UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition period from _________ to _________.
Commission file number: 0-25790
IDEAMALL, INC.
Delaware 95-4518700
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2555 West 190th Street, Torrance, California 90504
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (310) 354-5600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, $.001 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes[X] No[_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of March 30, 2001, the aggregate market value of the Common Stock held
by non-affiliates of the Registrant was $8,461,589. The number of shares
outstanding of the Registrant's Common Stock as of March 30, 2001 was
10,433,866.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's executive officers is set forth in Part I
of its annual Report on Form 10-K under the heading "Executive Officers."
DIRECTORS
The names of the directors, their ages as of March 30, 2000, and certain
other information about them are set forth below:
Director
Name Age Position Since
---- --- -------- --------
Frank F. Khulusi............34 Chairman of the Board, President and 1987
Chief Executive Officer
Sam U. Khulusi(1)...........45 Director 1987
Thomas A. Maloof(1)(2)......49 Director 1998
Ronald B. Reck(2)...........52 Director 1999
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Frank F. Khulusi is a co-founder of the Company (and its predecessor) and
has served as Chairman of the Board and Chief Executive Officer of the Company
since the Company's inception in 1987. Mr. Khulusi served as President of the
Company from the Company's inception in 1987 until July 1999, and resumed the
office of President in March 2001. Mr. Khulusi is also the Chairman of eCOST.com
and eLinux, both subsidiaries of the Company. He is the brother of Sam U.
Khulusi. From July 1999 to September 1999, Mr. Khulusi served as President of
Toytime, Inc., an online retailer of toys. In July 2000, a petition for
involuntary bankruptcy was filed against Toytime under Chapter 11 of the United
States Bankruptcy Code, which was dismissed by a federal bankruptcy court in
November 2000.
Sam U. Khulusi is a co-founder of the Company and served as Executive Vice
President and Chief Operating Officer of the Company from October 1994 until
February 1996. From 1987 until October 1994, Mr. Khulusi served as Chief
Financial Officer of the Company. Mr. Khulusi currently is the Chairman and
Chief Executive Officer of Vibex Software, an Internet software company. Mr.
Khulusi is also a director of ERUCES, Inc., a provider of data protection and
security solutions. He is the brother of Frank F. Khulusi.
Thomas A. Maloof has served as a director of the Company since May 1998.
Since January 2001, Mr. Maloof has served as the Chief Financial Officer of
HMC, Inc., a hospitality company. From February 1998 to November 2000, Mr.
Maloof served as President of Perinatal Practice Management, Inc. From
September 1997 until February 1998, Mr. Maloof served as Chief Financial
Officer of Prospect Medical Holdings. From January 1995 until September 1997,
Mr. Maloof was the Chief Executive Officer of Prime Health of Southern
California.
Ronald B. Reck has served as a director of the Company since April 1999.
Mr. Reck was employed by Applebee's International, from 1987 to 1997, serving
most recently as Executive Vice President and Chief Administrative Officer.
Since 1998 Mr. Reck has served as President and Chief Executive Officer of Joron
Properties, LLC, a real estate company.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership on Form 3 and changes in ownership on Forms 4 or 5 with the
Securities and Exchange Commission. Such officers, directors and ten percent
stockholders are also required by the Commission's rules to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
representations from certain reporting persons that no Forms 5 were required for
such persons, the Company believes that during the fiscal year ended December
31, 2000, all Section 16(a) filing requirements applicable to its officers,
directors and ten percent stockholders were complied with, except that Scott
Klein filed a late Form 4 with respect to one transaction.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Executives
The following table sets forth the cash and noncash compensation for each
of the last three fiscal years awarded to or earned by the Chief Executive
Officer of the Company and the other three executive officers whose compensation
exceeded $100,000 during the 2000 fiscal year.
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
------------------------------- ------------- All Other
Fiscal Salary Bonus Options Compensation
Name and Principal Position Year ($) ($) (#)(1) ($)(2)
--------------------------- ------- ---------- -------- -------------- ------------
Frank F. Khulusi............... 2000 400,000 -- -- 2,438
Chairman, President and 1999 400,000 -- 50,000 2,531
Chief Executive Officer 1998 400,000 -- -- 2,438
Theodore R. Sanders(3)......... 2000 207,382 46,833 --(4) 10,884(5)
Chief Financial Officer 1999 171,732 27,500 13,000 10,425(6)
1998 147,692 36,225 50,000 --
Scott W. Klein(7).............. 2000 309,150 46,052 -- 67,682(8)
Former President 1999 207,403 25,000 325,000(9) 82,358(10)
Daniel J. DeVries.............. 2000 248,904 29,642 -- 10,594(11)
Executive Vice President, 1999 225,000 18,000 35,000(12) 10,768(13)
Sales and Marketing 1998 207,221 -- 30,000 1,972
_______________
(1) Excludes options acquired as a result of the spin-off of uBid, in which all
options to purchase the Company's common stock were converted into options
to purchase both shares of the Company's common stock and uBid common
stock.
(2) Unless otherwise specified, the number constitutes Company matching
contributions under its 401(k) plan.
(3) Mr. Sanders joined the Company in May 1997 and was promoted to Chief
Financial Officer in September 1998.
(4) Does not include options to purchase an aggregate of 40,000 shares of
eCOST.com granted to Mr. Sanders in 2000.
(5) Represents automobile allowance of $9,730 and 401(k) matching contributions
of $1,154.
(6) Represents automobile allowance.
(7) Mr. Klein joined the Company in May 1999, was promoted to President in July
1999, and resigned in March 2001.
(8) Represents automobile allowance of $3,940, relocation payments of $61,242
and 401(k) matching contributions of $2,500.
(9) Does not include options to purchase an aggregate of 150,000 shares of
eCOST.com granted to Mr. Klein in 1999.
(10) Represents automobile allowance of $16,420 and relocation payments of
$65,938.
(11) Represents automobile allowance of $8,418 and 401(k) matching contributions
of $2,176.
(12) Does not include options to purchase an aggregate of 100,000 shares of
eCOST.com granted to Mr. DeVries in 1999.
(13) Represents automobile allowance of $8,618 and 401(k) matching contributions
of $2,150.
Option Grants in Last Fiscal Year
There were no grants to purchase the Company's common stock to named
executive officers during fiscal 2000.
The following table provides information on options to purchase shares of
eCOST.com, a subsidiary of the Company, during the 2000 fiscal year to the
following named executive officers:
Individual Grants Potential Realizable
----------------------------------------------- Option Value at
Number of Percent of Assumed Annual Rate
Securities Total of Stock Price
Underlying Options Appreciation for
Options Granted Exercise or Option Term
Granted in Fiscal Base Price Expiration --------------------
Name (#)(1) Year(2) ($/sh) Date 5% 10%
------ ---------- ---------- ----------- ---------- --------------------
Theodore R. Sanders.. 40,000 6.7% 1.00 6/11/09 $25,156 $63,750
- ---------------
(1) The options vest at a rate of 25% per year beginning on the first
anniversary of the date of grant. Upon the occurrence of certain events
resulting in a change of control of eCOST.com or certain major corporate
transactions, the options become fully vested and exercisable, subject to
certain exceptions and limitations.
(2) The Company granted options to purchase an aggregate of 598,000 shares of
eCOST.com common stock in fiscal 2000.
(3) The potential realizable values assume that the fair market value of the
eCOST.com common stock on the date of grant will appreciate at the indicated
rate compounded annually for the entire ten-year term of the option and that
the option is exercised and sold on the last day of its term. The 5% and
10% assumed annual rates of appreciation are mandated by the Securities and
Exchange Commission and do not reflect estimates or projections of future
growth of eCOST.com common stock.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values
The following table sets forth, for each of the executive officers named in
the Summary Compensation Table above, certain information regarding the year-end
value of unexercised options. None of the named executives exercised options
during the 2000 fiscal year.
Number of Securities
Underlying Unexercised Value of Unexercised
Options at End of In-the-Money Options at
Fiscal 2000 (#) End of Fiscal 2000($)(1)
-------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
------ ----------- ------------- ----------- -------------
Frank F. Khulusi..... 112,500 37,500 -- --
Theodore R. Sanders.. 35,050 43,750 -- --
Scott W. Klein....... 65,000 260,000 -- --
Daniel J. DeVries.... 139,550 54,250 -- --
- ---------------
(1) Value based on the closing price of the Company's Common Stock as reported
on the Nasdaq National Market on December 29, 2000, which was $1.125, less
the exercise price, times the number of shares issuable pursuant to such
options.
The following table sets forth, for each of the executive officers named in
the Summary Compensation Table above, certain information with respect to the
value of unexercised options to purchase shares of eCOST.com as of December 31,
2000. No options to purchase eCOST.com common stock were exercised by the named
executive officers during the 2000 fiscal year.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at End of at End of Fiscal
Fiscal 2000 (#) 2000($)(1)
-------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
------ ----------- ------------- ----------- -------------
Theodore R. Sanders. 10,000 30,000 -- --
Scott W. Klein...... 30,000 120,000 $24,000 $96,000
Daniel J. DeVries... 40,000 60,000 $32,000 $48,000
- ---------------
(1) There was no public trading market for the common stock of eCOST.com as of
December 31, 2000. Accordingly, the value of unexercised in-the-money
options listed in the table has been calculated on the basis of $1.00 per
share, which was the assumed fair value of the eCOST.com common stock at
December 31, 2000, less the applicable exercise price per share, multiplied
by the number of shares underlying such options.
Compensation of Directors
During fiscal year 2000, the Company compensated directors who were not
employed by the Company or its affiliates $5,000 per meeting attended, and
$1,000 per telephone meeting, plus expenses for services as a director. During
2000, the Company paid Tom Maloof $7,750 in consulting fees in connection with
his work on cost controls. Directors of the Company are eligible to participate
in the Company's 1994 Stock Incentive Plan. During 2000, the Company granted
20,000 shares to each of Sam U. Khulusi, Thomas A. Maloof, and Ronald B. Reck
under the Company's 1994 Stock Incentive Plan. The options were granted at $5.00
per share (which was the fair market value as of the date of grant), vest 25%
per year over a 4-year period, and expire 10 years from the date of grant.
During 2001, the Board amended the Director compensation plan for fiscal 2001 to
include a $16,000 retainer, $2,500 for each board meeting and $1,000 for each
committee meeting.
Employment Agreements
In January 1995, the Company entered into a three-year employment agreement
with Frank F. Khulusi (the "Employment Agreement"). Although the original term
of the Employment Agreement expired January 1, 1998, the Employment Agreement
further provides for one-year automatic extensions if the Employment Agreement
is not terminated by the Company or Mr. Khulusi. In 1997, the Employment
Agreement provided for an annual base salary to Mr. Khulusi of $400,000. The
Employment Agreement also provides that Mr. Khulusi is entitled to certain
severance benefits in the event that his employment is terminated by the Company
"without cause" or by Mr. Khulusi for "good reason" or following a "change
of control" (all as defined in the Employment Agreement). In such cases, Mr.
Khulusi would receive two times his salary and bonus for the preceding twelve
months in a lump sum distribution following notice of termination.
The Company entered into an employment agreement with Scott Klein on July
22, 1999. Pursuant to this agreement, Mr. Klein received an annual base of
$309,150, a discretionary bonus, and a one-time grant of options to purchase
325,000 shares of Common Stock under the 1994 Stock Incentive Plan. Mr. Klein
resigned in March 2001. Under the terms of his resignation agreement, Mr. Klein
will remain a consultant to the company for a period of time following his
resignation, and receive compensation equal to his monthly salary plus benefits
for each month he remains a consultant.
Compensation Committee Report on Executive Compensation
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933 or the Securities Exchange Act
of 1934 that might incorporate future filings, including this Form 10-K/A, in
whole or in part, the following report and the Stock Performance Graph which
follows shall not be deemed to be incorporated by reference into any such
filings.
The Compensation Committee reviews with management cash and other
compensation policies for employees, makes recommendations to the Board of
Directors regarding compensation matters and determines the compensation for the
Chief Executive Officer. In addition, the Compensation Committee administers the
Company's stock option plans and, within the terms of the respective stock
option plan, determines the terms and conditions of issuances thereunder. The
compensation of the executive officers of the Company, except for the
compensation of the Chief Executive Officer, is set and approved by the
Compensation Committee of the Board of Directors based on the recommendation of
the Chief Executive Officer.
Compensation Policies
The Compensation Committee's executive compensation policies are designed
to provide levels of compensation that integrate pay with the Company's
objectives and goals, reward above-average corporate performance, recognize
individual initiative and achievements and assist the Company in attracting and
retaining qualified executives. Executive compensation is set at levels that the
Compensation Committee believes to be adequate to recruit, retain and motivate
key employees.
There are three primary elements in the Company's executive compensation
program:
. Base salary
. Bonus
. Stock options
Individual base salaries are established based on an executive officer's
experience, historical contribution and future importance to the Company and
other subjective factors, without assigning a specific weight to individual
factors.
Bonuses are paid pursuant to executive bonus plans. Bonus awards are set
based on various goals dependent upon the person's function in the organization.
Certain individuals' bonus plans are set as a percentage of base salary, with
the specific percentage determined by the person's position within the Company.
The award of bonuses is dependent on the achievement of specified goals. The
achievement of quantitative goals at the department and corporate levels is the
primary factor in determining bonuses and such goals are tied to the achievement
of specified performance targets. A new executive bonus plan was approved during
2000 to provide a bonus pool of 10% of the incremental quarterly pre-tax profits
for the core business over the comparable quarter for the prior year. If the
prior year core business pre-tax results were a loss, the bonus calculation is
adjusted assuming prior year core business pre-tax results were breakeven.
The Chief Executive Officer's bonus, if any, is determined as set forth in
his employment contract, as described above.
The Company believes that a component of the compensation paid to the
Company's executives over the long term should be derived from stock options.
The Company believes that stock ownership in the Company is a valuable incentive
to executives and that the grant of stock options to them serves to align their
interests with the interests of the stockholders as a whole and encourages them
to manage the Company in its best interests. The Compensation Committee
determines whether to grant stock options, as well as the amount of the grants,
based on a person's position within the Company.
Compensation of Chief Executive Officer
In establishing the Chief Executive Officer's overall compensation, the
Compensation Committee considered a number of factors, including the record of
leadership and service provided by the Chief Executive Officer since co-founding
the Company. The Committee has not found it practicable to, and has not
attempted to, assign relative weights to the specific factors considered in
determining the Chief Executive Officer's compensation. Consistent with the
Company's overall executive compensation program, the Chief Executive Officer's
compensation is composed of base salary and bonus. The Chief Executive Officer's
base salary was set at $400,000 in his employment agreement with the Company and
is currently his base salary for 2001. In 2000, the Chief Executive Officer was
not paid a bonus and was not granted any stock options.
Policy Regarding Deductibility of Compensation for Tax Purposes--Compliance With
Internal Revenue Code Section 162(m)
Section 162(m) of the Code generally disallows a tax deduction to public
companies for annual compensation over $1 million paid to the chief executive
officer or any of the four other most highly compensated executive officers.
However, certain compensation meeting a tax law definition of "performance-
based" is generally exempt from this deduction limit. The Company does not
currently have a policy regarding qualification of cash compensation, such as
salary and bonuses, for deductibility under Section 162(m). However, none of the
Company's executives receive such compensation at levels that approach the
Section 162(m) $1 million limit. The Company has included provisions in the 1994
Stock Incentive Plan designed to enable grants of options and SARs to executive
officers affected by Section 162(m) to qualify as "performance-based"
compensation. However, such grants cannot qualify until such grants are made by
a committee consisting of "outside directors" under Section 162(m). Prior to
March 1999, the Compensation Committee did not meet this requirement.
Compensation Committee
Sam U. Khulusi
Thomas A. Maloof
STOCK PERFORMANCE GRAPH
The performance graph below compares the cumulative total stockholder
return of the Company with the cumulative total return of the Nasdaq Stock
Market-US Companies Index ("Nasdaq-US") and the Nasdaq Retail Trade Index
("Nasdaq-Retail"). The performance graph assumes that $100 was invested in the
Company's initial public offering, on April 4, 1995, in common stock of the
Nasdaq-US and Nasdaq-Retail. The stock price performance shown in this graph is
neither necessarily indicative of nor intended to suggest future stock price
performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among IdeaMall, Inc., Nasdaq-US, Nasdaq-Retail
[PERFORMANCE GRAPH APPEARS HERE]
Measurement Period NASDAQ STOCK NASDAQ RETAIL
(Fiscal Year Covered) IdeaMall, Inc. MARKET (U.S.) TRADE
--------------------- -------------- ------------- -----
Measurement Date
12/31/95 $100 $100 $100
FYE 12/96 $ 40 $123 $119
FYE 12/97 $ 54 $151 $140
FYE 12/98 $174 $213 $171
FYE 12/99 $151 $395 $150
FYE 12/00 $ 23 $238 $ 92
Compensation Committee Interlocks and Insider Participation
Sam Khulusi, who serves on the Company's Compensation Committee, served as
an executive officer of the Company until February 1996. Mr. Khulusi is a
stockholder, director or executive officer of certain entities with which the
Company has engaged in several transactions, which are described under the
caption "Certain Relationships and Related Transactions" herein. There are no
Compensation Committee interlocks between the Company and other entities
involving the Company's executive officers and Board members who serve as
executive officers of such companies.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 30, 2001 by: (i) each of the
Company's executive officers included in the Summary Compensation Table set
forth under the caption ''Executive Compensation''; (ii) each director; (iii)
all current directors and executive officers of the Company as a group; and (iv)
each person known to the Company to be the beneficial owner of more than 5% of
the outstanding shares of the Company's Common Stock. Percentage ownership is
based on an aggregate of 10,433,866 shares of the Company's Common Stock
outstanding on April 30, 2001.
Number of Shares Percent of Shares
Name and Address(1) Beneficially Owned Beneficially Owned
- ------------------- ------------------ ------------------
Frank F. Khulusi.............. 1,866,660(2) 17.7%
Sam U. Khulusi................ 1,926,585(3) 18.4%
Daniel J. DeVries............. 164,900(4) 1.6%
Scott W. Klein (5)............ 105,000(6) 1.0%
Theodore R. Sanders........... 40,300(7) *
Thomas A. Maloof.............. 15,000(8) *
Ronald B. Reck................ 13,750(9) *
All current directors and
executive officers as a
group (6 persons)............ 4,027,195(10) 37.2%
- ------------
*Less than 1%
(1) Unless otherwise indicated, the address for each person is 2555 W. 190th
Street, Torrance, California 90504.
(2) Includes (i) 8,575 shares held in trust for the benefit of the children of
Basimah Khulusi, and (ii) 125,000 shares underlying options which are
presently vested or will vest within 60 days of April 30, 2001.
(3) Includes 23,000 shares issuable upon exercise of stock options which are
presently vested or will vest within 60 days of April 30, 2001.
(4) Includes 164,300 shares issuable upon exercise of stock options which are
presently vested or will vest within 60 days of April 30, 2001. Excludes
40,000 shares of eCOST.com issuable upon exercise of stock options which
are presently vested or will vest within 60 days of April 30, 2001.
(5) Mr. Klein was an executive officer of the Company until March 2001.
(6) Includes (i) 65,000 shares issuable upon exercise of stock options which
are presently vested, and (ii) 18,000 shares held by Mr. Klein's spouse.
Excludes 30,000 shares of eCOST.com issuable upon exercise of stock options
which are presently vested.
(7) Includes 40,300 shares issuable upon exercise of stock options which are
presently vested or will vest within 60 days of April 30, 2001. Excludes
10,000 shares of eCOST.com issuable upon exercise of stock options which
are presently vested or will vest within 60 days of April 30, 2001.
(8) Includes 15,000 shares issuable upon exercise of stock options which are
presently vested or will vest within 60 days of April 30, 2001.
(9) Includes 10,000 shares issuable upon exercise of stock options which are
presently vested or will vest within 60 days of April 30, 2001.
(10) This figure includes an aggregate of 377,600 shares issuable upon exercise
of stock options which are presently vested or will vest within 60 days of
April 30, 2001. The figure excludes an aggregate of 50,000 shares of
eCOST.com, Inc. issuable upon exercise of stock options which are presently
vested or will vest within 60 days of April 30, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the 2000 fiscal year, the Company sold computers and computer
products in the ordinary course of business aggregating of $363,635 to ERUCES,
Inc. and $179,994 to Vibex Software. Sam Khulusi, a member of the Company's
board of directors, is currently a director of ERUCES and the Chairman and Chief
Executive Officer of Vibex Software. Sam Khulusi is a principal stockholder of
ERUCES and Vibex. Frank Khulusi, Chairman, President and CEO of the Company, is
a principal stockholder of ERUCES.
Relationship with uBid, Inc.
In June 1999, the Company distributed to its stockholders all of the shares of
common stock of its subsidiary uBid, Inc., which constituted approximately 80.1%
of uBid outstanding common stock. Prior to the spin-off, uBid entered into
several agreements with the Company providing for the separation of the two
companies and the distribution of the Company's uBid common stock to its
stockholders, the provision by the Company of certain interim services to uBid,
employee benefit arrangements and tax and other matters. These agreements are
discussed below.
In April 2000, CMGI Inc. acquired all of the outstanding stock of uBid in a
stock-for-stock merger. Prior to the merger, Frank Khulusi, the Company's
Chairman, President and Chief Executive Officer, owned approximately 11% of
uBid's common stock and served as a director of uBid until November 1999. His
brother, Sam Khulusi, who is a director and principal stockholder of the
Company, owned approximately 12% of uBid's common stock prior to the merger.
Separation and Distribution Agreement
The Separation and Distribution Agreement uBid entered into with the Company
set forth certain agreements among uBid and the Company, with respect to the
principal corporate transactions required to effect the spin-off and certain
other agreements governing the relationship among the parties thereafter.
The Distribution. Under the Separation and Distribution Agreement, uBid and
the Company agreed that neither would take, or permit any of its respective
affiliates to take, any action which reasonably could be expected to prevent the
distribution from qualifying as a tax-free distribution to the Company and its
stockholders pursuant to Section 355 of the Internal Revenue Code. Accordingly,
uBid agreed not to issue or grant, directly or indirectly, any shares of uBid
capital stock or any rights, warrants, options or other securities to purchase
or acquire any shares of uBid capital stock that would affect the tax-free
nature of the distribution.
Registration Rights. The Separation and Distribution Agreement provided that
Frank and Sam Khulusi will have the right in certain circumstances, but in no
event prior to 180 days after the distribution, to require uBid to register for
resale shares of uBid common stock held by them under the Securities Act,
subject to certain conditions, limitations and exceptions. uBid also agreed with
Frank and Sam Khulusi that if it filed a registration statement for the sale of
securities under the Securities Act, then they may, subject to certain
conditions, limitations and exceptions, include in that registration statement
shares of uBid common stock held by them. In addition, for an additional 90 days
after this 180-day period, uBid would be entitled to include uBid shares in any
requested demand registration and to reduce the number of shares to be sold by
Frank and Sam Khulusi thereunder to a minimum of 20%, collectively, of the total
offering plus the amount of any underwriters' over-allotment option. uBid also
agreed to bear up to $100,000 of the cost of the first, and up to $50,000 of the
second, requested registrations and will bear the cost of all piggyback
registrations.
Releases and Indemnification. uBid agreed to indemnify, defend and hold
harmless the Company and each of the Company's directors, officers and employees
from and against all liabilities relating to, arising out of or resulting from:
(1) the failure of uBid or any other person to pay, perform or otherwise
promptly discharge any liabilities of uBid in accordance with their respective
terms; (2) any breach by uBid of the Separation and Distribution Agreement or
any of the other agreements described below; and (3) material misstatements or
omissions with respect to all information contained in the prospectus or the
registration statement used in connection with uBid's initial public offering.
Except as provided in the Separation and Distribution Agreement, the Company
agreed to indemnify, defend and hold harmless uBid and each of its directors,
officers and employees from and against all liabilities relating to, arising out
of or resulting from the failure of the Company or any other person to pay,
perform or otherwise promptly discharge any liabilities of the Company other
than the liabilities of uBid, and any breach by the Company of the Separation
and Distribution Agreement or any of the agreements described below. Neither
uBid nor the Company is obligated under the Separation and Distribution
Agreement to indemnify the other for: (1) any liability, contingent or
otherwise, assumed, transferred, assigned or allocated to the other under the
Separation and Distribution Agreement or any of the agreements discussed below;
(2) any liability for the sale, lease, construction or receipt of goods,
property or services purchased, obtained or used in the ordinary course of
business between the parties prior to December 9, 1998; (3) any liability for
unpaid amounts for products or services or refunds owing on products or services
due on a value-received basis for work done by one party at the request or on
behalf of the other; (4) any liability that uBid or the Company may have with
respect to indemnification or contribution pursuant to the Separation and
Distribution Agreement for claims brought against other party by third persons;
or (5) generally, any liability the release of which would result in the release
of any person other than a person released pursuant to the Separation and
Distribution Agreement. The Separation and Distribution Agreement also contains
provisions that govern, except as otherwise provided in any of the agreements
discussed below, the resolution of disputes, controversies or claims that may
arise between or among the parties. These provisions contemplate that efforts
will be made to resolve disputes, controversies and claims by escalation of the
matter to senior management (or other mutually agreed) representatives of the
parties. If such efforts are not successful, any party may submit the dispute,
controversy or claim to mandatory, binding arbitration, subject to the
provisions of the Separation and Distribution Agreement. The Separation and
Distribution Agreement contains procedures for the selection of a sole
arbitrator of the dispute, controversy or claim and for the conduct of the
arbitration hearing, including certain limitations on discovery rights of the
parties. These procedures are intended to produce an expeditious resolution of
any such dispute, controversy or claim.
In the event that any dispute, controversy or claim is, or is reasonably
likely to be, in excess of $5 million, or in the event that an arbitration award
in excess of $5 million is issued in any arbitration proceeding commenced under
the Separation and Distribution Agreement, subject to certain conditions, any
party may submit such dispute, controversy or claim to a court of competent
jurisdiction and the arbitration provisions contained in the Separation and
Distribution Agreement will not apply. In the event that the parties do not
agree that the amount in controversy is in excess of $5 million, the Separation
and Distribution Agreement provides for arbitration of such disagreement.
Noncompetition; Certain Business Transactions. The Separation and Distribution
Agreement provides that, for a period of nine months after the date of the spin-
off, the Company would not directly or indirectly, including by way of
acquisition of other companies, engage in the Internet online auction business
in substantially the same manner and format as conducted by uBid on the date of
the Separation and Distribution Agreement.
Expenses. Except as expressly set forth in the Separation and Distribution
Agreement or in any ancillary agreement, each party agreed to bear its own
respective third-party fees, costs and expenses paid or incurred in connection
with the spin-off.
Stock Option Adjustments. Options to purchase common stock of the Company
that were outstanding as of the date of the spin-off were adjusted to become
options to purchase shares of both the Company common stock and uBid common
stock, subject to certain limited exceptions. The number of shares of uBid
common stock that was covered by these options was based upon the ratio of the
number of shares of uBid common stock distributed to the Company's stockholders
in the spin-off, divided by the total number of shares of Company Common Stock
outstanding on the record date for the spin-off. In addition, the exercise price
for each adjusted option was allocated between the option to purchase Company
Common Stock and the option to purchase uBid common stock based on the
respective pre- and post-distribution prices of Company Common Stock and uBid
common stock on the Nasdaq National Market to preserve the intrinsic value and
ratio of exercise to market price of the options both before and after the spin-
off.
Tax Indemnification and Allocation Agreement
Prior to the spin-off, uBid entered into a Tax Indemnification and Allocation
Agreement with the Company, which provides that if any one of certain events
occurs, and such event causes the distribution not to be a tax-free transaction
to the Company under Section 355 of the Internal Revenue Code, uBid will
indemnify the Company for income taxes the Company may incur by reason of the
distribution not so qualifying. These events include any breach of
representations relating to its activities and ownership of uBid capital stock
made to the Company or in connection with obtaining an IRS revenue ruling or tax
opinion relating to the spin-off. In connection with the distribution, uBid made
various representations regarding its intentions at the time of the distribution
with respect to its business. The Tax Indemnification and Allocation Agreement
also provides that the Company will indemnify uBid for taxes for which uBid has
no liability to the Company under the circumstances described above. Regardless
of the indemnification provisions of such agreement, the Company and uBid will
each be severally liable to the Internal Revenue Service for the full amount of
any such federal corporate level tax that is not paid by the other.
At the time of the spin-off, the Company received an opinion from
PricewaterhouseCoopers LLP to the effect that for federal income tax purposes
the spin-off will qualify as a tax-free spin-off under Section 355 and that no
gain or loss will be recognized by the Company or by holders of Company Common
Stock upon the spin-off.
If the spin-off did not qualify as tax-free as a result of Section 355(e),
then the Company would recognize capital gain equal to the excess of (x) the
fair market value of the shares of uBid common stock the Company distributed to
its stockholders over (y) its adjusted tax basis in uBid common stock.
In addition to the foregoing indemnities, the Tax Indemnification and
Allocation Agreement provides for: (1) the allocation and payment of taxes for
periods during which uBid and the Company are included in the same consolidated
group for federal income tax purposes or the same consolidated, combined or
unitary returns for state tax purposes; (2) the allocation of responsibility for
the filing of tax returns; (3) the conduct of tax audits and the handling of tax
controversies; and (4) various related matters.
For periods during which uBid was included in the Company's consolidated
federal income tax returns or state consolidated, combined, or unitary tax
returns (which will include the periods on or before the date of the spin-off),
uBid was required to pay an amount of income tax equal to the amount uBid would
have paid had it filed its tax return as a separate entity, except in cases
where the consolidated or combined group as a whole realizes a detriment from
consolidation or combination. uBid is responsible for its own separate tax
liabilities that are not determined on a consolidated or combined basis. uBid
will also be responsible in the future for any increases to the consolidated tax
liability of uBid and the Company that is attributable to uBid, and will be
entitled to refunds for reductions of tax liabilities attributable to uBid for
prior periods.
As noted above, uBid has agreed to indemnify the Company for any tax liability
suffered by the Company arising out of actions by uBid after the distribution
that would cause the distribution to lose its qualification as a tax-free
distribution or to be taxable to the Company for federal income tax purposes
under Section 355 of the Internal Revenue Code. To ensure that issuances of
equity securities by uBid will not cause the distribution to be taxable to the
Company, uBid agreed to certain restrictions on its ability to issue and
repurchase its equity securities until three years following the distribution
date. Until the second anniversary of the distribution date, uBid cannot issue
its common stock or other equity securities, including the shares sold in its
initial public offering and any other stock offerings, that would cause the
number of shares of its common stock distributed by the Company in the
distribution to constitute less than 60% of the outstanding shares of its common
stock unless uBid first obtains either the consent of the Company or a favorable
IRS letter ruling that the issuance will not affect the tax-free status of the
distribution. After this period until the end of the third year from the
distribution date, uBid cannot issue its common stock and other equity
securities that, when combined with equity securities sold in and after its
initial public offering, would cause the number of shares of its common stock
distributed by the Company in the distribution to constitute less than 55% of
the outstanding shares of its common stock unless uBid first obtains the consent
of the Company or a favorable IRS letter ruling or opinion of tax counsel that
the issuance would not affect the tax-free status of the distribution. These
restrictions on the issuance of equity securities may severely limit its ability
to raise necessary capital or to complete acquisitions of other companies using
its equity securities. The same requirements for an IRS letter ruling or consent
of the Company are generally applicable to any proposed repurchases of its
common stock during these restricted periods. The foregoing restrictions do not
apply to uBid's issuance of debt securities that are not convertible into uBid
common stock or other equity securities.
In connection with the merger agreement between uBid and CMGI, those two
parties and the Company entered into an amendment to the tax indemnification
agreement which amendment became effective upon the closing of the merger of
uBid and CMGI. The amendment:
. deleted from the tax allocation agreement all provisions that would prohibit
uBid from undertaking the merger;
. provided that neither the negotiation of the merger nor the consummation
thereof constitutes a breach of uBid's obligations under the agreement;
. provided that CMGI agreed to unconditionally guarantee any indemnification
obligation that uBid may have under the tax indemnification agreement;
. provided that if a party to the amendment becomes aware of any proceeding,
such as a tax audit or tax controversy, that could give rise to an obligation
under the tax allocation agreement, such party must give notice to all other
parties to the amendment; and
. provided that in the event of such a proceeding, both the party subject to
the proceeding and any party who may have an indemnification obligation with
respect to such proceeding shall jointly control the proceeding.
Sublease Agreement
Until July 1998, uBid was dependent on the Company for warehousing and
distribution services. In July 1998, uBid became responsible for its own
warehousing and distribution and entered into a sublease for 100,000 square feet
of the Company's 325,000 square foot distribution center in Memphis, Tennessee.
In October 1999, uBid entered into a sublease which provides for the continued
use of the Company's inventory control and shipping systems during the term of
the sublease. The sublease is at a monthly rate equal to the Company's
obligation to the landlord, plus taxes and utilities, and will expire in 2002.
In December 1999, uBid subleased an additional 70,000 square feet at the
Company's distribution center in Memphis that expires in 2002. During the 2000
fiscal year, uBid paid the Company an aggregate of $2.2 million under the
sublease arrangement, which included accrued and current lease payments, as well
as prepayments of certain elements of the sublease through the term of the
sublease.
Other Relationships with uBid
Payable to the Company. From uBid's inception in April 1997 until its initial
public offering, the Company provided funds to finance its operations in the
form of advances that bear interest at the prime rate. uBid had amounts due to
the Company for working capital and fixed asset purchases totaling approximately
$3.3 million as of December 31, 1999, all of which was repaid in June 2000.
SIGNATURES
Pursuant to the requirements of Section13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this amendment to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Torrance, State of California, on April 30, 2001.
IDEAMALL, INC.
By: /s/ THEODORE R. SANDERS
-----------------------
Theodore R. Sanders
Chief Financial Officer
(Principal Financial and
Accounting Officer)