its subsidiary, Alibris Europe Ltd. All significant intercompany balances and transactions have been eliminated.

        Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and such differences could affect the results of operations reported in future periods.

        Foreign Currencies—The United States dollar is the reporting currency for the Company. The functional currency used by the subsidiary is the local currency. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are charged or credited to other comprehensive income.

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        Cash and Cash Equivalents and Restricted Cash—The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents consist principally of cash on deposit with a bank and money market accounts that are stated at cost, which approximate fair value.

        The Company entered into letters of credit with a bank. These letters of credit collateralize the Company's obligations to third parties. The letters of credit are secured by certificates of deposit that have been recorded as restricted cash.

        Accounts receivable—Accounts receivable consist of amounts due from customers and from credit card billings not yet received. The Company recorded an allowance for doubtful accounts of $337, $628, and $262 at December 31, 2001, 2002, and 2003, respectively.

        Inventories—Inventories, consisting of books available for sale, are stated at the lower of cost (specific identification) or market. The Company generally purchases books in lots and allocates cost to the individual books based on relative estimated retail sales prices. A reserve for obsolete and slow-moving inventory is included in the net inventory balance.

        Fixed Assets—Fixed assets are stated at cost. Equipment under capital leases are stated at the present value of minimum lease payments.

        Computer and related equipment is depreciated over a useful life of three years using the straight-line method. Office furniture and fixtures are depreciated over useful lives ranging from three to five years using the straight-line method. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life or remaining lease term.

        Included in fixed assets is the cost of internal-use software, including software used in connection with the Company's website. The Company expenses all costs related to the development of internal-use software other than those incurred during the application development stage. Costs incurred during the application development stage are capitalized and amortized over the estimated useful life of the software, generally one year.

        Goodwill and other long-lived intangible assets—Goodwill represents the excess of the purchase price paid over the fair value of net tangible assets acquired. In June 2001, the Financial Accounting Standards Board ("FASB") issued two new pronouncements: Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 prohibits the use of pooling-of-interest method for business combinations initiated after June 30, 2001 and also applies to all business combinations accounted for by the purchase method that are completed after June 30, 2001. The Company adopted SFAS No. 141 in 2001. The adoption of SFAS No. 141 did not have a significant impact on the Company's consolidated financial statements.

        Through December 31, 2001 the Company amortized goodwill on a straight-line basis over the expected periods to be benefited, generally five years. Effective January 1, 2002, Alibris adopted SFAS No. 142. Under this standard, all goodwill, including that acquired before initial application of the standard, will not be amortized, but will be tested from impairment at least annually. Accordingly, the Company ceased amortization of its goodwill in January 2002. The Company evaluated the $2,867 of

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unamortized goodwill during 2002 and 2003 and determined that an impairment charge was not required.

        The changes in carrying amount of goodwill and intangible assets for the years ended December 31, 2001, 2002, and 2003 are as follows:

 
  Goodwill
  Intangibles
 
Balance as of January 1, 2001   $ 4,088   $ 238  
Amortization expense     (1,056 )   (39 )
Impairment loss     (165 )    
   
 
 
  Balance as of December 31, 2001     2,867     199  
Amortization expense         (39 )
   
 
 
  Balance as of December 31, 2002     2,867     160  
Amortization expense         (39 )
   
 
 
  Balance as of December 31, 2003   $ 2,867   $ 121  
   
 
 

        Summarized below is the effect on net loss if the Company had followed the non-amortization provision of SFAS No. 142 for all periods presented:

 
  Year Ended December 31,
 
 
  2001
  2002
  2003
 
Net loss as reported   $ (13,727 ) $ (7,234 ) $ (4,838 )
Goodwill amortization     1,056          
   
 
 
 
  Adjusted net loss     (12,671 )   (7,234 )   (4,838 )
Accretions on redeemable preferred stock     (5,670 )   (5,944 )   (5,968 )
   
 
 
 
  Net loss applicable to common stockholders   $ (18,341 ) $ (13,178 ) $ (10,806 )
   
 
 
 

Basic and diluted loss per share:

 

 

 

 

 

 

 

 

 

 
  Reported net loss per common share   $ (18.53 ) $ (11.61 ) $ (9.21 )
  Add back: goodwill amortization     1.01          
   
 
 
 
    Adjusted net loss per common share   $ (17.52 ) $ (11.61 ) $ (9.21 )
   
 
 
 

        The Company continues to amortize long-lived intangible assets that arose from acquisitions over its estimated useful lives of 5 years.

        Amortization of goodwill and other intangible assets for the years ended December 31, 2001, 2002, and 2003 amounted to $1095, $39, and $39, respectively.

        Long-Lived Assets—The Company evaluates its long-lived assets for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset.

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        Fair Value of Financial Instruments—The carrying amounts of accounts receivables, accounts payable, accrued expenses, and other current liabilities approximate fair value due to the short maturities of these instruments. The carrying value of capital leases, revolving line of credit, and note payable approximates fair value, as interest is tied to or approximates market rates.

        Income Taxes—The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

        Revenue Recognition—Revenue is comprised of product revenue and shipping revenue. Revenue includes sales to customers fulfilled from the Company's distribution center and sales to customers through the Company's network of booksellers and wholesalers. The point in time that the Company records revenue from these two sources is determined in accordance with Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognized in Financial Statements". Revenue is recorded when the following revenue recognition criteria are met: (1) persuasive evidence of an agreement exits; (2) the product has been shipped and the customer takes ownership and assumes the risk for loss; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured.

        The amount of revenue recorded by the Company is determined in accordance with the FASB's Emerging Issues Task Force ("EITF") 99-19, "Reporting Revenues Gross as a Principal versus Net as an Agent", which address whether a company should report revenues based on the gross amount billed to a customer or the net amount retained by the Company (amount billed less commissions or fees paid). The Company records revenue on a gross basis in the amount that is billed to the customer because generally the Company is the primary obligor in the transactions, the Company has latitude in establishing price, the Company bears the risk of physical loss of inventory, the Company bears the return risk on inventory, and the Company bears credit risk for the amount billed to the customer.

        The Company provides an allowance for returns based on historical experience.

        Outbound shipping fees are included in revenue for the years ended December 31, 2001, 2002, and 2003 and amounted to $2,491, $5,067, and $8,258, respectively.

        Cost of Revenue—Cost of revenue consists of the actual cost of goods purchased for resale and related in-bound shipping charges, out-bound shipping charges, and the actual cost of tangible supplies used to package products for shipment to customers. The shipping costs and the cost of supplies used to package products for shipment to customers for the years ended December 31, 2001, 2002, and 2003 amounted to $3,465, $5,283, and $8,350, respectively.

        Fulfillment Costs—Operations expenses include fulfillment costs, which consist of the cost of operating and staffing distribution and customer service centers. Such costs include those attributable to receiving, inspecting and warehousing inventories; picking, packaging, and preparing customers' orders

F-13



for shipment; and responding to inquiries from customers. Fulfillment costs for the years ended December 31, 2001, 2002, and 2003 amounted to $3,081, $3,445, and $3,243, respectively.

        Advertising Costs—Advertising costs, which are included in marketing and sales expenses, are expensed as incurred and for the years ended December 31, 2001, 2002, and 2003 amounted to $589, $726, and $1,008, respectively.

        Stock-Based Compensation—The Company accounts for its stock option plans under SFAS No. 123, "Accounting for Stock-Based Compensation." This statement establishes financial accounting and reporting standards for stock-based compensation, including employee stock purchase plans and stock option plans. As allowed by SFAS No. 123, the Company continues to measure compensation expense for options granted to employees under the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The Company follows SFAS No. 123 for equity instruments issued to nonemployees.

        Deferred compensation associated with equity-based compensation is being amortized on an accelerated basis over the vesting period of the individual award consistent with the method described in Financial Accounting Standards Board Interpretation ("FIN") No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans."

        Loss Per Share—Basic net loss per share to common holders is calculated based on the weighted-average number of shares of common stock outstanding during the period excluding those shares that are subject to repurchase by the Company. Diluted net loss per share attributable to common stockholders would give effect to the dilutive effect of potential common stock consisting of stock options, warrants, common stock subject to repurchase by the Company, and preferred stock. Dilutive securities have been excluded from the diluted net loss per share computations as they have an antidilutive effect due to the Company's net loss. Share and per share information for each of the periods presented have been retroactively adjusted to reflect the reincorporation.

        A reconciliation of the shares used in the calculation is as follows (shares amounts in thousands):

 
  Year Ended December 31,
  Three Months
Ended
March 31,

 
 
  2001
  2002
  2003
  2003
  2004
 
 
   
   
   
  (unaudited)

 
Numerator:                                
  Net loss attributable to common stockholder   $ 19,397   $ 13,178   $ 10,806   $ (2,960 ) $ (4,968 )
   
 
 
 
 
 
Denominator:                                
  Weighted average common share outstanding